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November 05, 2010 at 05:57 AM
The Fed announced Wednesday $600 billion in additional purchases as part of phase II of the quantitative easing (QE) program.
In our view, these large scale asset purchases will not move the needle in terms of economic growth; the real benefit here is a further weakening of the U.S. dollar relative to other currencies.
Back in 1994, China revalued its currency 50% in a single day. The result was a manufacturing boom, as the price of their goods relative to other currencies became much more attractive. The undervalued RMB has resulted in a significant U.S. trade deficit with that country, and cost our country nearly 2.5 million manufacturing jobs over the last decade (around 1.6% of the current unemployment rate). According to Zack’s, third quarter GDP was reduced by 50% (to 2% growth from 4%) due to the trade deficit.
I’m sure the Fed has these facts in mind as they buy more outstanding debt by printing dollars. The greenback is almost certain to continue its slide, making foreign equity and fixed income markets relatively attractive. The easy money environment will allow corporations to continue borrowing in the open market.
