Deflation rearing its ugly head and the euro is up

Interesting day so far.
Stocks down, interest rates down, commodities down, including gold (seems the found Hugo’s gold?) but the euro is up some, after falling some last week.

With federal deficits too low most everywhere, it’s like a general crop failure, with the question being which crops will go up the most vs each other.

Not easy to say, but the euro has to be a bit of a favorite given the sincerity and intensity of their commitment to austerity/deficit reduction? And their new good buddies, the Swiss, now helping out by buying euro as others buy their currency with their new cap in place.

However lower crude and product prices do help the US more than the rest, so that’s a factor that gives the dollar an edge. And the portfolio shifting/speculation/trend following in illiquid markets can overpower the underlying fundamentals as well medium term.

And the dollar and the euro are seeing bids from China and Japan now and then as those nations work to protect their softening export markets.

My least favorite currency longer term may be the yuan, with its inflation issue and ongoing deficit spending, both direct and via state bank lending, though they too seem to be cutting back some. But until FDI (foreign direct investment) lets up, those ‘flows’ continue to support the yuan.

And commodity currencies are in a class of their own, weakening with weakening commodity prices.

It’s also noteworthy that the deflation is coming at a time when central banks, for all practical purposes, can’t be much more inflationary by (errant) mainstream standards of measurement. Unfortunately, however, it’s not that they are out of bullets, it’s that the presumed lethal live ammo has turned out to be blanks, with mounting evidence that the gun was pointed backwards as well.

The obvious answer is a simple fiscal adjustment- just a few keystrokes on the govt’s computers can immediately restore aggregate demand/employment/output- but they’ve all talked themselves out of that one.

However it’s not total doom and gloom.
For example, the US deficit is large enough to muddle through with decent corporate earnings and a bit of minor ‘job creation’ as well.

And sequentially, GDP is slowly improving: .5 q1, 1.0 q2, and maybe 1-2% for q3.
Good for stocks, not so good for people, but the bar is now set so low and the understanding so skewed that ‘blood in the streets’ isn’t yet even a passing thought, so don’t expect much to change any time soon.

And standby for the ECB writing the next check, no matter how large, to keep that all muddling through as well.