Spend, Tax, Borrow

Posted March 22, 2009

The US dollar weakened again over the weekend against most major global currencies in response to expected drops in U.S. yields due to the implementation of a policy of quantitative easing. Eastern Europe is back in the news as central banks plan to lower benchmark interest rates to fight continued economic declines even as currencies values plunge.


The current US plan for bringing the recession to a halt can be summed up in three words: spend, tax, borrow.  President Obama plans on spending over a trillion dollars to stimulate the economy.  He plans on increasing taxes to pay for his domestic agenda which includes health care reform.  He plans on borrowing trillions of dollars to cover the growing US deficit.

The effect on the greenback is a decline in the US dollar.  The dollar began falling last week when the Federal Treasury Secretary Geithner announced a policy of quantitative easing was beginning.  The decline was extended over the past weekend as investors speculate U.S. yields will fall as the US government begins purchasing Treasuries.

Yes…it’s true.  The US is going to incur massive amounts of debt and then sell Treasuries so it can pay itself back.  Apparently investors don’t find any confidence in this plan as the dollar fell against the euro to $1.3633 dollars per euro and to 96 yen per dollar. 

Today, 23-March-2009, Treasury Secretary Geithner announces details on a plan to eliminate toxic assets from bank balance sheets.  All people know right now is that the plan involves a joint public-private effort and toxic assets will go up for auction.  No one seems to know for sure who will want to buy something called “toxic” but whatever the details include there will be a plan for government backing of all assets bought and sold. 

In the UK the policy of quantitative easing is getting into full swing as the government takes drastic action to slow down the UK economic decline.  On 20-March-2009, the UK pound gained against the dollar in response to the US plan to buy Treasuries and to the Bank of England chief economist saying the UK economy will grow this year.  

The pound advanced to a seven week high against the US dollar to reach $1.4449 US dollars per pound.  The UK pound also strengthened against the euro to 93.77 pence per euro.

Eastern Europe is back in the currency news after a relatively quiet 2 weeks.  The Hungarian, Czech, and Poland central banks are expected to begin cutting interest rates.  The currencies in Eastern Europe have become the worse performers in the marketplace over the last six months.  Normally during these economic conditions, interest rates would be raised to attract foreign investors.  These are not normal times though so radical responses are needed.   It is believed the reduction in interest rates will stimulate the economies which is taking priority over plunging currency rates.

The European Union leaders have agreed to increase the credit line to the emerging economies which did lead to a small rally in currency values.  The Polish zloty gained against the euro to 4.5885 zloty per euro.  The Hungary forint rose to 301.35 forint per euro.  The Czech koruna strengthened to 26.665 koruna per euro.

The Australian and New Zealand dollars continued their advance against the US dollar as commodity prices rose.  The Aussie rose to 69.02 US cents.  The kiwi rose to 55.95 US cents.

On 20-March-2009, Banco do Mexico reduced the benchmark interest rate to 6.75%.  In response, the peso rose to 14.1671 pesos per US dollar. 

So in this strange financial market in the making, the US is printing money so it can buy its own Treasuries.  In other words, the US government is going to loan itself money and then pay itself back.  Sounds a bit convoluted, but at least a plan is going to be announced concerning the toxic assets.  That is what the G-20 has been demanding in the last week…a toxic asset plan.

In the meantime…spend, tax, borrow…spend,tax,borrow…