It’s hard to characterize just how nasty the action in the currency market is here. The Dollar Index got clubbed to the tune of 2.69% yesterday in the wake of the Fed’s monetization move. That is one of the biggest declines ever (the move against the euro was the worst since 2000). DXY is down another 2.05% as I write, extending its streak of daily losses to eight. As you might expect, gold is rocking and rolling in response, up to roughly $956 an ounce from an intraday low of $884 yesterday.
Now I’ll be the first to admit the stock market doesn’t care — and that most mainstream economists don’t seem to care either. They are saying the Fed HAS to do anything and everything to save the economy from deflation. But the Fed is playing a dangerous game here.
Printing money at your central bank — and using that newly created cash to buy your country’s sovereign debt — is the kind of stuff you typically see in emerging markets and Banana Republic countries. It’s not what you’d expect the U.S. to do. And it’s certainly not what you’d expect a country that is deeply in hock to foreign creditors to do. After all, the Fed is deliberately devaluing the greenback, and in the process, devaluing the bills, notes, and bonds those creditors are holding. We’ll have to see if there’s any pushback in the days ahead.
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{ 5 comments… read them below or add one }
Didn’t Premier Wen Jiabao already stated he was “worried” about the US debt. At of the end of 2008 China held 700 billion in US treasuries…I’m sure all the other foreign creditors are a bit worried too. That was BEFORE the FEDs latests move.
Although most on CNBC and some other stations thought it was a briliant decicion don’t you think it was a little irresponsible?
Hi, I’m a longtime Safe Money subscriber and enjoy your perspective.
Can you tell me why the cost of Treasuries goes UP when the dollar goes DOWN? Why would investors rush into dollar-denominated debt when the dollar falls? It seems to me like this is backwards, but I can’t find an explanation for it.
You reference it in your “Money and Markets” email today but don’t say why it happens.
Thank you.
The Fed is out of control. They are risking the creditibility of this country’s economy and currency in order to lower mortgage rates that were already ridiculously low. This is a headline from the Australian two days ago: “IT’S an ominous day when the world’s economic superpower starts printing money to buy its own government’s debt.”
The problem is not the cost of borrowing. Mortgage rates are already at historic lows. And I agree it won’t spur homebuying. I know cash buyers who aren’t buying because they have either lost their jobs or are worried about losing their jobs or are, frankly, worried about the financial stability of the communities they live in. So here we risk larger damage to our country in order to give a few mortgage processors jobs and allow a few people to refi 1/2 percent lower. Bernanke is an idiot.
Mike,
I like your articles regarding real estate financing and the overal real estate market. I am a Realtor and real estate investor. I do agree with your latest writing that it is NOT a good time to buy in reaction to the latest drop in the 10 year yield and ultimately interest rates.
My personal opinion is this latest Fed move will “stabilize” existing home-for-sale prices….idling them for awhile….but when this latest hype subsides, prices of homes will continue to drop and eventually, rates will have to rise. And we all know, as interest rates go up, the real estate values will come down. For now, supply and demand will have more effect on existing home sale pricing than this latest fed move. I agree with you.
On a different note, what’s your opinion on purchasing distressed or preforeclosed properties? Is it wise in your opinion to buy, fix up and flip within the next year or buy, fix up and rent out.
Mike, I find your commentary very insightful… I have a question regarding the impact of what the fed did on China. As you mentioned the fed action had two impacts - it sent treasuries soaring and the dollar plunging. Since China pretty much pegs its currency to the dollar and they hold a ton of treasuries, shouldn’t they be quite happy with the fed’s action?