Conventional wisdom is often conventional because it is correct, but not always. I’m on a rant these last few days because I think the conventional wisdom will be proven wrong on the bailout reversing the trend in the dollar. The assumption is that the package will be inflationary. It may be, assuming no one is willing to buy US government debt. But in a world of few attractive alternatives (Russian oil stocks, anyone?), I think funding will not be an issue. Inflation was not an issue in the 1990s after the RTC soaked up billions in bad assets from Savings and Loans and I doubt it will be an issue in the long run as there are enourmous deflationary forces at work in the asset markets (just check your IRA statement).
This guy agrees:
Stephen Jen, global head of currency research at Morgan Stanley, notes that in the past, government takeovers of banks haven’t necessarily been bad for their countries’ currencies.
He examined five cases — previous banking crises in Japan, Thailand, Norway, Sweden and the U.S. — and found that nationalizations tended to occur after the currency had already weakened substantially. Rather than heralding further weakness, he wrote, it “often marks the low.”
