The story has become much more clear this week. The dollar standard is going to be defended by the G8. They are now united against China's calls. Russia is now falling in line since the G8 meeting this week. Japan's minister said their trust in US treasuries is "unshakable". http://www.reuters.com/article/usDollarRpt/idUST32538820090612 Russia's finance minister said they have full confidence in the dollar, and that there's no immediate plan to switch from the dollar. http://www.bloomberg.com/apps/news?pid=20601087&sid=abKnXn3puSjY "The U.S. dollar is currently trading at a fair level on global currency markets and the greenback is unlikely to get be pushed lower in the near future, International Monetary Fund Managing Director Dominique Strauss-Kahn said Saturday." http://news.morningstar.com/newsnet...J/200906131149DOWJONESDJONLINE000470_univ.xml The IMF announcement to me means that the G8 will defend the dollar in the forex markets. This pre-empts the meeting between BRIC countries next week. The dollar is emerging the victor. With Russia making an about face this week, after mentioning earlier that they were going to dump the dollar, it seems the powerful allies made an offer they can't refuse.
You're absolutely right. Once we start in that direction, the next step would be to go back to the barter system (well, that would be "going backwards" for most of the civilized socieities of the first world). And once we make that mark, we might as well just revert to pure tribalism. None of these things are going to happen unless there is a major collapse of our current socieites, and that would not be a good thing.
Unshakable huh? So i guess this means that we can print 10 trillion dollars tommorrow and they will still take our money? Wow...that sounds like a good deal for us! After all...their trust in our monetary policy is unshakeable meaning there is NOTHING we can do to shake it...there is no decision bad enough that we can make that will shake their confidence. Do you see how ridiculous that statement is? The fact that these guys are talking that they have full confidence today and last week they are talking about not having the dollar as a reserve currency anymore means something fishy is starting to go on. I'm smelling B.S. right now.
We'll see if their actions follow their words. It seems more and more as time goes on that lip service is just that. I am sure that they are all very nervous and just don't want display that.
I never implied that the Fed would lose the control of its monetary policy, I just mentioned that it is a possible thing to occur (eventhough I actually think it wont happen). Scrabino mentioned the Japan case and, while there was not inflation there, it was another example where the CB lost control, or effectivines, over monetary policy. The equilibrium was achieved not with inflation but with lack of effective demand, thus the lost decade(s). Mission NOT acomplished. Here goes attached a part of one of my fav macro books by Gregory Mankiw where the liquidity trap is briefly explained:
I think the threat of a liquidity trap was nullified with quantitative easing. The equity markets have definitely changed from a deflation bias in March, to an inflationary bias in May/June. This change coinciding with the last G20 meeting where the central banks agreed to pump the system with massive liquidity.
In that tidbit from Mankiws book he imples that the liquidity trap is avoided via inflation; once nominal interest rates are near zero, only surges in price indexes can púsh real interest levels down. I dont know if the market is having a inflationary bias recently, I think he is more like in standby mode right now. We just came from a year of massive wealth destruction and if it wasnt for all the money pump we would have had massive deflation as well. So basically what CBs did was adequate and not inflationary at all vis a vis the mentioned context. We have to pay attention to which marcoeconomic variables the market is taking into consideration and what is the main cause/effect relationshop that is going on (sometimes it even happens on reverse) now. For example, if markets start to believe the Fed will protect the dollar, treasury yields will rise while dollar strenght will grow (. But, if the players get the feeling that the Fed is getting behind the curve, the dollar will weaken but the yields may rise as well, in this case to serve as a protection of inflation - and this would led to a whole another different kind of equilibrium. In the first case higher yields are accepted by market participants while in the second higher yields are demanded by them. Subtle but crucial differcence. I think it is pointless to try to predict the future since it is still not defined yet - eventhough we traders have the feitish that what is about to happen is a perfect mathematical function of the past! It will depend on what CBs will do and how the markets will percieve it. But, to take sides, considering all possible scenarios, the sucker bet may be in the play over the dollar taking a beating - which seems like the less likely outcome to me.