I see a few problems with the reasoning in that article.
This increases the demand for domestic currency, which - if the central bank does not intervene - tends to appreciate in value. As the currency appreciates
Increasing the supply of your own currency and doing nothing else- -such as increasing exports- -will cause the value of your currency to FALL, not rise. This is simple supply and demand and has been working on the US$ for decades.
quotes.ino.com
At the same time, the central banks use their increasing stocks of dollars to invest in US assets in order to earn a return. The return flow pushes up the value of the dollar (just the wrong direction for reducing the US trade deficit)
A falling US$ makes US exports more, not less, competitive.
and also pushes up asset values in the US, including property and Treasury bonds. Higher bond prices go with lower yields, and therefore lower interest rates. Lower interest rates push up consumption, domestic debt and imports in the US, and cause the country's deficit to grow even bigger.
I'd agree with that. "Hot" money (liquid money) goes looking for the highest yeild. You do that when you shop banks for a places tom park your savings. Companies and hedge funds do it with much larger sums and do it across borders. This is one of the reasons I believe the FOMC blew it with the last rate cut- -it makes the US$ less attractive and organizations sell or don;t buy lower yeilding US$ assets. You can see a sharp drop in the value of the US$ against the dollar index at the time of the cut (Sept. 18).
Meanwhile, US consumption soared, spurred on by equity extraction from rising house values, and so therefore did the US trade deficit.
I'd agree with THAT!
The US house buyer/consumer (below the top 20% of households) was increasingly insolvent, or nearly so.
I believe that is true, but
bigpicture.typepad.com
Got a better link?
This tends to support it:
financialsense.com
The large international banks, hoping for the best, waited until the summer of 2007 before they began to acknowledge that many of their complex debt instruments (ABSs) were non-performing: the debts could not be repaid, yet the banks were counting them as revenue-yielding assets.
Does this sound like the Japanese mess in the late '80s and early '90s?
But in August 2007 they jammed on the brakes and cut lending, including to each other - and in many other parts of the Atlantic economy (not just the US) as well.
Uh, yeah. :-)
The figure to watch is the ratio of total US debt to GDP.
Yeah. And we're in trouble and getting deeper.
I regard the fed gov'ts CPI and PPI index as suspect. They have too many reasons to understate inflation. A proxy:
charts3.barchart.com
The printing presses:
research.stlouisfed.org |
