The Fed is in a no-win situation now.

Foreign Exchange Outlook ; We continue to see a widening gap between the truly socialist European and the more free-market American approaches. Talk of the US going pinko, whether in the government itself (the Treasury and Fed) or the presidential race, is dumb. We have no evidence that government interference in free markets is going to become institutionalized for the long-run in the US. In any case, the election will be held two weeks from today and we will be able to put aside all this silly talk, and acknowledge that everything being done is being done for the sake of expediency, with nary a core principle in sight.

The key point is that it’s ain’t over yet. Banks may be loosening up for one day or one-week or even 3-month tenors, but that doesn’t mean they will be there for the rollover into a more distant future. By the time this thing is over-sometime next year, we assume-the US will have spent well over $1 trillion, the banking landscape will be littered with the corpses of bad banks, and the people will be thoroughly discouraged, having lost much of their net worth.

This is a good thing-a fresh start-but it’s painful.

By then also the demand for US Dollars will be waning if not gone, and how is the Fed going to sweep them up without discouraging economic activity? The Fed is in a no-win situation now.

But that’s off in the future. For today, we still like the dollar exchange rate, in part because we know the Fed will be cutting interest rates, perhaps to zero (like Japan) and this looks good in contrast to holdouts who refuse to acknowledge disaster. Admitting you have a problem is the first step to curing it, or something. Weirdly, the pounds to dollars gets the occasional burst from the same reasoning.

It’s bizarre, but not wrong.

Buy for Now

Barbara Rockefeller
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