Minyan Mailbag: The Dollar and Gold
That's a whole lotta debt.
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Editor's Note: Minyanville is a community of people who share an interest in fiscal literacy. As perspective is an important aspect of our daily routine, we share this exchange with hopes that it adds balance to your process.
We all know the fed is raising short-term interest rates, or as we call it, the nominal cost of borrowing, and who knows if the fed funds is going to 4 or 5%. I guess the inflation genie will tell us how far they go.
But even with a fed funds at 4%, real rates are flat to up half of one percent. And that is a stretch, with all the statistical gymnastics going on at the dept of labor. So the PPI and CPI figures are hard to believe anyway.. Still with all that said, if you are buying the dollar because the fed is raising rates does that not seem short sighted. I thought the balance of payments determines the ultimate value of currencies. The U.S is running record trade, current account and potentially budget deficits once again; and that is usually a big dollar negative.
Are the markets totally ignoring the warnings from Volcker, Peterson, and Rubin? Do currency market participants assume China, Japan and other foreign central banks will always pick up the tab? Therefore why focus on a potential train wreck. Any thoughts would be appreciated.
From all aspects there is an unfathomable amount of debt denominated in dollars around the world.
As U.S. rates rise there is greater incentive to pay off this debt, which since it is in dollars, increases demand.
In the short run this outweighs the longer term concerns that Volker and Rubin (and we have humbly expressed at Minyanville) about the debasing of the currency.
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