Guy, a) domestic money may switch to bonds, but brokers will show customers the interest differential with junk bonds and forget Treasuries. Treasuries tend to be dominated by trading houses, banks and foreigners. Junks tend to be dominated by the slow witted. So, the shift will make a little difference, but not much. Nobody thinks they can get rich making 5.31 pct. They can make much more at lower risk in income plays, but they and their advisors are not sophisticated enough to know that. Every tout loves long bonds, which means they are a disaster about to happen, IMHO.
b) Credit growth is so high, a weaker dollar will put pressure on the Fed to reduce the supply of cash. They won't, but they won't increase the Ms or expand credit greatly from its already ridiculously high levels.
The negatives you listed are part of the dollar story.
However, the number one thing is that the dollar cannot continue to soar with our current trade deficit. We are buying imports at a record rate becuase they are cheap. The only way to shrink the deficit is to make imports more expensive. This can be done two ways: 1. Lower the buying power of the dollar. 2. Reduce the overcapacity in foreign countries. I am very confident about #1. But #2 may only occur with attrition. For example, as demand grows, over the very long term, the capacity could become normal and stop being a glut. As long as something stupid is not done, such as cutting US rates to increase glut capacity domestically. And, since attrition is a slow process, the odds of us doing something stupid are very high.
The weaker dollar could be positive in the sense that it could make for a stronger yen and if one of the causes of weakness is higher Japanese rates. The world economy goes nowhere until the Japanese start spending. They need higher rates to reduce the need to save (if nobody gets rich at 5.31 pct., try 1 1/2 pct. -g-). So far, we have seen no move to raise rates in Japan. They are talking about lowering taxes, which means the individual will save even more and the cut in Govt. expenditures will further depress the economy. Too bad they don't have economists who realize that saving/exporting Japan is not spending/importing USA. Different animals who need different medicines.
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