Fed Stays Put

The Fed is staying put. That means “exceptionally low” rates for an “extended period,” according to the world’s most nefarious helicopter enthusiast.

To commemorate (or rather to lament) the deplorable institution’s resolve, your editor is today traveling to Japan, another nation that decided to “stay the course” in the economic trenches. We can hardly wait to see how wonderfully things turned out for the Land of the Rising Sun!

We’re joking, of course. Every investor knows the narrative of Japan’s lost decades, of zombie banks and thus-far-irrecoverable losses their stock market sustained as a result of “saving face” bailouts and government coddling. American policy makers especially know this, as they were the ones to caution against implementing such obstacles to Schumpter’s creative destruction.

History reveals that Japan didn’t heed the advice and, today, twenty years later, the Nikkei 225 bobs up and down around one quarter the value it was pre-implosion. More unforgivable still is the fact that the U.S. squandered so many chances to boast a well-earned “I told you so,” by following the exact same path themselves. Mistakes like these are unfairly devalued if nobody bothers showing up to point and laugh at them.

In any case, we’re looking forward to catching a glimpse of one possible version of America’s future. That the U.S. will retrace Japan’s steps to the print is not a given, of course, but if they do not it won’t be for lack of the Fed’s trying.

In contrast to what one might expect, the greenback actually rallied after the Fed’s statement yesterday. Gold rallied, but not enough to cause any real ruckus. It seems the market had already “priced in” a somewhat more dovish outcome.

“The dollar rose 1.1 percent to settle at $1.393 per euro in New York following the Fed statement and was little changed in early overnight trading,” Bloomberg reports. “The greenback gained after the Federal Reserve left intact its $1.75 trillion purchase program, which also includes as much as $1.45 trillion in mortgage-related securities and debt.”

That the Fed is sniffing one and a half trillion bucks worth of the same glue that sent the world’s largest economy to the emergency room seems not to bother the general investing public. “As long as you don’t inhale,” they say.

But inhale it does.

“It is intervening in markets as no Fed ever has,” relays Bill Bonner. “Its balance sheet – a measure of how much intervention it has undertaken – has shot up in a way that is not only unprecedented, but also almost unbelievable. Altogether, along with its not-so- pungent holdings of US Treasury bonds, the Fed’s balance sheet shows more than $2.7 trillion worth of assets.”

So what action might “more of the same” from Bernanke’s Fed solicit from the lengthy queue of irritated U.S. creditors? If we had to take a wild guess, we would say “more of the same.” That means continued pressure from Russia and China for a “more stable” reserve currency. From the BRIC nations – who between them hold some $1.5 trillion in dollar-denominated assets – it means more ominous meetings behind the former Iron Curtain. And, of course, it means more embarrassing laughter from Chinese Econ. 101 students when Timothy Geithner fronts up in Beijing to assure them that “our dollars are safe with you.”

It also means China’s incentive to cultivate domestic demand and to diversify away from dependence on the U.S. consumer grows stronger.

The Daily Reckoning