We'll see. In my view, our country has engaged in a severe
abuse of the dollar as a reserve currency for a very long
time. This is the cornerstone of all bubbles, since all
of those are really blown by the Fed. The resulting
misallocation of capital is huge - US still runs enormous
trade deficit with the rest of the World, consuming all its
savings, and it only got larger as the dollar index lost
30%. We resort to making money in bubble industries, such
as construction, service, and finance, which means just
credit multiplier for the money printed by the Fed.
Manufacturing gradually disappeared. It is now only 10% of the
economy. Lots of dollars are stored outside the country,
ready to come back in a crisis. I have quite a few worries.
1) Once the confidence in the dollar as a reserve currency
is lost, lots of dollars will come back from abroad, causing
more of a decline. Rates will shoot up because of foreign bond
selling.
2) What about Yen carry trade that held the dollar up for so
long? All that will have to reverse.
3) What can the Fed do? They can't lower, and will have
to raise rates! Raise rates and print, that's what they
will do, and have been doing!
4) What can the government do? They already used the
budget deficit tax reduction pill to bail out the stock market
bubble of 2000. They are broke. Raise taxes now?
5) How can we repay the debt to other countries if
we have 10% of manufacturing? What will we eat and consume if
we are dependent on constant imports?
My conclusion: the dollar crisis will have very severe
consequences for the economy, and it will take a very
long time ~ 10-20 years to come out of it! Housing will
collapse. The debt will have to be forgiven, or eaten away
by hyperinflation, since the Fed most likely will resort
to printing more dollars. Printing dollars is all they really
can do. They don't have magic powers. It's a central bank. |
