IIF warns of a dollar collapse, and rising capital flows to emerging markets
Euro Intelligence
“The Washington-based Institute for International Finance has warned of a crash in the dollar as a result of the Federal Reserve’s expected policy of further monetary stimulus, according to Frankfurter Allgemeine. In a report, the IIF calls on the Fed to pursue a monetary policy that supports foreign demand for US goods. Otherwise there is a threat of a significant spike in capital flows to emerging markets, which would rekindle global imbalances and financial instability. The managing director of the IIF is quoted as saying that market participants have to be persuade that the large economies comprehend their collective responsibility to achieve balanced and sustainable growth. The IIF also published its forecast for net capital flows into emerging markets, raising its previous 2010 estimate of $709bn to $825bn.”
Yield Hunt Leads to Currency Debt
Alex Frangos and Mark Gongloff/Wall Street Journal
“The global rush for yield is driving investors to buy emerging-market debt issued in local currency, adding foreign-exchange fluctuations to the list of risks bondholders face.”

Do Past 10-Year Returns Forecast Future 10-Year Returns?
Bill Hester/Hussman Funds
“The argument that above-average long-term returns typically follow periods of poor past long-term returns is not wrong, it’s just incomplete. The more complete argument is above-average long-term returns can be expected to follow long periods of low or negative, provided that they end with low P/E multiples on smoothed earnings and precede a period where the economy can be expected to enjoy robust growth. Today, valuations are at levels that have normally been followed by 10-year returns that are well below average. At the same time, based on a template from more than a dozen prior credit crises, the argument that the economy will grow strongly over the coming decade finds little support.”
Bank of Japan cuts benchmark rate
“The Bank of Japan lowered its key interest rate to virtually 0% Tuesday, citing concerns about the pace of the economic recovery.”
Euro-Zone Growth Slows Sharply
Nicholas Winning/Wall Street Journal
“The euro zone’s economic growth slowed sharply in September as contractions in peripheral countries such as Spain and Ireland threatened the currency area’s recovery, a survey by financial-information company Markit showed Tuesday.”
Bernanke warns of high budget deficits
Neil Irwin/Washington Post
“The nation’s economic future would be endangered if the government does not rein in budget deficits in the years ahead, Federal Reserve Chairman Ben S. Bernanke said Monday, and Congress should consider new budgeting rules to try to make that happen.”
Deflation and the Fisher Equation
William T. Gavin/St. Louis Fed
“The current consensus is that the Federal Open Market Committee cannot raise interest rates because the unemployment rate is so high. The unemployment rate, however, is a poor guide for setting the policy rate during a recovery because unemployment lags growth in gross domestic product. The high unemployment rate will persist even as the economy recovers and real interest rates rise. So, according to Irving Fisher, one reason to worry about deflation is that the federal funds rate is expected to be held near zero as the economy grows out of this recession.”