Gold and The Dollar

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In recent days the Canadian and Swedish central banks have joined the majority of other G10 central banks by indicating that they too may engage in quantitative easing now that the interest rates have been reduced to 25 and 50 basis points respectively. The ECB is wrestling with ways to extend its own form of quantitative easing and an announcement is likely at its next meeting on May 7th.

While some observers have focused on the potential debasement of the US dollar by the aggressive monetary and fiscal policies of both the Bush and Obama Administrations, many investors are worried about the viability of the whole universe of paper money.

Unlucky Number Sleven: G7 and Beyond

I was walking through Central Park the other day. I came across some old guys playing chess. There was also this young kid trying to kibbitz—offering unsolicited advice to the players. It made me think about the G7. Those that will be doing the talking won’t be taking action and several key actors in the important geo-political and economic dramas are not going to be attending. The old men who do attend will be proffering advice to those who are not. China should let allow a more flexible currency, in apparently a unilateral direction. Oil producers should also allow their currencies to appreciate and do more to contain the increase in oil prices. Iran, whom the Israeli Prime Minister said, along with Syria, was behind recent suicide bombing in Tel Aviv, faces a month-end UN deadline to cease its uranium enrichment program. It is under international pressure not to acquire the weapons that at least three of the G7 countries posses.

The QE Paradox

It was supposed to be straightforward. In mid-March the Federal Reserve announced it would begin buying US Treasury bonds. This is quantitative easing (QE), no? The Fed is printing money. Other things being equal, as the supply increases, the price will fall.

It may be QE but is not QED, an acronym, which traditionally ends mathematical and philosophical proofs, for a Latin phrase meaning “which is demonstrated”. The negative implications of the Fed’s QE policy have not been demonstrated. The resilience of currencies whose countries have engaged in QE has been remarkable. It is worthy of examination.

G7: Old Whine, New Skins

For the first time in four years, the G7 changed their statement about the foreign exchange market. Rather than simply note that the foreign exchange market should reflect fundamentals and that excessive volatility was not desirable, the G7 raised their level of concern.

“Since our last meeting”, the G7 said, “there have been at times sharp fluctuations in the major currencies, and we are concerned about their possible implications for economic and financial stability.”

A Reasonable Case for Guarded Optimism

Toward the end of the month we will learn that US economy continued to contract sharply in the first quarter. The economy is also likely contracting in the current quarter. Unemployment is still rising and house prices are continuing to fall. But to conclude, as many of the cynics do, that all the government spending has proven for naught, is premature.

In fact, in the current quarter, income and spending are likely to be more robust than many suspect. The reason it may surprise is because of the exclusive focus on the market, in this case the market for labor. The deterioration of the labor market and the decline in household net worth, as the price of homes and equities tumbled, slashes income and consumption.

Bloomberg: Euro Up Ahead of BOE

An Open Letter to John Galt

John Galt is the fictional protagonist in Ayn Rand’s 1957 classic Atlas Shrugged. Rand, who escaped with her family from the Soviet Union as a young adolescent, sketches out libertarian views through her work. In her novels strong, creative, and heroic individuals resist statist and collectivist forces. Galt organizes a strike by these people in response to the dystopian socialist America Rand paints. Galt and the other “Atlases” withdraw from society and build their own free-market utopia (which is never detailed).

As the US government increased its role in the economy in recent months, and especially as officials began trying to cap compensation schemes from those institutions receiving large sums of tax payer money, Atlas Shrugged has seen new interest. On March 25th, a little more than a half a century after it was first published, the book rose to 17th place in Amazon sales, surpassing most books including President Obama’s Audacity of Hope. There is much talk in the blogsphere of a new Galt strike. Rand fan and California Congressman Campbell recently warned: “The achievers, the people who create all the things that benefit the rest of us, are going on strike. I’m seeing, at a small level, a kind of protest from people who create jobs, the people who create wealth, who are pulling back from their ambitions because they see how they’ll be punished for them.”

Dear John,