Thursday, November 30, 2006

 

Dollar falling

A weaker economy is causing the dollar to fall. The virtuous circle was rising price of assets attracts investment into the U.S. which keeps the dollar high. The wicked circle is falling asset prices cause investment to move out of the country which brings down the value of the dollar and further discourages investment in the US. The upside is lower prices for foreign goods which counters inflation. But inflation is not really our problem, deflation is. Falling prices will not help an economy that is overleveraged. Understanding the effect of debt on individuals and the economy is key to understanding what is happening in the economy.

We are in for a very different kind of recession because our debt levels are very high. Lower interest rates will mean little if Americans hold more debt than can be adequately serviced by there income. The only solution is for lower asset prices to meet rising income. The worst case being falling prices spiralling lower as fear keeps people from buying. You see it is really about psychology.

Also, a summary of real estate news from Illinois.

Update:

One thing I meant to add, a falling dollar helps curb inflation but that might not mean falling interest rates. If the dollar starts falling far enough it could keep interest rates from falling. Fear of a crashing dollar might force the Fed to keep from cutting rates. No sign of this in the short or long term interest rate markets but it is something to keep in mind. So far the interest rate markets are jumping on the recession bandwagon which raises the question: Will lower rates bail out the housing market? I am doubtful for the reason I stated above. We are running out of asset markets to inflate. What will be the next bubble? (I would be surprised if the stock market was up next year but I am would not be shocked. I am beyond the capacity to be gobsmackingly thunderstruck by the American capacity to believe in the dream of ever increasing asset prices.) The other thing is the beautiful trend in the stock market appears to be over. Whether this is a pause or a reversal is not apparent. It should be in the next week or so. Exciting times!

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