Monday, December 04, 2006

US Dollar plunging: equals higher interest rates

You'd think the US would bend over backwards to render the dollar "as good as gold." But ironically, this is hardly the case. Instead, the US is the world's wildest spender. The US is the world's greatest spendthrift. The US creates deficit after deficit. The US has become the greatest debtor the world has ever seen. At this point the current account deficit of the US is running just under $900 million, which amounts to 6.6% of the US's entire Gross Domestic Product. No currency has ever survived that kind of ratio for long.

For years sophisticated, knowledgeable investors have expected the dollar to decline, and I mean decline in a major way. And for years these sceptics have been wrong. Even the world's greatest investor, Warren Buffett, was wrong on the dollar, and it proved to be an expensive mistake (at least in timing) for Mr. Buffett.

Remember, it's to no one's advantage to see a plunging dollar. If the dollar heads down in earnest, US imports will rise in price, and since the US is addicted to foreign goods, the cost of living in the US would rise substantially. This is called price inflation, and Americans would not be happy with it.

If the dollar probes the lower depths, the rest of the world could panic. The fact is that much of the world depends for its prosperity on its exports. And the target of a huge percentage of the world's exports is the United States. The US is consumer to the world.

The implication of a dollar cave-in are huge. For one thing, a swooning dollar would immediately be accompanied by rising interest rates. Rates would rise because dollar buyers and holders would demand a greater pay-off as a reward for holding dollars. In turn, rising rates would probably throw the US into recession, if for no other reason than rising rates would crush the already fragile housing industry.

1 Comments:

Blogger vfsv said...

There's certainly not much going on in the way of jobs.

The latest Silicon Valley figures are published at:
http://www.viewfromsiliconvalley.com/id283.html

9:16 PM  

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