We still rule

December 21, 2008

Everyone seems excited about the Fed’s actions this week lowering discount rate to zero, and announcing they would come up with whatever programs were necessary to continue injecting liquidity (‘quantitative easing’ I guess is the fancy new term).

I agree that short term our concern is negative growth and deflation, so injecting dollars is the right medicine (of course the Fed will have to time the recovery right and pull back on a dime or else we’ll end up with a nasty inflationary hangover).

This is obviously bad for the dollar (more dollars chasing the same Yen, Euro, etc. drive price down).  It will probably lose a third of its value before it swings back.

But someone on CNBC’s Fast Money claimed the danger is that we’ll start a devaluation war, and everyone seemed to agree.

I don’t think that’s a problem because of the unique position the Dollar still has as the world’s main reserve and trade currency:

In the short term a weaker dollar will help promote exports and demand from domestic producers.

In the medium term everyone else will have to devalue.  They will do this either by decree, by lowering rates and if they run out of room via ‘quantitative easing’ (effectively following the Fed’s lead), or by buying dollars in the open market (or rather treasuries, which will lower yields and help us finance our stimulus programs).

We will lead, everyone will follow, until we reach balance again.

It’s nice to think that as banged up as we are, we still rule.

Wishful thinking perhaps.  We’ll see.

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