Thursday, December 06, 2007

The Gathering Storm

An academic predicts that 2008 is going to be a rough year:

Why a devalued US dollar is bad for exports:

First, the bulk of crude oil purchases takes place in dollars; a falling dollar translates into still higher crude oil prices. Second, the U. S. dollar is the major reserve currency of the international monetary system and dollar-paying investments (such as U.S. Treasury bills and bonds) are held in massive amounts by foreign banks and governments. Dollar devaluation makes these investments less attractive and any disinvestment in these areas would sharply drive bond prices down and increase interest rates.

The third reason why dollar devaluation makes recession more likely is that it effectively prevents the Federal Reserve from pushing U.S. interest rates much lower. Any additional Fed easing (inflation) would be seen as a signal of even further future dollar devaluation and even higher dollar prices for oil. Unfortunately, we will not be able to "inflate" our way out of this recession this time. We will simply have to take our lumps and let market forces liquidate the bulk of the malinvestments caused by the unprecedented Greenspan money bubble. This liquidation process will not be pretty but it is necessary to restore a sustainable economic recovery in the years ahead.

Needless to say Professor Armentano is not really optimistic about the economy in 2008. The rest of his column is here.

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1 comment:

Rightwingsnarkle said...

Nobody who's paying any attention seems optimistic about the economy.

Job growth has been consistently poor for 7+ years, middle class real wages have been stagnant, the housing markets are crashing in many areas (and pulling back in most others) with associated defaults, household consumer debt is super high while the savings rate is super low, and federal trade/current account balances are badly on the deficit side.

It's a mess, to say the least, and I have to wonder why anyone in their right mind would want to take over as president in the face of all this.

(PS - thx for your comment at my blog, and your response over at Belle's. Yeah, I swear a lot at my own site, though I try to just keep it to snark at everybody else's).