Currency continued...

Just a couple of notes to my last post.

I don't know why Japan doesn't show inflation, given that they have the weakest currency in the world.

Also, it is important to view the shift from bonds to equities that foreign central banks are embarking on is a slight shift in direction, not a reversal of global liquidity. It does indeed signal a more dangerous route, but that time is not upon us yet. In the mean time, it signals a global equity boom, for the time being. It will speed up the instability of the system because it shifts China's lending from benefiting consumers, (through lower mortgage rates) and therefore the US economy, to benefiting bankers and hedge funds (and hopefully your friendly blogger as well).

Right now, it seems that Japan is not feeling the strain of the system. They have been printing money willy nilly and they still have no inflation. They may make a token show of protecting the Yen from speculators, but that will be all.

China is a different story. They are under political pressure from the Democrats to appreciate their currency. A sharp revaluation could break the system; i.e., China might not be able to keep rates down if they don't have enough dollars coming in. A big pop in their stock market bubble could also shock the system, but probably not to the point of stopping the circle. In fact, liquidity is a three headed monster containing Japan, China, and OPEC.

Europe and Britain are keeping their currencies strong and raising rates, and they still have run-away inflation. What is the difference between them and us? China, OPEC, and Japan are throwing money our way, so we have lower rates. However, rates will go through the roof if that money ever stops.

Bernanke will probably see that coming, and eventually he'll raise rates. But in the meantime, he doesn't want to kill housing if he can help it.