Tracking QE – Currency Wars

In our introduction to QE, “Quantitative Easing: Facts and Fallacies“, we did not support a call for QE3 because we could see no rationale for it. In a recent video broadcast, Jim Rickards said some form of QE3 will come as early as May. He sees this as a function of the currency wars – to cheapen the dollar. It presupposes that the Fed would choose to intervene directly in what he calls the currency wars. The Fed is certainly aware of the issues. We do not think they will intervene overtly. Rather, as Rickards suggests, it will be via some oblique excuse around the economy. Their mandate to maintain stable employment would allow such an intervention if the dollar rose too high against other currencies such as the euro or the yuan.

We think it important enough to track the signs of QE and its development, partly to keep the pundits honest and partly for its potential economic and market impacts. We think Rickards is right. So the things to watch are the USD and the EUOUSD cross charts. To follow developments over time, read on.

  • 20111231:  King World News: Jim Rickards (21:32 minutes).
    • QE will come in some oblique form in response to continued devaluation of the currencies of major trading partners , including a possible re-peg of the yuan to the dollar.
    • It will be called targeting GDP or something oblique. This, as he argues, will have no ceiling or end-date, unlike QE1 and QE2.
    • Commentary: Such a move would give the Fed unlimited license to print. This in turn gives them a policy tool by which they could execute rapid response to monetary developments in other countries. The questions to consider are what assets would they buy to implement this policy and how much of the monetization actually goes into circulation.
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