Without the dollar carry trade, it’s hard to see where they’re going to dig up the next bubble.

you are missing the point on why the MM is “improving”. Just as an example, most of the recent CP “improvement” was due to the Fed, the very same scenario plays out in the MM.

Banks cannot, and will not compete with the government and the Fed, who became the only game in town, _explicitly underpricing_ all the risks.

The immediate consequence of the above is that the banks will go to areas where the government isn’t there, yet. What happened in Japan is that the Japanese banks started
a yen carry trade. Things to ponder.

SB

Deflation: Making Sure “It” Doesn’t Happen Here

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

In this hyper-volatile roller coaster VIX ride, these engineer gurus want to take us back to the party days of summer where commodities were un-regulated and out of control in a whipsaw environment of speculative manipulation. The Fed rate cut at this point is obviously symbolic and meaningless for economic stimulation, but it does serve as a priming function to re-boot the speculative commodity bubble and open the door for hot money to get back into the business of stimulating volatility and maintaing global systemic instability.

IMHO, if the ZIRP-linked value of currencies connects the deflationary impacts of depreciation to lower yields, hot money will chase after commodity swaps that are based on nothing but speculation. Hence, we will see inflation increase during this recession and a return visit to stagflation with a nice taste of liquidity trap.

This does go back to the concept that tossing a trillion bucks at a hundred trillion is like sprinkling pennies in front of Buffett and watching him get flattened by a steamroller. While there may be some dancing in the streets today and a huge campaign to turbocharge the amplification of the music, the game of musical chairs and hot potato have yet to be played out.

I suggest re-reading some of The Helicopter Ben Bedtime Stories, of which there are many, and here is one example: “This distinction between inflation that is positive yet too low and deflation is worth exploring for a moment. Although the Federal Reserve does not have an explicit numerical target range for measured inflation, FOMC behavior and rhetoric have suggested to many observers that the Committee does have an implicit preferred range for inflation. Most relevant here, the bottom of that preferred range clearly seems to be a value greater than zero measured inflation, at least 1 percent per year or so.”

1. (from today) Oil advanced as much as 9.9 percent on forecasts that the U.S. Federal Reserve will cut rates today to help spur a recovery in the world's biggest fuel-consuming country. China lowered rates today and the European Central Bank may reduce them next week. Prices also rose because the dollar fell the most against the currencies of six major U.S. trading partners since 1998.

2. (from the other day) And so, simultaneously, without a clear trigger, traders piled out of the yen and into stocks. Overlay a graph of yesterday’s moves in the S&P 500, which gained more than 10 per cent, with a graph showing the number of yen to the euro, which rose by more than 11 per cent at one point, and it is hard to tell the difference. Every downtick for the yen was matched by a rise in US stock
http://www.ft.com/cms/s/0/45eca9…? nclick_check=1

Chart 2.5 Share of corporate debt accounted for by
businesses with interest payments greater than profits:
2001 = 30%
2002 = 30%

2007 = 27%
2008 = ?
2009 = ?

“I don’t know why she swallowed a fly..”