Sunday, November 11, 2007

The Fed Has Wrecked the Stock Market

"America is finished, washed up, kaput. Foreign investors and central banks around the world have lost confidence in US markets and are headed for the exits. The dollar is sinking, the country is insolvent, and its leaders are barking mad. Investors are voting with their feet. They've had enough."

So says Mike Whitney "and many others" at I feel the need to be contrary to the alarmism. Yes, the dollar is on the way down, down to the bottom... of the market (not the ocean). However, it is entirely possible that the bottom is NOT at flat zero value. I've been concerned in the past that the deliberate attempts to artificially raise foreign demand for the dollar (such as the constant maneuvering, both diplomatic and warlike, to ensure that the middle eastern oil market continues to do business in US Dollars) was unsustainable. The dollar was strong, but brittle. The current rejection of the dollar as "worldwide reserve currency" was bound to happen at some point, and is now dropping relative to foreign currencies not because the physical part of the US economy has anything wrong with it now that it did not have before, but because the foreign dollar speculation "bubble" has burst.

So long as the response in the US is not panic, but rather acceptance of our new place in the international order, it's entirely possible that this situation can pass, that the bottom for the dollar will not be total collapse, but rather a settling to a lower, more sustainable level. The US can, as a result of its lowered currency, go back to being an exporter and a lender, rather than relying upon artificial foreign demand for our currency for our standard of living. The other thing that has to happen, of course, is for the political and economic elites to realize they can no longer borrow and inflate at the rate they once did.

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