I could be wrong—hell, most of the time, I’m way wrong. But I do think that today is the day the dollar breaks down.
Consider the evidence:
The Bank of Japan managed to keep the yen down following last Friday’s Sendai quake. It was trading in an eerily placid 81-to-82 band on Monday, Tuesday and Wednesday—but then Thursday (Japan time), someone at the BoJ must’ve prematurely decided that it was all over, because they let go of the gas.
What happened? It all went south—huge. As I write this morning (8:12am EST), the yen is trading at 78.50 to the dollar.
Meanwhile, on the eastern side of the Pacific pond, the Producer Price Index numbers came out yesterday—and they weren’t pretty. During February, PPI rose 1.6%, against a consensus estimate of 0.7%. For the year ending February 28, the PPI rose 5.6%. (report here)
Tomorrow, the Consumer Price Index numbers come out—and if the PPI numbers are any gauge, they do not look promising.
But Ben Bernanke and the Tools of the Fed are cavalierly dismissing any notion of incipient inflation. They keep insisting, "Core inflation is all that matters! Forget fuel and food and commodity prices! It's Core Inflation!" As if people bought more of this magical "core inflation" at the supermarket than food, and filled their cars with "core inflation" rather than gasoline.
Anyway: Bernanke and The Tools need to keep interest rates artificially, sickeningly low. Their rationale is that their Zero Interest Rate Policy (ZIRP) and Quantitative Easing 2 (QE-2) are necessary so as to kickstart the economy. But they also recognize that if they raise interest rates, the Federal government would not be able to finance itself—
—in other words, the Federal government will go broke if the Fed raises rates.
This is really the crux of the matter: The Federal Reserve is in a position where they realize that if they raise rates, they bankrupt the Federal government. So they have to stand pat, and pretend to the public and to themselves that there is no inflation, it’s all just a mirage.
As it is, the Fed debt monetization policy otherwise known as QE-2 is buying up 50% of the Federal government’s deficit for FY 2011. And though QE-2 is supposed to end in June, Treasury funding requirements are so huge—and the Treasury bond market is so weak, especially now that Japan is in crisis mode and will not be able to buy up its regular share—that Quantitative Easing will have to be extendeaasasd.
But that’s a side issue: For now, the markets all have the fim expectation that the Fed will not raise rates, no matter what the inflationary provocation, precisely because of the reality of the Federal government’s de facto bankruptcy.
Now, a couple of weeks ago, I wrote a piece called "The Dollar and the Next Ten Days", where I argued that the dollar was at a crossroads: I argued that, off a three year trend, the dollar was at a crucial juncture of either breaking down, or bouncing back up, and that it would all happen over the next week and a half of trading—hence the caveat "the next ten days".
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