In the past, Fed accommodations have helped to stimulate economic growth after a brief cyclical downturn. This time a structural downturn is necessitating greater demand for relief through massive injections of liquidity to support a strategic plan to protect asset prices via the great buy hedge. Now, the EU's cheap euro strategy which is needed to facilitate repair of the economic conditions brought about by a de-leveraging world, is challenging the Fed's asset stabilization policy. While the Fed has provided a covered hedge for assets such as stock prices, a cheap euro policy may ultimately force the hedge to be cashed-in as world pricing power wains, profits fall, and job growth remains weak.
The world seems to heading towards a new standard of living set point. The Fed's policy of asset stabilization may in the end be the difference between deflation and just a bit better than deflation. Either way, the great buy hedge will see some pressure as some may take the opportunity to raise cash by liquidating against the hedge.
