That's about the only prediction of armageddon that hasn't come true:
One of the most extraordinary features of the past month is the extent to which the dollar has remained immune to a once-in-a-lifetime financial crisis. If the US were an emerging market country, its exchange rate would be plummeting and interest rates on government debt would be soaring. Instead, the dollar has actually strengthened modestly, while interest rates on three- month US Treasury Bills have now reached 54-year lows. It is almost as if the more the US messes up, the more the world loves it.
Ken Rogoff is the former chief economist of the IMF; when he talks about financial crisis, you should listen. And he's worried about how what will happen if the world loses confidence in us.
One thing is for sure: we won't end up like emerging markets, which don't borrow in their own currency. I don't mean that the Fed can inflate its way out of the debt--it won't, not at the level that emerging markets would try to if they could. 4% inflation instead of 2% is not going to get us out of the pain of paying back the money we've borrowed. But when a country's currency is really on the skids, its interest rates shoot up just as the ability of its currency to purchase the dollars to repay the loan drops; the resulting combination generally leads to default, and sharp economic contraction.
What we could see is higher interest rates on our debt just at the time when we need to put taxpayer money into the financial system to restructure it. Given that neither of our two presidential candidates has any notable plans to close the current deficit, this would put a serious crimp in America's lifestyle.
Debt being destroyed is deflationary, so dollars go away. The Fed flying in dollars is inflationary. It's a big fight.
IMHO, the first part of this year was about inflation winning. All of the dollars generated by the previous bubbles floated around in the economy until they landed in commodities. Oil flew up, consumer food prices went up (with a LOT of stuff doubling), etc.
Then, the deflation in the housing and junk mortgage markets started winning, destroying capital at the edges. Now the rot is infesting the "big names". One money market fund just broke the dollar because all of its Lehman bonds are now worth $0 on the books. That's deflationary. The Fed reacts by trying to pump in money, but that's generally pushing on the string.
In a year or two, we'll know if we're having inflation, deflation, or both. It's still too early to know.
At this point I see no particular reason to expect higher than usual real interest rates on Treasury debt. Of course the current levels won't persist, but what has really happened to make someone think they should be moving their money out of Treasuries over the long haul?
The recent strength in the dollar makes more sense if you take a global view: the commodity correction, along with the fall in the value of the currencies of commodity-exporting countries and the fall in the value of the currencies in developed countries with their own real estate busts (e.g., Britain) seem to have sent more investors into U.S. Treasuries.
Since, as you suggest, our current low interest rates are most likely temporary, this would seem to be a great time to borrow a couple hundred billion dollars to create a vulture fund to stabilize our financial system. Buy distressed mortgages at 50 cents on the dollar, or 50% of the underlying property's current assessed value, whichever is lower. That ought to help put a floor under the prices of mortgage-backed securities and the more complex securities derived from them, and help unfreeze the market for these securities. Financial institutions could then raise needed capital by selling these securities. By buying the mortgages at such as steep discount, the federal government would probably make a profit on the deal in a few years after the crisis has passed.
How much of the dollar's continued strength is explained by China's continued investment? And how unlikely is China to pull back considering that if the dollar collapses, they're going to be pretty screwed?
http://www.theatlantic.com/doc/200801/fallows-chinese-dollars
"Given that neither of our two presidential candidates has any notable plans to close the current deficit..."
Megan, your premise wrong. If Obama is elected and withdraws most of our troops from the Middle East, it will have a profound effect on our budget deficit.
"At one point during the day, investors were willing to pay more for one-month Treasurys than they could expect to get back when the bonds matured."
OMFG!!!! The yields on T-Bills are negative!!
Dogs and cats living together - mass hysteria.
I wish we had a straight talker in this campaign. Unfortunately the current GOP is neither conservative nor truthful.
That straight talk, of course, would be thus: we are not as wealthy as we thought. We cannot afford the things we have been buying. We will have to consume less and pay more in taxes to focus on getting the country's, and our own personal, finances in order. Tough, but that's the breaks.
Stan says, "If Obama is elected and withdraws most of our troops from the Middle East, it will have a profound effect on our budget deficit"
....which might be true, if terrorism is incapable of following the troops back to our shores. I don't think you could begin to price out the cost of another 9/11, and I hope you don't want to.....
More to the point, Stan, his proposed budget spends the money thus saved several times over--and McCain is now on roughly the same timetable as Obama in Iraq, thanks to the deal the administration inked.
Higher interest rates and a decline in America's standard of living are the obvious outcomes. But both parties have an interest in postponing this news until after the November election.
Would there even be that much savings? I don't think Obama would just say Bagdad you're on your own. You'd keep some people there for training, so that expense doesn't go away, overall aid would likely increase once soldiers are gone, at least short term, there's a large upfront cost to moving everybody out. All the increased medical expenses incurred taking care of wounded soldiers are maintained. The soldiers you have still need to be paid, and many would just be diverted to Afghanistan.
What is actually saved besides not having to pay *some* soldiers extra money for being in a war-zone, and not having to pay for the extra weaponry?
How much of these savings will be spent "surging" Afstan?
we can somehow afford a $1.5tn preventive^2 war and a $XXXbn farm bill and oil over $100 and... along comes a $80bn bailout which will be with us for a long long time...? while the only thing really going down the drain for good is the ecology?
whoever wins might not reverse the growth of deficits (both ecological and economical) - but it should be easy for the next president to boost that he did not accelerate it?
The US government is the only net source of dollars. Thus the money other countries are using to buy treasury bonds had to come from government spending. Paying off the debt, isn't really possible, since assuming you accomplished this, no one would have any savings.