Wednesday, September 10, 2008

An Item Like This Is Bigger News Than "Lipstick."

The precedent set by the government in the Fannie-Freddie fiasco now makes them the “spender” of last resort. What will their moral compass lead them to do should Lehman come knocking hat in hand? The question is almost moot.
Because underneath it all is the long-term deterioration of the U.S. dollar. The U.S. government has run a loose monetary policy and ever expanding fiscal deficits for the last eight years. Now it has also made its mission (once again) to use your tax dollars to shore up majorly irresponsible financial institutions…all supposedly in your best interests.

But the effect of the weak dollar is finally taking its toll elsewhere in the world. Yesterday, in news far off the front pages, Argentina and Brazil announced they would no longer use dollars for bilateral trade. That is a big vote of No-confidence in the dollar. Instead, they’ll use their own currencies – the Brazilian real and the Argentine peso.
Once upon a time, quoting bilateral trade in dollars served as a source of stability. You could sell your Brazilian jets on terms and not have to worry that you quoted the sale in a currency that was going to plummet in value before you could get fully paid. Or you could sell your Argentine wine and not worry that the million pesos you were expecting at the end of 30 days…would be worth only half that by the time the invoice was paid.
But now, it’s not the emerging-market currencies that are constantly losing value. For the last six years, it’s been the U.S. dollar on a steady downward path. And – despite a recent rally – it appears many governments around the world still don’t like the handwriting they see on the wall for the U.S. dollar.
How, will the U.S. government pay for all its rescue operations? Ultimately by raising taxes, printing money, or both. Raising taxes might entail a political fight. But cranking up the printing presses is a process that doesn’t require a popular vote. No wonder the Gulf States continue to debate de-pegging from the U.S. dollar. The weak dollar has helped push inflation up to nearly 9 percent annually in the Gulf nations. And, following U.S. policy, they’ve been forced to lower interest rates to negative real yields.

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