Wednesday, August 20, 2008

Dollar goin' doooown

An economist, from the Northern Trust, predicted in July (quote below) that the US dollar will fall precipitously propelling us into a serious recession if Freddie Mac and Fannie Mae fail and must be bailed out by the US Government.

Now it looks like that has happened.
Fannie and Freddie have 233 Billion of debt that no one will touch, except us, dear reader, the US taxpayers. Thus, they're toast; we're all toast. Let's be toast together!

Our risk case scenario is that the U.S. dollar begins to fall precipitously coinciding with a rise
in Treasury bond yields. U.S. inflation does not moderate because of the depreciation in the
dollar. As a result, the Federal Reserve is forced to raise the funds rate even in the face of a
rising U.S. unemployment rate. This would be “checkmate” for the U.S. economy, turning a
relatively mild recession into a severe one. Why might the dollar dive? Because the U.S.
Treasury is forced to issue more debt in order to recapitalize either Fannie/Freddie/ the Federal
Home Loan Bank System/FDIC, and the rest of the world balks at being the buyer of last
resort for U.S. government debt. As this is being written on Friday, July 11, a hint of this is
happening. Rumors are swirling that the U.S. Treasury will have to recapitalize Fannie Mae
and Freddie Mac. Rather than resulting in the usual flight-to-quality bid for U.S. Treasury
securities, yields on Treasury coupon securities are rising and the dollar is falling. Another
factor that could precipitate a further sharp decline in the dollar might be the severing of the
pegs that foreign monetary authorities have maintained between their currencies and the U.S.
dollar. The byproduct of these pegs has been upward pressure on the inflation rates in these
foreign economies. If these monetary authorities can no longer tolerate this imported inflation
and sever their currency pegs to the dollar, the dollar would likely go into a tailspin.
Northern Trust prediction of US economy, July, 2008


tamar said...

Did you see Bush insisting that it was not a bailout? I swear, this administration's use of language is so Orwellian.
It is so frustrating and worrisome that the economy is going to be bad for a long time, and that Obama (should he be elected) will get blamed for things not improving immediately. How many Americans really understand that each CITIZEN owes approximately $30,000 to cover our national debt. If you consider a two income family with, say, 3 kids, that means that household "owes" about $150,000. Even with the two incomes that is a staggering amount of debt to pile on top of the financial obligations that arrive every month in the mail.
I know you can't get elected saying you are planning on raising taxes. But really, with a debt that size, and Social Security issues looming, how can taxes not be raised? The "top 5%" (Obama's suggestion) can't possibly pay enough more in taxes to make a dent in these problems. It really needs to be more like the top 80% paying more. Otherwise we will be passing the debt onto a future generation.
Now, that's what I call taxation without representation!

djinn said...

The Bush administration has been a disaster for all but the hyper-rich, who now pay about as much taxes as I do, and for companies--did you read the recent article somewhere (must look up) stating that almost all US corporations paid no tax at all? Do all these idiots think that civilization is free? Roads come from the road fairy? Sewer systems from the sewer fairy....aaaaauuughhhh.....