Take a look at the US trade deficits over the past 40 years. Use
1992 dollars to eliminate inflation effects. What happens is that
the US exports huge piles of dollars. Foreigners are onto our game
since Nixon left them holding the bag when he dropped off the
gold standard. Now our promises mean nothing, they demand that
we show them the money. In other words, we have to keep our
interest rates high in order to avoid having all those dollars flood
back into our country, which would be disruptive, inflationary and
embarassing.
If we hadn't shipped all those dollars outside the country we could
have lower interest rates. This is explains why whenever you see
the dollar go down, bonds go down with it, while short rates go up.
Eventually something has to change, trends don't go on forever.
We could start to run a trade surplus, but that's not gonna happen
while our major partners are practically in depression. Our we could
lower interest rates, let the dollar crash, expect the cost of imports
to zoom (remember the oil crisis?), screw the foreign banks holding
US dollars as collateral, screw the foreigners holding US $100 bills
in their mattresses as a store of stable value and watch gold go up
past $2000. This would be pretty ugly, so we will avoid this until
the last possible moment. But the third possibility is that our
trading partners start their economies again, and we start selling
them enough stuff to reverse the trade deficit. In order to do this,
they have to start their economies up. The usual technique is to
lower interest rates. But that hasn't helped the Japanese, because
you can't force people to borrow money. They probably need to
start running big fiscal deficits instead of continuing to uselessly
practice easy monetary policy. The German problem is different,
they are still too afraid of inflation to lower interest rates to 0.5% like
the Japanese. Only time will tell.
Tonite the dollar is down, you can expect bonds (and stocks) lower
tomorrow. (BWDIK.)
-- Carl |
