Dollar Goes Down Along with Bailout Plan 55 comments
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The rejection of the $700B bailout plan by the House of Representatives came completely out of the left field, driving a knife through both US equities and the US dollar. For the Bush Administration, it certainly feels like they are moving one step forward and taking two steps back, but the severity of the financial crisis makes it absolutely necessary for Washington to put economics ahead of politics.
Although traders were initially dissatisfied with Congress’ approval of Paulson’s plan, they were counting on a bailout. The combination of a huge liquidity injection by the Federal Reserve today and the hope that the bailout plan would move forward kept stocks from falling further. However those efforts and the sleepless weekend of debates turned out to be futile after the House rejected the bailout bill.
In fairness, there was no was guarantee that Paulson’s plan would have helped average Americans, but at least it could have brought some stability to the financial markets. Unfortunately it is now back to the drawing board for Paulson, who has to meet with Bush, Bernanke and Congress to discuss their next steps.
Volatility in the financial markets benefits no one, especially as more than $1 Trillion in market value has been wiped out from US stocks today. The VIX, which measures equity market volatility, shot to the highest level in 6 years while gold prices jumped 3.8 percent. LIBOR rates have also skyrocketed while the TED spread continued to widen, indicating that as a result of the House’s rejection of the bill, investors both domestically and internationally have become more risk averse. Those who are willing to part with their cash are demanding a high premium.
Dow 10,000 Could Mean 100 USD/JPY
The Dow Jones Industrial Average closed down more than 770 points while the S&P500 dropped more than 8 percent. This is the largest single day drop in the Dow ever, and the largest percentage decline in the S&P500 in 20 years.
We have long argued that if the Dow hit 10,000, USD/JPY could fall to 100. That correlation remains intact today as the plunge in US equities drags USD/JPY towards 104.00. In the September 19th edition of the Daily Currency Focus, we argued that the US dollar could fall by another 5 percent. At that time, USD/JPY was trading at 107.40, and to many people a 5 percent move lower, which is the equivalent of 530 pips, seemed like a farfetched possibility. However, since then the dollar has already fallen close more than 300 pips, making a move towards 102 within reach.
With the US stock market plunging and the US government looking to raise the national debt, in addition to hammering out the bailout plan, the Bush Administration will have to work extra hard to reassure foreign investors.
Gold Becomes a Hedge for Inflation and the US Economy
Now more than ever, the US needs to rely on foreign funding. If Central Banks and Sovereign Wealth Funds around the world start to lose confidence in the US financial markets or the US government, we could be looking at a complete freeze in lending that expands beyond the banking sector.
According to an article in the Wall Street Journal, central banks are already loading up on gold as European central banks cut their sales to the lowest level in almost 10 years. Gold prices are up more than $35 an ounce today as a hedge for inflation and a hedge for the US economy. Everyone is starting to realize that commodities are the only assets that have no counterparty or credit risk. Gold prices first jumped on inflation fears after the Federal Reserve’s liquidity injections this morning. Having more than doubled swap limits from $290B to $620B, the Fed is trying to tell the market that it is serious about providing liquidity, and given today’s sharp volatility, it will continue to do aggressively in the coming days.
TARP Drama Gets More Dramatic - Time to Play Defensive
For everyone from traders, investors and banks to the average American, the latest development in the TARP soap opera means one thing – which is that it is time to become more defensive. The Treasury has failed to restore confidence in the financial markets and it could be some time before there is stabilization.
This is the new age of conservatism, which means tighter terms for loans on credit cards, cars and homes as well as more penny pinching by US consumers. Expect this to lead to more layoffs and less expansion efforts by US companies. In fact, the longer the US government takes to agree on a plan, the greater the recessionary risks.
Looking ahead, we still expect more weakness for the US dollar, particularly against the Japanese Yen. House prices, Consumer confidence and Chicago PMI are due for release on Tuesday.
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This article has 55 comments:
look into the camera and admit why we are here and how we got here!
Debt is the problem.. not that there isn't enough available
Savings ='s Security... Companies that grow too fast run the risk of failing in hard times.
I hate to say that our country has adopted the same monetary policy that threatens our sovereignty now. It is at risk my friend.
It's time we CUT Social Security, Fannie and Freddie and every other Bull#@it government program that entitles us...
We should start over with something like...
you have the right to: Life, Liberty and the pursuit of happiness!
Why are we so provincial that we can't learn from other countries? Our problems are unique only in scale. Otherwise, we're not the first and only.
if you want to loan those idiots in washington your money I understand...
they don't need mine
Our country is BROKE!
bottom line
This is your Wall Street just a little bit drunk.
-George Bush
Enjoy:
www.cbs.com/primetime/.../
P.S.: Paulson says the sky falls TOMORROW!
I'll have you know that I paid off 35k in debt last year and tucked 20k away in the bank. I am debt free and I rent! I didn't buy because I saw a bubble!
I didn't buy anything! Furthermore... if you removed the Government cosign in Fannie and Freddie, you correct the problem.
Right now, we have an inflated real estate market and this Paulson plan is only delaying the necessary correction.
we should hit ctrl Alt Dlte on our country's monetary policy and take our country back!
These people should loose their homes if they can't pay. And the government shouldn't bail them out. Last year I almost got a mortgage. I have been wanting my own home for a long time. I got pre-approved, and could have gotten a nice house. But I didn't. Why? Because as much as I hated to admit it, I couldn't really afford at the time. So currently I'm living with my parents and saving up every penny I can. And then when I get enough saved up, I'll go and put a 20% down payment on a house. Personally, I think that every home buyer should be required to put at least 10% at a bare minimum down on a house. If you can't save that up, then you aren't ready to own a home.
I'm all for helping out the unfortunate family who's been paying their bills regularly for years, then suddenly the husband looses his job and after months of not being able to find a job they can't make ends meet. (there's a difference between being not able and not willing - and working at McDonald's could at least be a temporary thing. Might even teach you a little humility). People like that should be helped. But those who took a loan much higher than their means, and got all the extras, I say repo the house and the boat and the cars. Make them go rent. The taxpayer shouldn't have to help someone who doesn't even want to help themselves.
I spoke with Glenn Beck on Friday about it. I sent him a 10 point outline that started with just that! Mr. Greenspan!
and I was at the time a homebuilder here in Nashville and even I saw this coming! Our country is overextended and overexposed and without a real energy policy, Our country is in SERIOUS danger!!!!
it is time for change! but not the kind you 'hope' for with obama...
this is going to require work, and pain... and I don't see it with either of my choices for president....I'm a conservative and my party has left me!
I don't care what your social/moral values are... just govern by the CONSTITUTION.... I'm starting to sound like Ron Paul:(
if anyone doesn't know the #, it is 202-224-3221
hold them accountable!
did you know that congress passed a 25B loan for American Auto makers last Wed?
They are OUT OF CONTROL! They must go...and you will see my name on a ballot sooner than later... and it won't be pretty but it is all necessary!
1. Fed/greenspan cuts rates to spark artificial demand of housing
2. Gov. fannie/freddie guarantee loans.. REMOVES RISK
3. Banks got nothing to lose! Gov. on hook... loan it!
4. Congress wants poor and minorities in houses...loosen restrictions
5. Loans guaranteed so get creative 7yr ARMS
6. introduction of 'newly' financeable people in market
7. supply flat... price skyrockets
8. all is good for 5-6 years...
9. all idiots buying too much house does so...
10 You are reading this post
@#@# CAN WE DO AWAY WITH FANNIE & FREDDIE???
risk-free gov. backed loans is why we are here.... I still don't agree with them. What can I do?
What was that misleading headline again? Oh, yeah,
"Dollar Goes Down Along with Bailout Plan"
When I questioned one person about their mortgage payment (more than 1/2 their income), they told me that they deserved such a nice house, after all they've been through. Another person had 3 car payments ranging from 500-800, and they deserved them because they worked hard at their job. Ironically, that person made monthly bonuses the year before and the first couple months of this year, and just one of those bonuses was enough to pay off the entire debt. But, surprise, surprise!! They spent it on vacations and such. Didn't save a penny of it. Now they are out of work. Guess they must not have worked that hard, huh? :-)
So yeah, most people put themselves in that type of situation because of their own poor choices.
lets start there... then lets not lend it and borrow it and overexpose it
Problem is.... I've been losing money for the past week, as the dollar has gone UP, ever so slightly, but UP.
So if you'd be kind enough to tell me where dollar is going down, I'd like to go there.
I realize the market's rigged, and the Fed and it seems every other government in the world is holding the dollar with everything they got. But they shouldn't really be able to do it on pure muscle, just like you can't really hold the market on pure muscle. Or can they?
Then part B will be where other countries which rely on export will try to hold their currency lower than USD, so they are more likely to cut rates if they could against the USD.
I might be wrong, but that's what I think. And it's a gut feeling.
Have you ever thought of borrowing dollars and spending them as taking a short position against the dollar? Isn't there an expectation of easily acquiring dollars later to use for repayment? Can what we see now be a bit of a short squeeze going on as debtors sense present and future difficulty in acquiring dollars?
Your only hope is that "Helicopter Ben" helps 'em out. Otherwise, this could be the mother of all short squeezes unraveling.
You can certainly arrest everyone one and set blame later, but just ignoring the problem will just cost you more in the end. But hey, you've been ignoring the problem for 10 years, why not keep going? Look where that got you.
Good luck with that and remember America is bliss.
The federal reserve ,SEC ,Treasury all need to focus on how to get trust back between banks (the bailout would not have worked ) -and it should be full disclosure (it doesnt necessarily need to be in the public domain much like the fdic 's list of troubled banks isnt ) -to regain trust between one another -giving Grades to banks (much like moody's but a private rating) would benefit the market in the long run - it is my opinion that the weaker banks are already dead men walking but other banks need to know who they are in order to move on and start lending once again -
You Americans need to start saving and so does your government. Your government saves by cutting expenses and/or raising taxes. Cutting spending is basically idiocy since it will cause your economy to freeze even more (with the exception of removing your troops from Iraq). America has been living large on credit and high liquidity for years. You will pay today or tomorrow. You can not solve this by printing more money (although sadly in the real short term you need to since everyone is tightly squeezing their money right now, even as it slips away).
If this were one or two companies, no problem, let them fail and a stronger company will buy them out. There are no strong companies in America left, they are all teetering, the only somewhat strong institution left is your government. But ignorance is winning the day.
You are going to pay in higher taxes, the choice is today or tomorrow. Tomorrow will mean that your pensions, IRAs, and 401Ks, and jobs will be wiped out along side.
I know, its not your fault. The Wall Street executives and inept politicians did this. That and those crummy sub-prime homeowners. Guess what? They are Americans, its all the same problem whether you caused it or you neighbor did. If an arsonist sets your home on fire does it matter that you didn't cause it? Well guess what, America is burning. Save the blame game and the trials for later. Worry about fixing the problem now. Put out the fire first, catch the arsonist later.
Personally, it is painful for me as a Canadian, since we will suffer too, but let's be clear about one thing. Our banks are stable, our currency is stronger than ever before, and we have tons of natural resources to rely on. Similar claims can be made for Russia, OPEC, China, India and most of Europe. You Americans will suffer more than anyone else. The choice is yours.
From non-partisan watchdog opensecrets.org
Its strange how some comments on seeking alpha operate.
I read this title and laugh for just a simple matter, without commenting on other issues here as well. The dollar as gone UP young lady! Unless you think the dollar is doing down just because it actually slices down the EURUSD chart!! Lets see...
When the news came out - this plan as it is wont go through (just!) - the green back scored 143.90 and quickly and expectedly fell to 145.72, thats 181 pips sharp decline on the Dollar. But then, and here's the relevance of this comment, it got back UP to 143.23 by the time i'm writing this. As said - will not comment on the bailout per se for i think is to early (for comments not the plan), but certanly am asking all S.Alpha commentators to be more reasonable and balanced in those lines for you can actually interfere in decisions of those less experienced readers and/or new investors.
so the title should have been:
"Dollar climbs (still) against all odds"
And you base this on what? Empirical evidence? Some magic formula? Please do tell what evidence do you have that it does what you say it does?
Well what should one expect? The one thing all Americans have in common is that the sole reason they or their ancestors came here--leaving family, Friends, Carree, and the village their ancestors had lived in for ten thousand years--to become filthy rich without working. (The only exception is Blacks, but only those whose ancestors came here before 1807, when the slave trade ended; Blacks and "Hispanics" coming to the US since 1865 are just as greedy, often more greedy as whites.)
Americans have in their genes total selfishness. Well you guys deserve what you get.
There's a worldwide dollar shortage, but don't let that bother you.
Just keep going on about how the dollar is being devalued because that's what you learned sophomore year.
Disclosure: long UUP.
Now if the number of dollars increases less quickly than the number of euros or yen, then the relative value of each dollar will increase vs. those currencies. While in the larger picture each of the three currencies will buy less "stuff" than it could prior to the increase. It's still inflation, just that the dollar is inflating less than the euro or yen.
the dollar is soaring
for Reviving the Economy
Stan Muse
smuse@us.ibm.com
The Federal Reserve is out of Federal Funds rate options and now the Congress is about to pass legislation which will be the largest bailout bill in the history of the world. Fannie Mae and Freddie Mac are now penny stocks with perhaps over 1000 bank failures yet to come. The American taxpayer will be told that they and their children will be writing big checks to rescue the Wall Street crooks and congressmen that caused all the problems, while receiving nothing in return.
Anyone who has been following recent congressional hearings knows by now that this is unacceptable to Main Street, the voters who will be firing their congressmen for turning the USA into a socialist country. It is also widely believed that this bailout bill may not be embraced by Wall Street because of its onerous terms even if passed. Finally, it will not provide sufficient liquidity for improving the rest of the economy.
A much more effective and fairer way to end our economic crisis is easily attainable. To state it simply, all Congress has to do is to pass a Mortgage Investment bill which allows individuals a one-time option to use some of the funds in their IRAs to pay off their mortgage balance in full, without any penalty, interest, or taxes for doing so. In return, individuals choosing to exercise this option give up their mortgage interest tax deduction for life. This bill could be passed quickly and independently of any other economy-related legislation currently being debated, or included in the current bill. Individuals choosing this option would need sufficient IRA funds to pay mortgage balance in full. The actual payment to the individual’s mortgage company would be done by the IRA managing institution to avoid fraud.
As one senator recently stated, ‘for most people their home is their IRA’. For many others, their 401-K plans hold many trillions of dollars, much of which by now is parked in money market funds or T-bills as mine is. If these IRA funds could be released to pay off mortgages, we could possibly avert, or at least significantly shorten, the economic recession we now find ourselves in. In fact, no other bailout legislation may even be necessary, although more regulatory legislation is certainly needed.
I asked Allan Meltzer, Arthur Segel, and Ellen Zentner to review this proposal and received some positive responses. Ellen said it seemed to be fool-proof and better than a reverse mortgage. In fact, it is a no-brainer for the homeowner with a large 401-K balance, and for the government. The only people who might object, as Ellen stated, are the bankers who want to keep homeowners dependant on them, especially those in the upper-income group. But even the bankers can not want the government to own a large stake in their business for a multitude of reasons.
It makes sense to allow people to use their IRA money, which they earned, to invest in the best and safest investment they could ever make, their home. Presumably they will need a place to live in retirement on a fixed income. It makes no sense for someone with more than enough IRA funds to cover their mortgage balance to loose their home because they lost their job and can not pay their mortgage. It also makes sense because it is not some form of government bailout which rewards the bad behavior of mortgage companies and unqualified borrowers. Instead, it rewards the good behavior of those who have saved and invested in the economy
If only 5 million people chose this option, for an average of only $200,000 each, the result would be $1 Trillion in paid-off mortgages, providing liquidity to the mortgage industry. By executing the option, an individual’s annual mortgage payment would become disposable income to put back into the economy or back into IRA accounts. To the individual, the effect is the same as lowering taxes. If only 5 Million people were able to put back $20,000 per year into the economy, the result would be a $100 Billion per year stimulus package for many years to come.
In my case, with $800K in IRAs and a secure pension, I would increase disposable income by $1600 per month while reducing the IRA balance by only $160K, but saving over $120K in future interest payments. I could retire, which I can not afford to now, and leave my six figure job to someone else. I could also quickly replenish the IRA money used to pay off my mortgage with the extra income.
Adding a further provision to delay receiving Social Security payments for a year in order to exercise the option would be a baby step towards privatization of Social Security. Anyone financially able to exercise the option should be able to delay the payments. For every 5 million people choosing the option, approximately $100 Billion would remain in the Social Security fund. This could fix our problems with Social Security for good.
Some of the benefits of this plan would be to:
• Immediately increase an individual’s or married couple’s disposable income by tens of thousands of dollars each year while enabling them to become debt free
• Save homeowners hundreds of thousands of dollars in mortgage interest payments
• Encourage individual IRA savings by many who have never saved
• Allow many people to retire earlier than they otherwise could
• Create demand for housing, reducing inventory, and stopping the decline in home prices
• Stimulate the overall economy, creating and saving jobs
• Not cost the government anything, and actually Increase federal, state, and local tax revenues by eliminating individual mortgage interest tax deductions, without raising tax rates
• Force the banks to sell their good loan assets to cover their bad loan losses, instead of forcing the taxpayer to buy their worst loans, and increase liquidity for new loans to those who need them
• Allow the free market economy to work through the crisis rather than resorting to socialism
• Not increase the national debt nor the money supply as a bailout would do and contribute to inflation
• Allow the individual home owner to the freedom to become their own banker with the money they earn, reducing America’s dependence on bankers, and changing America from renters and borrowers to homeowners and savers
The merits of this simple plan, the Mortgage Investment bill, for saving the economy, instead of trillions of dollars for a Wall Street bailout which will socialize the finance industry, are obvious and would benefit everyone involved. The individual gets more disposable income and a chance to live debt free, the capital markets get needed liquidity, the government collects more taxes and collects them sooner at the expense of the bankers, the housing market gets more demand, and the general economy gets a much needed boost for the next few years.
Democrats should like this plan because they can claim that it lets the wealthy pay for this mess. Republicans should like it because it increases disposable income, which has the same effect the same lowering taxes. The average voter should like it because it addresses all segments of the economy with a huge economic stimulus package, not just Wall Street, and costs nothing while helping to pay off the national debt and potentially fixing Social Security.
Dave
interestingly, though, i think if you priced all assets in gold, this depression would be deflationary as well. so perhaps it depends on what currency you are using when asking whether the depression is inflationary or deflationary.
On Sep 30 12:58 PM Muddling Investor wrote:
> Last time we had Great Depression, we had deflation. Why would we
> have inflation now? Credit is frozen, how do you get money to inflate?
> It's ridiculous. Just look at the dollar strength against all currencies
> yesterday and today.
>
> Disclosure: long UUP.