I’m no economist. I can count, make decisions and read a calendar. Therefore, let’s take on some of our esteemed colleagues. The normally clear-eyed David Smith of the UK Times fears the Fed will monetize the new debt that will have to be issued to finance the mortgage-debacle bailout. This assumes that the old saw that greater government borrowing “crowds-out” private investment and leads to higher interest rates is correct…Higher than what? Anyone who’s been paying attention for the last decade knows that interest rates have, if anything, been too low. That’s the central charge against the Maestro, that he kept rates too low for too long.
Excess savings in Asia, the Middle East and Latin America flowed into the US with abandon over the last ten-fifteen years raising the chicken and egg notion of what came first, the savings glut or American over-consumption. The press (and their economist comrades) tend to blame American over-consumption, paying little attention to the fact that countless emerging markets keep their currencies unnaturally weak in order to keep exports flowing toward the developed world, creating all, manner of distortion. They now reflexively fear that the Fed will crank up the printing presses to fund the new government bailout.
My guess is that foreigners will have renewed appetite for US debt once the chaos of recent days dies down and capital markets take on a more normal tone. With the global economy slowing they will be very unlikely to adopt more flexible currency regimes (the Yuan has not appreciated considerably in months, for example). The torrents of capital may slow some, but I’ll wager they will comfortably cover anything the US can throw at the market and then some. The dollar may weaken a bit until those trends become clear, but I doubt we will do much more than retrace 38.2-50% of its fall from 1.6045, or between 1.4700 and 1.4950.
