And as we know, when that happens, commodities, especially oil, gold, copper, grains and a host of other products, get some price benefit, even if demand from the tanking global economy limits some of these price gains.
And that's what happened overnight.
There had been early signs Friday night with the US dollar weakening and oil, copper and some other commodities rising.
But last night oil leapt 17%, the biggest move ever, to more than $US130 a barrel at one stage, before easing. Oil eased at the end to finish just over $US120 a barrel as the October contract expired.
Oil eased in early Asian trading to around $US109 a barrel on the November contract is is now the main pricing contract.
Gold rose $US40 to over $US909 an ounce and copper jumped by more than 9 cents to $US3.2685 a pound. Copper also eased a touch to trade around $US3.25 a pound, still up on Friday's close.
The US dollar plunged by the largest amount ever against the euro, hitting and falling past $US1.4800 and the Aussie dollar jumped more than 2 US cents to top 85 US cents.
Yields on 10 year US Government bonds rose past 3.8%.
Investors are wondering about the impact from the $US700 billion on dodgy mortgage-related assets and providing $US400 billion to guarantee money-market mutual funds, plus another $US140 billion to bail out AIG (even though there's some opposition emerging), Bear Stearns and the initial costs of saving Fannie Mae and Freddie Mac.
That $US700 billion fund seems to be transforming daily from just residential securities, to car loan debt, credit card and student loan debt, to debts of foreign investment and other banks who have large operations in the US (such as HSBC).
This raises the question will corporate debt be included, thus helping the likes of KKR, CVC, Blackstone and hedge funds?
US reports say the Democrats want the fund to take equity in firms being helped and want other absurd things done, all of which stand to devalue the impact of the proposal and turn it into a slush fund that will raise the cost of help and push up inflation.
Bloomberg reported yesterday that the Bush administration had widened the scope of its plan by including assets other than mortgage-related securities.
Bloomberg reported: "The U.S. Treasury submitted revised guidance to Congress on its plan a day after first submitting it, as lawmakers and lobbyists push their own ideas. Officials now propose buying what they term troubled assets, without specifying the type, according to a document obtained by Bloomberg News and confirmed by a congressional aide.
"The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset.
"That may force an eventual increase in the size of the package as Democrats and Republicans in Congress negotiate the final legislation with the Bush administration, analysts said."
Those investors worried about inflation and money supply are starting to fret about the possibility of an inflationary breakout, coming just as inflation globally seems to be turning because of falling commodity prices, led by oil, and the emergence of a global economic slowdown.
While these new concerns remain, oil is likely to remain over $US100 a barrel, copper and gold remain firmer than they were before last week's mad trading; grains higher and precious metals will cost more.
That's potential bad news for inflation and for the struggling US dollar.
The rescue comes as the US budget deficit grows as the US economy slows. The trade deficit has improved as imports have slowed and exports have surged.
That's why US economic growth grew at an annual 3.3% rate in the second quarter. We get the final update on that this Friday.
The Congressional Budget Office has forecast the domestic deficit will increase to $US438 billion next year from $US407 billion and over half a billion according to other analysts because of rising unemployment and slowing tax revenues and other income for the federal, state and local governments.
Another drawback for the dollar is that the Fed's key rate of 2%.
That's 3.4 percentage points less than the inflation rate, a 28 year high, and the next move is likely to be down, although the Fed gave no hint of any change at all last week.
Our rates here are falling and a cut could come next month.
We will get a better idea of our outlook when the Reserve Bank releases its bi-annual Financial Stability report this Thursday.
According to Bloomberg, Goldman Sachs says that the "biggest beneficiaries may be Brazil's real and Australia's dollar, as demand for higher-yielding assets rebounds".
Goldman forecast that the two currencies, the biggest losers versus the dollar since July, may rebound 7.7% and 4.6%, respectively, in the next two weeks.
"The currencies that have been damaged the most have the best growth," according to Goldman Sachs in New York."You're going to see a lot of flows back into these currencies now," Bloomberg reported.
Both are the two most exposed currencies to commodity price movements (even though iron ore and coal are not traded and Australia is big in both of these still strong commodities and Brazil in iron ore).
The Standard & Poor's GSCI Index of commodities had the biggest three-day gain in 18 years, surging 8.4% until last Friday.
Oil has been the big driver, which should start setting off alarm bells in central banks if we see a surge in its price while global economic activity is subdued.
Of course this is all dependent on investment funds rediscovering their mojo and wanting to trade.
And with short selling now banned for at least a month in major markets, currencies and commodities loom as alternatives where hedge funds and other speculators can play, although the US has recently moved to limit the importance of financial speculation in its commodity pits and trading floors.
Driven by oil, commodities had the best first half in 35 years in the six months to June, but have fallen sharply this quarter.
The Reuters/CRB Index of 19 raw materials is down 22% since June 30, and looks like its heading for the biggest quarterly loss in more than 50 years.
Rather than a return to the conditions of the first half, commodities will trade sideways in the next few months; the downward momentum from slowing demand and still rising output is still a powerful force.
Emerging economies are slowing and are having problems, but the financial condition of many of the victims of the 1997 crash in Asia, are not stronger than the US with trade and current account surpluses. Fancy that!
The key to what happens next remains in the US, and the key to the performance of the market and shares is what's happening in the underlying stockmarket.
US optimists reckon the $US700 billion bailout fund will work and will support sentiment and through that, help the market.
In other words, the market will boom because credit and risk return: that is a very big call.
Asset values have not stopped falling and won't until the US housing slump sorts itself out.
So what does the bailout fund mean for the US economy?
Well, according to Alan Oster, the National Australia Bank's head of economics, the proposal is unlikely to materially change the short-term outlook for US growth, "with the US economy in the third quarter on the verge of (if not already in) mild recession".
In a special report released yesterday he made the following points:
The principal short-term focus of the US banking/securities sector is likely to be further consolidation, recapitalisation and strengthening of balance sheets, in an environment in which regulators are likely to be pushing for much larger future capital buffers;
Risk premia/borrowing spreads will not return to the lows of 2006 and 2007, which in turn will continue to lean against the stimulatory stance of monetary policy. In a more consolidated lending industry; there is now much more scope for pricing (rather than volumes) to drive earnings growth;
There is still plenty of potential for nasty surprises, for example with hedge funds excluded from the proposal (think LTCM and interconnectedness) and with the next wave of 2006 and 2007 ARM resets occurring in an environment of much lower house prices and higher unemployment.
Mr Oster and his team said that despite the 35% fall in oil prices since mid-July, US households remain under considerable stress from stalling income growth and steady falls in house prices.
"With the stimulus from the tax rebates fading, real consumer spending fell by 0.4% in July and foreshadows a decline in the third quarter (the first since the recession of 1990-1991).
"The average level of housing starts in July and August also was 9.8% lower than the average of the second quarter, an acceleration from the 2.5% fall in the first quarter.
"To be sure, the likely ensuing decline in the stock of unsold new houses (assuming the fall in mortgage rates after the nationalisation of the GSEs has helped support new housing demand), confirms the 'purging' process is becoming much more advanced in the housing sector.
"However, it comes at the likely cost of a much deeper drag on GDP growth in the second half of 2008.
"The US trade sector accounted for much of the 3.3% jump in GDP growth in the second quarter.
"However, the increasingly synchronised downturn in domestic demand growth across the OECD region, and cooling growth among many large developing economies, together suggests export growth has peaked.
"US imports could also bounce back in the third quarter (subtracting from US GDP growth), as the rate of destocking slows. In this environment, a recent moderate strengthening in durable goods orders (and subsequently in equipment investment) is likely to prove tepid.
"After an estimated 1.7% increase in 2008, we expect US GDP growth to slow to just 0.7% in 2009. (In a Bloomberg survey, the estimate was for 1.5% growth in the US next year).
"A return to trend GDP growth is unlikely before an upturn in the housing sector, which is not expected to bottom much before mid-2009.
"Moreover, underpinned by the combination of lower oil prices, slowing wages growth and further increases in economic slack, US inflation should fall sharply in 2009 (although from rather troublesome levels).
"With inflation heading in the right direction, the Fed is unlikely to begin reversing policy until credit markets are beginning to function normally and housing has clearly bottomed.
"We expect the Fed to leave the funds rate unchanged at 2.0% until mid-2009."
