Collectively either through policy or via the populace the US can choose a liquidationist, deflationary resolution to the twin problems of our hollowed-out economy, and the debt that squats on top of it. I'll assume you know where that leads: Depression 2.0 with another 50% down in houses, mass layoffs from all levels of govt, and so on. Now, if the US had savings and productive capacity and a pile of gold in Ft Knox that was more than 1.6% of our liabilities--then we might have some prospect that the USD would soar. However, my view is that if such a deflationary pathway is 100 steps long--in the first 10 steps, markets will indeed bid the USD and USTreasuries higher. However, the markets would then proceed to a recognition phase fairly quickly, I think, that there is simply not enough cash flow behind Treasuries, or behind the USD. The economy will be exposed for what it became: too small to warrant the purchasing power of the USD, or our high wages. That's the point where we flip from contractionary deflation in which markets robotically hide in the USD and the UST--to capital flight away from the US.
The world suspects we are broke but the world is just like so many people in the US: they actually believe the debt can be paid back. At least with reflationary policy, enough chum gets stirred into the water to give people hope we're recovering. Once we choose the austerity route, we are of no use to anyone: our GDP will only decline further, and our bonds will be revealed as toxic. That's when the money printing might even accellerate by the FED, and thus the death spiral would begin on the USD's purchasing power.
This has been my view for some time. We are currently in an inflationary depression. It's not a strong inflation yet, but, we are losing just enough of our purchasing power to mark it as such. If we choose the deflationary depression route instead, then we get increased purchasing power for 10 steps, and then the next 90 steps we go into a failure--first of the Treasuries, and then the currency.
BTW, I do not see the USD going to zero. But a crash to 40 on the USDX seems quite possible to me.
HTH.
G |
