Tuesday, December 1, 2009

The Bear Dances on One Foot

The Dollar resumed it rapid descent against anything of real value while China holds fast to its direct peg to the Dollar. This caused world equity markets and other risky investments to continue to inflate. Vietnam entered the fray by formally devaluing its currency by 5%. This move has the rest of the countries who compete with Vietnam to provide cheap labor to consider making similar moves to keep from being overwhelmed by the surge of cheap Dollars and the corresponding cheap Yuan from China.

Conservative economists are decrying this break down of free floating foreign exchange as the precursor of protectionist tariffs. (if only we could be so lucky) In reality every country in the world but the US already has some sort of tariff scheme to protect their vital industries. If not out right tariffs and import bans like China then some sort of value added tax as the Europeans do.

Gold had dropped in price due to the Dubai panic as investors feared a strengthening Dollar but Dollars continue to flow like water and gold has resumed its climb. Even oil is going up again despite a lack of demand as anything that is not USD is considered a good bet.

The Fed is continuing to let it be known it intends to be ready to take liquidity out of the market by "buying" money in a scheme called "reverse repos" to take up surpluses from the big banks if needed to maintain stability. When the bubble bursts this is about as likely to work as expecting Smokey the Bear to pee on the forest fire. Saying that they are prepared to control the call flow this is just what is needed to pump up the irrational exuberance in the markets still higher so it can fall even harder. The bear looks nervous and is dancing on one foot. www.prairie2.com