Apparently, the Swiss franc is too high — or so says the Swiss central bank. As a result, they are selling francs in the foreign exchange market to get the franc to come down. There has been a lot of speculation about the Swiss and their plans to devalue the Swiss franc, including on this site. It now seems clear that devaluation is where things are headed. On Feb 19th, I said as much:

Thirty years ago, it was “Anarchy in the U.K.” as Britain tried to get away from its role as the sick man of Europe. That meant civil unrest, high inflation and a weak economy. Margaret Thatcher was seen by many as the solution. Today, the British economy is sick again and there is anotherready solution to hand: quantitative easing a.k.a printing money:

Judging from recent events, the bond vigilantes are right to suspect that Ben Bernanke is all talk and no action when it comes to keeping long-term rates low. If you recall, I had actually believed the Fed would support bonds because it was concerned about long-term interest rates. This is part of the reason I believed that Treasuries would rise despite being in bubble territory but it looks unlikely.

News in Japan has been particularly grim. Industrial production has plummeted, exports are in free fall and banks are simply not lending as excess reserves pile up. As a result, Japanese share prices threaten to revisit lows that bring the country back to 1981 prices. Japan is in Depression. The question is what to do about it. Rates are already near zero. The answer that I believe will be found by Japanese policy makers is what is known in economic policy circles as quantitative easing, a hifalutin way of saying printing money.

Federal Reserve Chairman Ben Bernanke gave a speech at the London School of Economics today in which he outlined the measures the Federal Reserve was prepared to take in order to deal with the financial crisis. Of particular note, Bernanke indicated that the U.S. central bank would keep interest rates low and that it would buy mortgage-backed assets in order to increase its direct control over the interest rates borrowers actually see.

To my mind, lowering interest rates in the aftermath of an enormous credit bubble where institutions have just destroyed $1 trillion in capital is wrong. It distorts lending decisions such that yet more money will eventually be lent out imprudently. The only way to increase credit availability is by getting reserves into the system. And normally you do that by making a profit. However, profits are hard to come by for financial institutions right now.

The yield on he three-month U.S. treasury bill went below zero for the first time ever. This seems to be an unprecedented move where investors are actually paying the U.S. Government to borrow money. In my estimation, this is not just a flight to a safe haven in turbulent times. Negative interest rates in U.S. treasuries reveal a bubble that will pop and end badly for all concerned.

First the Fed and now the ECB and Bank of England are talking about some form of quantitative easing! Of course, if they are all going to do it, do we have a dollar crash or is it more of a crisis of confidence in fiat currencies in general? The only obvious [...]

As interest rates in the developed economies approach the zero bound, we must begin to ask ourselves how effective monetary policy can reasonably be in these circumstances. And if policy is to be effective, which policy tools will be most advantageous to use? Or are we just pushing on a string here?

In plain English: central banks are running out of bullets and the deflation bogeyman seems to be right on our doorstep. Can they even stop him from ripping our house to shreds and sending us into depression?

In economic circles, there has been a lot of buzz about Quantitative Easing of late. Basically, the U.S. Federal Reserve has lowered interest rates to near zero percent and the fear is that these cuts will not have enough effect on the willingness to lend in order to reflate the U.S. economy. Therefore, the Fed has decided to take more draconian measures, one of which is Quantitative Easing, flooding the economy with money.