Obama’s Secret Jobs Plan

Written by: parisalexandra - Posted in: Job Articles

The dollar’s value plunged Tuesday, while gold simultaneously hit a record high ($1,045 per ounce). You might think this would worry the administration and send the Treasury secretary to the microphones in an attempt to head off further collapse in the currency. Do the darkest days of the Carter administration loom again, with inflation and unemployment both rising, apparently without limit?

Far from it—the last few weeks of dollar depreciation is an amazing stroke of luck for the Obama administration, admittedly facilitated by their adroit maneuvering in the corridors of high international finance. If it lasts—and they need some more luck—this could save the midterm elections for the Democrats.

The near-term causes of the latest round of dollar decline are obvious. Australia’s central bank raised interest rates slightly on Tuesday. By itself, this would not be an exciting development, but it comes fast on the heels of the G-20 Pittsburgh summit in which all participants (including Australia) seemed to imply that “tightening monetary policy” (i.e., raising rates) was some way off.

So if Australia begins to tighten—an implication that its economy is picking up—market participants reckon that more commodity producers and other parts of the Pacific Rim will soon feel the need to do likewise. At the same time, the U.S. has signaled—most recently on Monday, in the powerful form of William Dudley, president of the New York Fed—that interest rates here will remain low for the foreseeable future.

If you can borrow in dollars and buy Australian (or Korean or Chinese, etc) government debt, you are in what is known as a positive “carry trade”—because of low interest rates here, you pay close to zero to borrow the dollars (e.g., if you are Goldman Sachs and have unfettered access to the Fed’s discount window) and you can invest in Australia at more than 3 percent interest (or you can plunge into speculative Chinese automotive stocks, as Goldman is now doing).

And if you think interest rates will rise in the rest of the world before they do in the United States, because the dollar is on its way down, then this carry trade becomes a one-way bet: You make money on the carry, you hold foreign currency while the dollar falls, and then you pay back your loan in depreciated dollars.

Source: http://www.thedailybeast.com/blogs-and-stories/2009-10-06/obamas-secret-jobs-plan/

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