“Hey, buddy, can you spare a dime?”

“Sorry, son, all my money is tied up in currency.”  – W.C. Fields

(I never get tired of that joke.)

I believe the phrase of the week will be “currency crisis”.

Simon Johnson is expecting intervention, and soon.

The G7 needs to slow down the disorderly run into the dollar.  This run is in danger of snowballing into a panic – as people fear further rises in the dollar (and falls in their local currency), they rush to buy more dollars (to cover debts in dollars and also to shift their portfolios), and so on.

Coordinated intervention, announced over the weekend most likely, will involve selling dollars, selling yen, buying euros and pounds.  This can calm things, by showing there are no one way bets.  (Will the Chinese be involved?)

No announcement so far.  And since the really large dollar reserves reside primarily in Asia, any intervention by the G7 would be window dressing at best.

Writing in the U.K. Telegraph, Ambrose Evans-Pritchard is his usual cheery self: Europe on the brink of currency crisis meltdown

Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.

“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.

The threat to Britain lies in emerging Asia, where banks have lent $329bn, almost as much as the Americans and Japanese combined. Whether you realise it or not, your pension fund is sunk in Vietnamese bonds and loans to Indian steel magnates. Didn’t they tell you?

One more article for a lazy Sunday afternoon.  Most economists seem to think the chances of a second Great Depression are essentially nil.  Greg Mankiw is not quite so sanguine, since there is not really any consensus on exactly what caused the first one.

The Fed and the Treasury Department, intent on avoiding the early policy inaction that let the Depression unfold, have been working hard to keep credit flowing. But the financial situation they face is, arguably, more difficult than that of the 1930s. Then, the problem was largely a crisis of confidence and a shortage of liquidity. Today, the problem may be more a shortage of solvency, which is harder to solve.

The three researchers show that the leading economists at the time, at competing forecasting services run by Harvard and Yale, were caught completely by surprise by the severity and length of the Great Depression. What’s worse, despite many advances in the tools of economic analysis, modern economists armed with the data from the time would not have forecast much better. In other words, even if another Depression were around the corner, you shouldn’t expect much advance warning from the economics profession.

My new favorite chart of the day:  Daily effective vs. target Fed Funds rate.  Something funny started happening in mid-September, and not “ha ha” funny.

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