The question isn’t how low can we go, but rather, how high can the Dollar bounce?
With our manipulated joke of a currency, the knee-jerk response is “not very” but I was at the Economist’s Buttonwood Gathering yesterday (see my write-up of Day 1 here) and taking the pulse of the audience of movers and shakers and I was not very encouraged by what I saw and heard. Even less encouraging, was the Treasury’s 5-year TIP sale going off yesterday WITH A NEGATIVE YIELD. As David Fry points out over at the ETF Digest, “Who would buy a bond with a negative yield? What’s the message for investors? Hyperinflation and soon!”
Dave goes on to lament that “the USA is rapidly becoming the World’s laughing stock” and I’ll have to agree with him as the international crowd at Buttonwood made many a joke at the expense of our economy and master bond pimp, Mohammed El-Erian summed it up nicely by saying “We won the war against global depression but we are losing the peace… QE2 is putting money into a system that is structurally deficient,” it forms bubbles and something will break when the other side says they refuse to play the game (extend and pretend).
Well the audience was full of those game players and you can tell by the way they were eyeing each other as El-Erian spoke that they were wondering who was going to flinch first like gunfighters circling each other at the “economy is not at all OK corral.” Phillippa Malmgren of the Canonbury Group was on one of the Buttonwood panels yesterday and she pointed out that Quantitative Easing in the West is simply shoving inflation into emerging markets, raising the probability of structural defaults down the road.
On the part of the West (especially the US) she called it “inflation as a mechanism for defaulting.” In other words, by causing massive global inflation, the US shrinks the relative size of their debt in relation to GDP and is better able to fulfill its obligations to lenders – at .50 copper pennies or less to the inflated Dollar, of course.
No one was shocked by this statement. In fact, I daresay that no one even shifted uncomfortably in their chair. “THEY” know what game is being played and “THEY” know how it’s going to end but accepting a US payment restructuring masked as full payment in worthless currency…
