Dollar, treasuries, and reserve currency thoughts

Quote from Pascal:

I think the threat of a liquidity trap was nullified with quantitative easing. The equity markets have definitely changed from a deflation bias in March, to an inflationary bias in May/June. This change coinciding with the last G20 meeting where the central banks agreed to pump the system with massive liquidity.
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I want to believe this, but a few points don't jive:
1. Russia's recent clamoring for SDR's as a new reserve currency (pointless but vocal)
2. China's veiled threat against quant easing. Chinese are buying commodities because they won't buy agencies, don't get anything for Treasuries except currency risk, and have been restricted in purchasing significant shares in equities (CNOOC/Conoco)
3. Persistent weakness in the consumer sector - where do you see the 'green shoots'? There will not be a consumer recovery, and the liquidity provided will not reach the end user. The low end of the market is tapped out and can't borrow or spend. The high end of the market is paralyzed by collapsing housing values and anaemic equity recovery, combined with sub 1% interest paid on demand deposits. And everyone is fearful of unemployment.

So, aside from oil being warehoused offshore in tankers (just like adding to the SPR in the last run-up; notice how nicely that correlates to the rise in oil BTW), how is there going to be inflation introduced into the system? And you can't push oil up too high without choking out all the lower wage workers - saw that happen to my employees once gas rolled above $3 a gallon.

The liquidity trap has been deferred a few months, perhaps on plan to allow the banks to recapitalize, but it is only a deferral. The underlying cause (US housing, debt unsustainability, lack of income generating opportunities) remains.
 
Quote from aradiel:

In that tidbit from Mankiws book he imples that the liquidity trap is avoided via inflation; once nominal interest rates are near zero, only surges in price indexes can púsh real interest levels down.

I dont know if the market is having a inflationary bias recently, I think he is more like in standby mode right now. We just came from a year of massive wealth destruction and if it wasnt for all the money pump we would have had massive deflation as well. So basically what CBs did was adequate and not inflationary at all vis a vis the mentioned context.

We have to pay attention to which marcoeconomic variables the market is taking into consideration and what is the main cause/effect relationshop that is going on (sometimes it even happens on reverse) now. For example, if markets start to believe the Fed will protect the dollar, treasury yields will rise while dollar strenght will grow (. But, if the players get the feeling that the Fed is getting behind the curve, the dollar will weaken but the yields may rise as well, in this case to serve as a protection of inflation - and this would led to a whole another different kind of equilibrium. In the first case higher yields are accepted by market participants while in the second higher yields are demanded by them. Subtle but crucial differcence.

I think it is pointless to try to predict the future since it is still not defined yet - eventhough we traders have the feitish that what is about to happen is a perfect mathematical function of the past! It will depend on what CBs will do and how the markets will percieve it.

But, to take sides, considering all possible scenarios, the sucker bet may be in the play over the dollar taking a beating - which seems like the less likely outcome to me.
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Too erudite for this neighborhood, but I agree although I think the macroeconomics mean less under these contrived circumstances.
 
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