The upcoming reprise of the Resolution Trust Corp., will weigh on the dollar in the near term and the implications of this course of action are a little hard to suss out. One one hand it will strengthen the dollar if the U.S. finance industry and by extension the economy is put on decent footing. On the other hand, it will massively increase the Federal Budget leading to a surplus of Treasury bonds. Since the government is in effect setting a floor under mortgaged backed securities, it is in effect inflating away the value of the debt in order to prevent a deflationary unwind.
While I have worried quite a bit recently about the potential for a deflationary outcome to the turmoil, it is instructive to remember that Bernanke is the country's foremost scholar on the Great Depression and determined to prevent deflation at all costs. Much of my concern was caused by the fact that I could not foresee further mechanisms for addressing the deflationary spiral. This new gambit by Paulson & C0. allays those fears.
The dollar will not collapse. Much as we have seen the correlation between the direction of the Euro and the direction of commodity prices breakdown over the past three weeks, we may be in for a period where inflation accelerates while the dollar's relative strength against its trading partners continues. If you just went, "Huh?!" I empathize. I am not sure that this is even possible according to the laws of economics, but this is one of the reasons I'm writing on this website. If you have any ideas on this unorthodox notion, please let me know.
Subscribe to:
Post Comments (Atom)
Posts
No comments:
Post a Comment