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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (14430)	10/31/2004 9:06:12 PM
From: RealMuLan	Read Replies (1) \| Respond to of 116555

Currency and Interest Rates Consultants Current trends in the dollar vesus the Euro and the Yen seem to indicate a freefall. Decline is, indeed, inevitable but look long term before you predict imminent disaster. The recent trend of the US currency exchange rates versus the Yen and the Euro looks very bad. It should, of course. The US is running huge government and current account deficits which are being funded by Asian exporters who are keen to keep their own currencies low (particularly China which maintains a peg) and are happy to recycle the barrels of dollars we are sending them back into purchases of US Government bonds. Recent purchases of US Government debt has amounted to very nearly 75% of all new debt. This is certainly the primary reason that America has been able to borrow, both the government and the consumers, and still luxuriate in the lowest interest rates in a generation. This situation cannot hold: interest rates will rise, substantially, to at least the average yield curve of the past ten years if not the last fifty; to the extent that rates do not soak up all of the slack, the Dollar will fall. There is every reason to believe that American home prices will fall and a noticeable number of overextended consumers will face bankruptcy. However, to look at the trend of the last two years and to predict that the end is imminently at hand is a bit overwrought. Taking a look at the data for the last six years will have a distinctly calming effect. America will obviously not default, we are not facing a Russian debt crisis; nor will the adjustment be sudden. There is, in fact, plenty of time for the Fed to raise rates even more and even more rapidly once the election is over, and there will be time for the next Administration to pursue fiscal policies that would have a dampening effect. The former seems like a reasonable possibility; whether there is any hope for the latter is a bit doubtful, but an enlightened or liberated Treasury Secretary could very well have a positive effect on both the White House and the Congress in the new year, thereby saving all of us considerable pain. With the data indisputable and with no impending elections, the next year provides an opportunity we can only hope is not missed. The greatest fear is probably that there is no Administration until Spring; such an outcome would favor action from the Bush administration because most of the people are already in place, but neither candidate-elect would benefit from an extended wrangle. Let us hope for an outcome that is clear to the American electorate; that whatever the swarms of lawyers end up doing, that there is a general consensus that one of the candidates won the election cleanly enough that ordinary citizens can go back to their daily lives with the expectation that their government will do the same. The war on terror will obviously take center stage in either administration, but our general, worrisome indebtedness also needs attention. Link: Active Insight: Currency and Interest Rates yeald.com