So the Federal Reserve Bank is going to raise interest rates again. Yippi-kai-o. Or not as the case may be. I'm going to be reading the news reports tomorrow to see if any of the mainstream new sources even hint at the real reason interests rates are going up - to prop up the sagging dollar. For the last few months the euro and pound have maintained comfortably high levels against the formerly mighty greenback. Furthermore we've had a few currency exchange scares over rumours, and only rumours mind you, that the big overseas dollar holders might be about to cash in their chips.
It turns out that China has accumulated over $800 billion in dollar reserves. My what a dent in our economy that would make if they started dumping it all. But they wont - or at least not yet since it would hurt considerably too. However that doesn't mean they can't stop investing, and the same appplies all over the world. Who would want to invest in Team USA right now?
When virtually every other currency is doing quite nicely thank you very much against the dollar wouldn't you just want to cut and run? But all the time the USA is buying scads of overseas goods and services with its dollars which means somone must be taking those dollars off our hands in exchange for the foreign currencies we need - like Euros. Not forgetting to mention our biggest problem - deficit spending which means getting people to loan us even more money.
So more healthy increases in the dollar interest rate will be needed to keep people interested in taking the dollar off our hands. And recent small decline in Euro and Pound values is nicely explained by anticipation of the rise in dollar rates. In a week or two when the excitment of a Fed rate hike has worked its way out of the system those currencies will both be off to the races again and guess what... we'll be looking at another rate hike, and another, and another. The question is will all the rate hikes eventually cause inflation? At my economics class they told us about cost-push and demand-pull inflation, but they never talked about deficit driven inflation. It seems to me if the economy isn't grown and the idiots in charge are spending like crazy but not kick starting the economy then all the high interest rates will just stiffle the economy even more. If costs rise due to higher borrowing costs then I think that was what was known as stagflation, something that haunted the US economy back in the good old 1970's.
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