Saturday, June 13, 2009

Heads they win, tails we lose

Anyone, please tell me where I'm wrong in the following analysis. I'd love to be proven stupid in this case.

I'm having a hard time imagining a scenario in which the American consumer doesn't get hosed even worse than their current not-so-pretty predicament. The dollar has been weak. The US govt can either let that continue or work to bring about a stronger dollar.

What makes a stronger dollar? The dollar has to be a more attractive investment ... which translates rather simply to higher interest rates. Hmmm, higher interest rates would slow (stop?) home buyers in their tracks, harm the already over-extended consumer with higher debt payments, and slow the rumored-to-be-happening-but-I'm-not-seeing-it-here economic recovery as companies think twice (or three times) before borrowing funds... assuming the banks will lend money in the first place. That would be bad.

Of course, choice number two would be to leave the dollar weak. But if that's the government's choice, it comes with its own set of problems. A weak dollar means that we will most likely have trouble selling those lovely government obligations that are keeping our collective heads above water right now. Because oil is denominated in dollars no matter where it is traded, you can count on higher oil prices. The sheiks in the Middle East will still want to maintain their lives in the style to which they have become accustom, even if that now costs 5 barrels of dollar-denominated oil per hour instead of the previous 3 barrels. A weak dollar also means that goods imported from overseas cost more - price inflation on pretty much everything sold in American stores. These things would also be bad.

In either case the consumer gets violated, but at least with a stronger dollar we have the chance to sell more bonds and further enslave our children's children whilst avoiding immediate bankruptcy.

Anyone want to bet on scenario #1 being the final outcome? I just don't see how it won't be.

I had just hoped to be kissed first.

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