Buck Up or Buck Down?
July 2nd, 2008 by 
reality
I have somewhat been assuming that, in the intermediate and longer term, that the deflationary pressure in the US would more than overcome the pressures weakening the US dollar. I’m now coming to doubt that assumption.
We’ll see what happens in the morning (a policy announcement is due), but it sure seems that the ECB is prepared to do what is necessary to keep Eurozone price inflation under control. I don’t think the Bernanke Fed, with its dual mission of monetary stability and economic growth, is prepared to do the same. I did not expect the price increases in food and energy, although in retrospect it was predictable that the newly enriched developing countries (China, India, Vietnam,…) would spend at least some of their dollars on these essentials. These price increases are going to further weaken the dollar, as the US is no longer self-sufficient in either food or energy. (Yes, I know the US is the largest exporter of grains but on balance it is now a net importer of food).
I think I’m going to increase my foreign currency exposure.
Edit: The ECB did, in fact, raise rates by 0.25%.
Posted in Inflation & The Dollar | 
July 2nd, 2008 at 7:41 pm
Interesting thought. Don’t make a big switch at one time. Don’t want to buy high and sell low. Didn’t Buffet buy a lot of TBills or currency a while back? I wonder how that turned out.
I think deflation/depression are more likely in the next 2 yrs vs. inflation. Housing, jobs, cars, boats, eating out, other non-essentials etc are not going to shoot up in the near term. Just gas and food (which is a small % of my budget).
Then there’s taxes. Which taxes 55% of our income. and it will only increase after Obama (and his democratic congress)
July 3rd, 2008 at 5:55 am
I doubt that deflation will occur with this Fed. More likely, we get a light version of weimar/zimbabwe. Our problem is too much debt; the only way out is to inflate our way.
I would own some CHF and gold, but would avoid euros. The problem with europe is the italians, and to a less degree Spain and Portugal.
I’d like to meet the people buying 10-years at 3.97%s. The fact that rates remain so low convinces me that our bubble was in credit/fixed income, and housing was only a symptom not the disease.
July 3rd, 2008 at 7:51 am
I own long Treasuries. Not because they’re a great investment, obviously they are not. But long rates typically decline in recessions, and Treasuries are relatively safe. All in all, not a bad deal.
July 3rd, 2008 at 9:02 am
True, and I own TIPS. TIPS are also imperfect because the govt inflation numbers are a joke.