Although the US elections dominated the media last week, there was another piece of news with probably bigger consequences to our global mobility world. Sure, sure, sure, the Republicans took over and the Tea Party movement got a few people in Washington, but so what. Now, instead of filibuster everything on the Senate, they simply won't pass it in Congress. The end result will be just the same gridlock we have enjoyed over the past couple of years.

Bypassing this gridlock, going along on its own, and under the cover of a media obsessed with analyzing the election results, the Federal Reserve pressed the Print button for the second time since 2008, this time pulling $600 billion out of our (future) behinds. This was, arguably, as important as who won the election.

Why did the Fed do it? You can read Bernanke's op-ed here, or simply look at this chart:

Joblossesrecessionsoct2010

[Chart from Calculated Risk via The Big Picture]

Scary, isn't it? Long term unemployment is (literally) off the charts, and the US economy seems unable to recover as rapidly as it used to do in past recessions.

To get the economy out of neutral, the Fed is flooding the system with freshly printed money, which should push the stock market higher, which should make people feel richer, which should help them spend more and therefore stimulate the economy. Or so the theory goes. It is nothing but another (undercover) stimulus package, something Tea Party members will certainly not be happy about.

Why is this a concern for a blog dedicated to mobility?

Everything being equal (basically if, and only if other countries don't push their currency lower too), more dollars in circulation means that they will be less valuable. This in turn should boost US manufacturing and exports, creating jobs. So far so good, for companies like Tesla or GM.

But since the dollar is still the world's reserve currency, important things like say, oil, are still priced in dollars, so changing its value has real consequences (beyond making traveling to Paris more expensive for Americans).This is how Barry Ritholtz describes in Bailout Nation the period between 2001 to 2008 when Maestro Greenspan kept interest rates at historic lows (another way to lower the value of a currency):

"As the dollar tumbled, anything that was globally priced in US dollars, including oil, gold, industrial metals, foodstuffs - in fact, most commodities - rallied dramatically in price. It still cost the same amount to produce/grow/mine these items, only the money use to buy'em was worth only half as much."

To put it in simple notation (on the consumer side):

  • Fed Printing  = Lower Dollar = Higher Commodity Prices = Higher Gas Prices

On the manufacturing side:

  • Fed Printing  = Lower Dollar = Higher Commodity Prices = Less Margins*

Hopefully chairman Bernanke is right, and the US economy wakes up after this latest shot in the arm, pulling along the rest of world. But the fact remains that the world is simply not set up for a low dollar; higher commodity prices are just an easy-to-understand consecuence of the new Fed policy, but we are getting into uncharted territories here, and the rest of the world is certainly not happy about it.

Of course nothing will happen overnight (although oil is again at 2007 levels) but if I were you, I wouldn't be selling that hybrid anytime soon (unless you are trading it in for a Voleaf).

 

 

* Auto is very susceptible to commodity prices, especially steel. Check this Financial Times article for their latest problems (via Sox First where subscription is not required). Since the global car market suffers from chronic overcapacity, and the competition is fierce, passing along higher costs to consumers is really not an option.

Posted
AuthorJOSE PARIS