Let’s take note of two seemingly unrelated developments. The Fed is busying itself making noise about another round of quantitative easing. The intended market signal is that even with internal dissent the Fed can still push QE3 liquidity into bank balance sheets and the bond market. I think it’s funny that one stated intent is to “keep inflation from slipping” below a target. The Fed’s historic mandate has always been to fight inflation. Abetting the devaluation of the dollar is the new Fed mission.
The lesson is not lost on other nations. India will reportedly pay Iran in gold for oil shipments. Take that with a grain of salt. An unconfirmed report from an Israeli intelligence mouthpiece should be considered in the context of Israel’s reported security ties to India. Israel has little reason to formally embarrass its security partner but may wish to deter it from working around anti-Iran sanctions. Releasing a hint from a grey source carries little risk. At any rate, the public mention that large oil consumers are considering moving away from settling trades in dollars makes sense in the context of the Fed’s willingness to harm the dollar’s purchasing power.
I will presume that the Fed has an Observe-Orient-Decide-Act loop even if it doesn’t know such a thing exists. Its policies on quantitative easing and zero interest rate targets are oriented upon fostering a gradual inflation that will whittle away the federal government’s unfunded liabilities for middle class entitlements. That is an internal orientation, which is the Achilles’ heel of an effective grand strategy. The Fed’s OODA loop should take into account the gradual abandonment of the dollar that other G-20 nations will eventually pursue apace. That is an external orientation that can keep strategy on target. This OODA loop is thus incomplete and invites a positive feedback cycle that will end the dollar’s status as the world’s reserve currency.
Longtime readers may note that my tone when discussing the Fed and other major policy actors is now much more sanguine than the periodic vitriol I spewed in the early days of the Alfidi Capital Blog. In 2008 I was angry about incompetence and fraud in the financial markets. Now I am largely resigned to its continued existence. I am not sufficiently pedigreed to gain the ear of policymakers so I cannot dissuade them from any course they choose. I will always fight people who try to rip me off personally. I can offer no such assurance to anyone else.