lewisabroad

World Currencies Play 'Meet Me at the Bottom'

One missing point to this analysis. How much new cash was injected into the market versus how much liquidity was lost when the OTC derivative and commercial paper markets collapsed? CDO securities were traded a lot like cash up until a few months ago, and had a value based on the "underlying asset" and the ability of that asset to provide a return. When exchange in those derivatives slowed dramatically it should have been the equivalent of taking millions in cash off the balance sheets of big investment banks and corporations alike.
The real quesiton should be, how much "value" was destroyed during the risk repricing compared to how much liquidity was injected by the fed.
If the amount lost in value by these assets is less than the fed's injections, then deflation should be expected (as we see). Long term, nothing will change unless the credit markets and OTC derviative markets pick up again, requiring loan default rates to improve among other things.