bpcw wrote: ↑Mon Nov 23, 2020 6:03 pm
Yodean, thanks for answering my question, it helps to understand why the dollar is going to be stronger than other currencies but still unsure as to the Fed's agenda, do they want the dollar weaker than other currencies or stronger and why? Are they printing to prevent defaults which could lead to an economic crash and all other central banks doing the same. China pegs their currency to the dollar as they are an export based economy and the US doesn't like it as it gives them a competitive edge. It's just tying all this together to get a clear and coherent understanding. Thanks again.
No problem. My general approach to the markets is to force myself to have
strong opinions that are
loosely held. The strong opinions help me make the big trades that lead to significant profits, and the "loosely held" part allows me to quickly change my approach when certain trades go against me. I try not to fall in love with my own "storytelling" when it comes to explaining how markets function, as in my experience market advisors who fall in love with their ideologies tend to be terrible traders (e.g. Peter Schiff, Nouriel Roubini).
From my perspective, the Fed wants the USD to be slightly stronger than all the other currencies, but not too strong. As you've probably heard, it's a race to the bottom for all the currencies, and the USD will most assuredly be last, which is actually an advantage.
If the USD becomes too strong, however, servicing the record amounts of debt both domestically and abroad becomes impossible, and will likely tear the entire financial system apart. There is an insane amount of Eurodollar debt (USD-denominated debt outside the U.S.) - I don't think anybody really knows the exact amount (maybe
Etep/Budge knows,
).
So if the USD becomes too strong relative to the other major currencies, the Eurodollar debt system will implode with massive default/bankrupties, etc. (this leads to supply destruction of the USD in the global financial system, which is extremely deflationary, as well as halting the velocity of money, etc. - keep in mind that most big financial transactions globally are still conducted in USD, wholly or in part).
So the Fed is quite worried about these deflationary forces, and also keep in mind that the Fed is in general reactionary, as opposed to being proactive, i.e. the Fed is printing a lot because it senses deflationary forces are already operating. So you are right in that the Fed is printing to prevent defaults and an economic crash.
However, if the USD is slightly stronger than the rest of the major currencies, then it's an advantage to those who hold USD and USD-denominated assets (Brent Johnson's "USD Milkshake"), like the Fed. Part of the reason (maybe the main reason?) that U.S. equity markets have been so strong and the USD itself is likely bottoming at current levels is that they have become the new "flight to safety" for foreign investors, i.e. if your domestic currency abroad is getting crushed, you are better off parking your capital in USD or USD-denominated assets.
So the Fed is walking a tightrope, in a sense, but its biggest worry currently is deflation, not inflation. Yes, there will likely be asset price inflation in the USD and USD-denominated assets (see above) on a long-term basis (from foreign capital flows, etc.), but the Western world economy is in big trouble currently, especially the Eurozone.
Another concept that is starting to rear its ugly head is the Triffin dilemma . . . a bit too complex to go into detail here but worth looking up if you are interested.
