Forex Q&A with Ed Ponsi
By Ed Ponsi, President, FXEducator.com
Greetings from New York! I'd like to thank everyone for all of your great questions. Let's get started!
Q) Hi Ed, I really enjoy your column. Could you please explain the rally in the Euro after the recent FOMC meeting?
Ed Ponsi) Thank you for your email. The Federal Open Market Committee (FOMC) created quite a stir when they announced they would begin purchasing massive amounts of U.S. Treasuries. This is not very different from recent announcements made by Great Britain (please see "It's Not That Complicated") and Switzerland (please see last week's article, "Swiss Franc Goes Ballistic"). EUR/USD shot higher in response to this announcement, gaining nearly 400 pips in just a few hours (see figure 1).
Figure 1: Euro crushes the U.S. Dollar after the FOMC announcement on March 18. Source: TradeStation
Since the Fed plans to print the money used to buy the bonds, the USD fell due to the anticipated dilution of the greenback. After a recent announcement by the Bank of England, the British Pound slid by about 600 pips vs. the U.S. Dollar. Also prior to the Fed announcement, the Swiss Franc (CHF) lost nearly 400 pips vs. USD in just one hour on a similar announcement from the Swiss National Bank.
It seems that whenever a central bank announces they are about to fire up the printing presses, that currency falls. So which shoe will be the next to drop? So far, Europe has resisted the rush to print money, and the Euro has looked pretty stout recently, especially against the Yen and the British Pound. But on March 24, European Central Bank (ECB) Vice President Lucas Papademos said the bank could consider quantitative easing if all other options to revive the economy have been exhausted. Traders will be watching the news closely to see if the ECB joins the printing press parade, a move that could create a sudden down draft in the EUR.
Q) Hey Ed, maybe you can help me out with this question/comment. You and everyone else keep mentioning this enormous national debt that keeps on growing and growing. Is it really that big? It seems like if you take the total value of all the assets in this country, it would be well into the hundreds of trillions of dollars. Why are we so concerned having a debt level that is equal to probably 1% or 2% or less of total assets? I guess I'm on an island all by myself here but I don't see this debt being a serious problem down the line based on the ratio of the debt to total assets of all citizens in the country. What am I missing? If the U.S. were a corporation we would be talking about their phenomenal debt to asset ratio. Why is it so different - because it's a nation and not a corporation? I guess what I'm asking is why is a debt/asset ratio of 1-2% considered such a serious problem for a nation...yet considered great business practice for corporations? Thanks for the help. Keep up the great work.
Ed Ponsi) Thank you for your email, it's a great question. The first point I'd like to make is that generally speaking, companies borrow money to make more money; for example, if you borrow money to build a factory, you certainly intend to make enough money to pay back that loan many times over. I'd call that a good debt. But how would you feel about a company if it had to constantly borrow money just to meet its payroll and pay for employee pensions and healthcare? What if that company needed to borrow more money just to pay the interest on its outstanding debts? You probably wouldn't want to own stock in that company.
Also, while companies are expected to adhere to strict accounting rules, the financial statements the Federal government releases are held to a much lower standard. Government debt statistics do not include the amounts it expects to pay in the future for the Social Security, health care programs, and various other obligations, like publicly held debt, military and civilian pensions, Federal insurance, loan guarantees and leases.
So how big is the real U.S. debt? It depends who you ask. The National Debt Clock currently shows a liability of over $11 Trillion USD, a number that is compiled from figures given by the U.S. Treasury Department. But remember, some of the biggest liabilities are left unmentioned in official government statistics. According to David M. Walker, the former Comptroller General of the United States, the actual number is much higher – about $52.7 Trillion USD. This represents the equivalent of $175,000 per person living in the United States, or $410,000 per full-time worker. The really bad news is, Walker's $52.7 Trillion figure is as of 2007 – in other words, it was calculated prior to the massive spending orgy we are about to undertake. For the very first time, a single-year Federal budget will increase the overall debt by trillions of dollars. We are already in deep, and we are digging the hole much faster now.
Chuck Is Back!
Sorry to bum you out with all that talk about debt. Here are a few Chuck-isms to brighten your day:
Chuck Norris' options expire from sheer terror.
When your platform goes down, it's because Chuck Norris punched it in the face.
Chuck Norris' calendar goes straight from March 31st to April 2nd; no one fools Chuck Norris.
