Mish's Global Economic Trend Analysis Message Board

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Mish's Global Economic Trend Analysis

Public Reply Prvt Reply Mark as Last Read File

Previous 10 Next 10 Previous Next

To: mishedlo who wrote (15058)	11/8/2004 12:08:21 PM
From: CalculatedRisk	Read Replies (3) of 116555

You make a strong argument, but what happens if we have a currency crisis? I would think the FED would raise interest rates to attract foreign investment. On the surface, that would be a double whammy to the US economy since we would have higher prices for imported goods AND higher interest rates for the domestic economy leading to a slowdown in interest rate sensitive businesses, and most likely leading to a serious recession. But what if the FED responded by reducing interest rates and increasing the money supply in an attempt to keep the economy out of recession? Now you would have a downward spiral: a lower dollar leads to higher money supply leads to lower dollar, etc. That would be very inflationary. Inflation vs. deflation depends on how the FED reacts going forward. My guess is the FED will choose the first option (raise rates). It also depends on how foreign CBs react. Of course if the Euro becomes fixed to the dollar (don't laugh, this is being discussed), all bets are off... "Second, there is some noise -- at least from Morgan Stanley analysts like Eric Chaney -- that the ECB may conclude that it should intervene to protect Europe from the dollar's weaknesses during Bush's second term. While I don't agree with the Bretton Woods two argument that a new system of fixed exchange rates will make the US current accou[n]t deficit sustainable for twenty years, I should note that the proponents of Bretton Woods two long have been arguing that Europe would eventually have to join Asia in pegging to the dollar. The Bretton Woods two system of fixed exchange rates will expand before it collapses ... European intervention would be a way of spreading the "burden" of supporting US consumption growth that exceeds US income growth and the US budget deficits beyond Asia. I am not sure Europe wants that role. Jacques Chirac hardly wants to bailout George W. Bush. Japan may feel like it has no choice. I suspect there is a bit of a game of chicken now going on in the foreign exchange market. If central banks don't step in and provide some of the financing the US needs, then something will have to give -- since private investors don't seem willing to step in and buy US dollar assets at current US interest rates and current US exchange rates. " roubiniglobal.com

Report TOU Violation

Share This Post

Public Reply Prvt Reply Mark as Last Read File

Previous 10 Next 10 Previous Next