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Although Paulson doesn’t have the means to actually do much, if anything, about China, his rhetoric is right out of Wall St. and exactly what the markets want to hear.
An “orderly” resolution is very much desired as the alternative is a crash which could and almost certainly would have ramifications globally.
Do you think that Paulson’s (and Robert Rubin’s) Wall St. connection is crucial to the Treasury position? It’s hard to see Snow or O’neil with as much credibility.
The “starve the beast” theory isn’t really about access to funds. The government owns the printing press. They have unlimited access to funds. (although not at the current price 😉
They have a debt ceiling too, but every time they get near it, they raise it. It’s all politics, not economics. It’s a selling point for tax cuts without reduced spending.
What would be a good idea is going back to the Paygo system that we had from 1990 to 2002. That balanced our budget, started to pay off our debt, gave us fiscal discipline and created a responsible system.
Oh where oh where did my little Paygo go? :-))
The yield curve is, in fact, an important economic indicator. As such, it is included as one of 10 components of the U.S. leading indicators published each month by the Conference Board. In fact, most recessions have been preceded by inverted yield curves. But inverted yield curves have often not been followed by recessions, so using the yield curve as an economic forecasting tool can be hazardous.
Oil is a supply side shock creating higher prices for goods due to higher cost of manufacturing and shipping. The higher price for gas for consumers is inflationary by itself.
Yes, we are very vulnerable to high oil prices, but less so than in previous times. Nevertheless a shock could be devastating to our economy. We went from under a dollar in 1998 to over $3 in 2006. Ouch is what my wallet says. My SUV doesn’t look so good to me now! 😉
Education is increasing because of demand. When I grew up, not everyone was expected to go to college, now it’s a given. State schools run at a loss made up by tax payers. They simply don’t charge enough tuition to cover their costs. But when tax revenues are short, they have to make decisions on where to make changes. Remember colleges are funded by states, not the feds. Although there is some federal money for education, it’s not anywhere close to being a factor when compared to military spending. And none of this really leads to inflation.
Summary: Reuters reported that the dollar took a hit today that rang through the stock markets sending all of the major averages down today worldwide. U.S. stocks sank after a call from the world’s richest nations, the G7, for more flexible exchange rates sparked a sharp drop in the dollar that ignited fears overseas investors would flee U.S. assets. They said a flexible currency rate “is desirable for major countries or economic areas” in order to iron out global economic imbalances.” This signaled that Japan would interfere less with the value of the yen against the dollar. For some time, they have been intervening to hold the yen down so the US would continue to buy their imports. The weak dollar will benefit US manufacturing as our goods will be less expensive to foreign customers. This also extends to China who fixes their currency, the Yuan, to the dollar. Flexibility will allow the dollar to fall against the Yuan to a more reasonable level.
My Take: The impact of the strength of the dollar is both psychological and real. There are so many that feel that the traditional strong dollar policy has something to do with a strong nation and without any economic knowledge would think less of an administration that would support a “strong” dollar policy. Hence from this perspective strong vs weak is not the typical definition as construed by the voters and we often bow to political pressure when it is clearly wrong. But there is a real concern about the weakness of the dollar and its affect on interest rates, which is our topic this week. If foreign investors feel that the dollar will continue to fall, they may elect to remove their investments from the US and therefore sell US treasuries. Selling a bond lowers the price and raises the interest rates. If China or Japan, who both have billions in US treasury bonds, start to sell, rates could rise, possibly substantially. If professional investors feel that those nations may be making a move, they may try to profit from this by selling dollars and buying Yen, sending it down further or just moving their current dollar denominated investments to Eurodollars or other currencies that will appreciate when the dollar falls. Viewing the situation as only a gain for US manufacturing and not a threat to our economic recovery is short sighted and biased.