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Fed Easing may mean 20% decline of the dollar

cpwill

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Good, good good, if there is one thing history has repeatedly proven, it's that increasing inflation never comes with unintended consequences.

we are deliberately recreating stagflation :banghead: we learn nothing.

The dollar is in danger of losing 20 percent of its value over the next few years if the Federal Reserve continues unconventional monetary easing, Bill Gross, the manager of the world's largest mutual fund, said on Monday...

"When a central bank prints trillions of dollars of checks, which is not necessarily what (a second round of quantitative easing) will do in terms of the amount, but if it gets into that territory—that is a debasement of the dollar in terms of the supply of dollars on a global basis," Gross told Reuters in an interview at his PIMCO headquarters.

The Fed will probably begin a new round of monetary easing this week by announcing a plan to buy at least $500 billion of long-term securities, what investors and traders refer to as QE II, according to a Reuters poll of primary dealers.

"QEII not only produces more dollars but it also lowers the yield that investors earn on them and makes foreigners, which is the key link to the currencies, it makes foreigners less willing to hold dollars in current form or at current prices," Gross added...

"Other countries and citizens are willing to work for less and willing to work harder—and we forgot the magic formula somewhere along the way," Gross said.

In that regard, Americans should be investing a lot more overseas than they are to find growth as the U.S. remains in a slowish-growth environment, he said.

"Pension funds and Americans, in general, have a problem because their liabilities are dollar-denominated. It's probably worth the risk of getting out of dollars and getting into emerging countries and going where the growth is. All of which entails risk relative to the home country. But there's probably a bigger risk in simply staying comfortably within the confines of dollar-based investments."
 

oldreliable67

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cpwill said:
...increasing inflation never comes with unintended consequences.

Er, did you mean to say, "without" unintended consequences? Or was that a bit of sarcasm and I failed to recognize it as such?

Sorry to be so obtuse, but you've got me confused with that one.
 

rathi

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You can't throw around a precise number like 20% combined with a uselessly vague "few years". With healthy under 3% inflation, the dollar would still lose 20% of its value in under a decade. If the dollar lost 20% in 2 years that would be pretty bad, in 5 years, not so much.
 

Lord Tammerlain

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Given the US fed, treas all want the US dollar to be lower, I dont think this would be an unintended consequence of QE2. Much like the removal of the US from the gold standard in the 70's, the Plaza accord in the 80's the US government feels the US has become uncompetitive and needs a quick fix to a serious economic issue
 

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washunut

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You can't throw around a precise number like 20% combined with a uselessly vague "few years". With healthy under 3% inflation, the dollar would still lose 20% of its value in under a decade. If the dollar lost 20% in 2 years that would be pretty bad, in 5 years, not so much.

What has it lost in the last two months, something like 8%.
 

Wiseone

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Inflation is a relation between money supply, incomes, and prices(especially for items everyone uses). We have data here that the money supply will probably be increased by the Fed soon, however without data projecting, with a reasonable and accurate method, what incomes and prices will look like we can't say for certain there will be inflation.

Plus Economics is always a fickle science, its hardly physics in terms of accuracy
 

washunut

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Inflation is a relation between money supply, incomes, and prices(especially for items everyone uses). We have data here that the money supply will probably be increased by the Fed soon, however without data projecting, with a reasonable and accurate method, what incomes and prices will look like we can't say for certain there will be inflation.

Plus Economics is always a fickle science, its hardly physics in terms of accuracy

Well it is fair to say no one can predict an exact number. I doubt that Mr. Gross who is the Warren Buffet of bonds meant to do that. What is easier to predict is the directional move od something. Few economists have disagreed with Gross that the Fed printing money will create inflation. We are already seeing it in currencies, commodities like food, oil and metals.

The sad thing is that the Fed is trying in inflate housing, not the things mentioned above. But they do not have a way to do it. They are also trying to increase employment, but as I heard you can print money, not jobs.

The biggest losers unfortunately will be the poor. The inflation the Fed is bringing on is in food, feul to get to work and other consumables from overseas. The winners will be people who can afford to buy assets to hedge their dollar risk and spend a smaller proportion of their income on the basic necessities.
 

Lord Tammerlain

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20% decline in what? The USD index? Vs gold, silver, cocaine? 20% inflation?

Blanket statements are not constructive.

It would of course be a general overall decline in the value of the USD compared to other currencies, commodities etc. Within that grouping singular components may go up higher or lower depending on particular market forces.

The 20% is a broad secular decline,
 

Missed AB

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Few economists have disagreed with Gross that the Fed printing money will create inflation. We are already seeing it in currencies, commodities like food, oil and metals.
Inflation and a blanket statement that the dollar will lose 20 percent of it's value are 2 different things.

20 percent of it's value is a meaningless statement. Inflation is measured by CPI which takes into account consumer spending habbits.

Lets say you buy sneakers. Typically you buy Nike for 50. instead of NB for 45. But inflation hits and you are only willing to pay 50 for sneakers so you don't buy the nike for 55, you buy the NB for 50. There is no inflation.

What is easier to predict is the directional move od something.
After gold pops, bonds are the next bubble to blow, then emerging markets, the EU funds, Then oil, then SPY/DIA/NSDQ funds, then contra/short funds...then the cycle starts all over again. Cylical direction is not difficult to spot. For most people the difficulty is seeing the crowded trade.

But they do not have a way to do it. They are also trying to increase employment, but as I heard you can print money, not jobs.
Who runs the presses, makes the paper, cuts the trees, ships the money, makes the ink... Someone has to benefit!

. The inflation the Fed is bringing on is in food, feul to get to work and other consumables from overseas. The winners will be people who can afford to buy assets to hedge their dollar risk and spend a smaller proportion of their income on the basic necessities.
The real people who will benefit will be the one's who have incomes tied to exports. As the EU pushes to 1.40 I have noticed a huge spike in sales this past week or so.
 

cpwill

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Er, did you mean to say, "without" unintended consequences? Or was that a bit of sarcasm and I failed to recognize it as such?

Sorry to be so obtuse, but you've got me confused with that one.

it was; sorry to be obtuse
 

Wiseone

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it was; sorry to be obtuse

At least you aren't acute.

acute-angle.jpg
 

Lord Tammerlain

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justabubba

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It of course would be an educated estimate on the effects of increasing the money supply on the prices of goods and services

i haven't seen anything which would render that an educated estimate
we will experience a 20% inflation, but over what span?
where is the source of that "educated" estimate, so that the underlying assumptions can be examined?
 

Lord Tammerlain

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i haven't seen anything which would render that an educated estimate
we will experience a 20% inflation, but over what span?
where is the source of that "educated" estimate, so that the underlying assumptions can be examined?

The source of the estimate is of course Gross's own research and knowledge. Which is rather deep considering the size of Pimco. The 20% value of course would be over and above the rate of inflation the economy would experience during the time frame. While not expressed I would suggest he would be thinking in the time frame of 3-5 years
 

washunut

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The source of the estimate is of course Gross's own research and knowledge. Which is rather deep considering the size of Pimco. The 20% value of course would be over and above the rate of inflation the economy would experience during the time frame. While not expressed I would suggest he would be thinking in the time frame of 3-5 years

It would be interesting to find out. I would be surprised if he was talking about a 3-5 year timeframe. How much has the dollar declined in just the last 2 months, and QE2 has not been officially announced yet. A 20% in the dollar versus gold for example only gets it to about 1600. Good chance it will not take 3 years to get there. Congress has been pushing the 2nd largest economy, Chine to appreciate it's currency by about 40% versus the dolar. Look at what even the Loonie has done over the last few years.
 

Lord Tammerlain

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It would be interesting to find out. I would be surprised if he was talking about a 3-5 year timeframe. How much has the dollar declined in just the last 2 months, and QE2 has not been officially announced yet. A 20% in the dollar versus gold for example only gets it to about 1600. Good chance it will not take 3 years to get there. Congress has been pushing the 2nd largest economy, Chine to appreciate it's currency by about 40% versus the dolar. Look at what even the Loonie has done over the last few years.

He did say over the next few years, to me that would generally indicate a time frame of at least 2 but most likely 3 or more.


I would expect he means a more permanent decline, rather then just some of the significant market swings we have seen. Also it will be effect a wider variety of areas, like domestic consumption in the US past just food and energy costs
 

washunut

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He did say over the next few years, to me that would generally indicate a time frame of at least 2 but most likely 3 or more.


I would expect he means a more permanent decline, rather then just some of the significant market swings we have seen. Also it will be effect a wider variety of areas, like domestic consumption in the US past just food and energy costs

We are in such unchartered ground it is very hard to predict where we will be in 3-5 years. I heard him speak recently abd he talked about shortening the maturities of bonds he is holding to this 3-5 range to limit his furation risk. He feels that the Fed will do whatever it needs to do to keep interest rates low for a couple of years. But if that takes QE2,3,4,5 who knows what inflation rates we are buying into.
 
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