Quote from FerdinandAlx:
The market is starting to emphasize inflation. You can already see this priced into the hefty premiums that sellers in the TIPS market demand. It's only a matter of time before it starts to weigh on the prices of stocks.
Right now the stock market is still being fueled by a declining dollar but soon enough this will translate into fear. I expect the mass media to pick up on the stagflation scenario in the next few weeks, with stock and bond markets being sold off in tandem.
Good points. I actually see the bottom for the dollar coming up soon. Exports increased by something like 4% last quarter. Additionally, with recessionary fears, I just don't see Americans spending money which is going to start reducing imports. This should help stabalize the dollar's free-fall.
Truth to be told, we have the worst of all worlds over the next quarter. We have a deflated dollar, a huge trade defecit, low interest rates (which cause capital flight) and the rising price of oil.
But the reality is that we really probably need to be in this position to realign the American economy. The good news is that we will hopefully get this "sick" economy the medicine it needs which has been put off for about a year now.
First, I believe that stabalizing the dollar is priority number one, hence the lowering of interest rates and decreasing imports. Once we get the dollar stabalized, then the fed can start raising interest rates again to try and attract the foreign investment back. With an improving dollar and deep discount securities, this could prove really attractive to those foreign investors.
To give a gross analogy, sometimes you just need to barf to get better and trying to hold it in only prolongs the sickness.
So contrary to what most people's opinions are, I think the lowering of interest rates are important even if they are painful at the same time.
