Uncle Sam Hands Out More "Free Money"

Joined : 23 Dec 2007 Posts : 235 Location : Nigeria

Today's commentary is by Sean Hyman, Currency Director and editor of The Money Trader.

Good Day Currency Traders! Very Happy

Washington D.C. has been concerned that the Fed's "cheap money" policies may not be enough to get the U.S. economy firing on all cylinders again. So on Thursday night, the House of Representatives passed a bill to hand out some "free money" of its own and stimulate the economy until the Fed's recent rate cut kicks in. bounce

Originally, Congress's plan was to send US$100 to US$200 to every U.S. person who earns the lowest income levels in America.

Even though that was a US$150 billion package, it wouldn't have done the job. And apparently, Congress realized their original plan would flop.

So late Thursday evening, the House passed a different bill (that will still need to go through the Senate) that proposed several items. Assuming it passes and the Senate doesn't change any provisions, this bill could infuse the economy - even if they're way too late to stop a recession.

US$1,200 Checks in the Mail?
The bill says rebate checks should be sent to as many as 117 million households.

These are the households that have single adults making under US$75,000 annually or married couples earning under US$150,000. Singles that qualify could receive up to US$600 and the couples could get up to US$1,200. It's possible that a couple could receive up to US$300 per child in their home too. A person would also have to minimally earn US$3,000 annually to get a rebate check.

If a person/family meets those provisions, then they could receive a check within 60 days as long as it passed by the Senate. Since this will probably take until May to pass, don't look for a check before July. So this summer, you may have sparks flying not only from fireworks but also from a "free" check in the mail courtesy of Uncle Sam.

This Aid Won't Stop a Recession...
But At Least It's Coming
Again, nothing's etched in stone yet. The qualifications and provisions could all change but that's where they stand now. Of course, this is the government we're talking about, so the timeframe could certainly change too.

However, it looks like the troops are trying to hold off the "enemy of recession" but the question is...will the supply make it to the troops in time? I think they won't.

Since the government is slow to see the need and then slow to act, we won't avoid a recession.

Congress Tries to "Throw the Fed a Bone" monkey

The stimulus from the government is meant to help in the short-term because the rate cuts from the Fed take minimally six to nine months to kick in before the economy feels it. Many economists argue that it takes longer, but no one is arguing that the effects happen any sooner than six to nine months.

So the Fed doesn't have a magic wand to wave. If they were truly forecasters as they like us to believe, then they would preemptively raise and cut rates before it's too late.

However, the truth is they never will be able to. Again, this is a government organization that we're talking about. Nothing is efficient in the U.S. government.

So look for the rate cuts and rebate checks to have an "eventual" effect but not an "immediate" effect.

Uncle Sam Has Good Intentions, He's Just Late
So the government is trying to do what they can. I'll give them that. They're just always late to the ballgame. However, they'll even be allowing Fannie Mae and Freddie Mac to enlarge the amount of home loans that can qualify under their programs.

Also, the U.S. government is incentivizing businesses, so Congress can encourage businesses to spend more on equipment, etc. The new bill would allow businesses to deduct twice as much as they normally are allowed on new equipment (so twice the current US$112,000).

So all of this will help...just sadly not in enough time to help the U.S. avoid a recession. So expect stocks to remain bumpy for a while and currencies will follow that lead-- "not to be out done" by stocks. So you'll see the volatility spill over there too once again.

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Making 'Cents' of the Headlines
Trichet is So Full of It with His "Fighting Inflation" Talk cherry

From our Currency Director: Sean Hyman

I'm sorry but I just don't believe Trichet's nonsense. He keeps talking about fighting inflation. Well, go ahead and raise rates or shut up then, Trichet! He's all bark and no bite. He's had plenty of chances to "fight inflation," but he's been holding rates steady instead - and apparently relying on his "get touch on inflation" talk to actually fight inflation.

If he hikes rates, he'll have more money to flood into the euro and rates will be pushed even higher. Historically, the economy caves when exchange rates get this high.

In fact, since the creation of the euro, the exchange rate has never been this high.

But if you use the Deutsche mark as a proxy for the "pre-euro" years, as many traders do, then you'll find that the exchange rates have been this high over the past 25 years (although not for long) and when they fall....look out below.

Check out the chart below that goes back about 25 years so you can visualize what I mean.

This Exchange Rate is WAY Too High for Comfort

Why the Deutsche mark? Because the euro responds the most to German economics. It's the Eurozone's largest and most productive economy. So traders watch German data much more than Italian, French, or any other Eurozone country.

So the high exchange rate will slow the Eurozone down as it continues to crush its export sector. I see the euro easily going back to the 1.30 to 1.35 levels this year. That would be an enormous drop of 1,000 to 1,500 pips!

So Trichet's got his head in the sand. The Dow Jones STOXX 50 dropped about 100 points (over 3%) overnight one day last week. The Eurozone economy will eventually suffer if Trichet doesn't get that exchange rate down.

He will eventually have to wake up to reality and cut rates along with most of the industrialized world. Will someone set an alarm clock so he'll wake up?
Sleep