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2007-10-30 Home Front Economy

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Posted by Steve White 2007-10-30 00:00|| || Front Page|| [2 views ] Top

#1 This is arguably the biggest story of the day and after 15 hours not a single comment! We haven't really felt the effect of this yet. And with a warm winter, we may be spared the full effect for some time. But come next summer, we're looking at $5.00 plus gas.

The cost to the United States in seigneurage if trading in oil is switched to Euros would be tremendous. So why are we allowing this to happen?

The CW is that it is due to the need to keep rates low because of the sub prime crisis and the response to protectionism.

But the Fed has demonstrated that it can prevent financial system meltdown through artful use of the discount window (for its original purpose. And if the worry is recession, well, expanding the money supply like this won't generate new housing starts when the market is already glutted, it will only create stagflation.

And though our current account deficit is narrowing, there is no way it will be balanced by exchange rate fluctuations. Only a revolution in China will accomplish that, and that won't be painless either.

So why, for the love of Pete, are we doing this?

What aren't we hearing any more?

Calls for China to untie the yuan from the dollar and allow it to float against the dollar.

China's only import is oil. As long as they keep the yuan tied to the dollar, the cost of oil goes up as much for them as for us. And their trillion dollars of reserves is losing value by the day. Effectively we are playing a game of financial chicken with them. But at least our exports are becoming more competitive and taking up some of the slack for a residential construction sector that is ready to hibernate in any case.

Posted by Nimble Spemble 2007-10-30 16:13|| 2007-10-30 16:13|| Front Page Top

#2 I pretty much agree with your analysis NS -- and with the danger we're facing in this situation.

Posted by lotp 2007-10-30 16:40|| 2007-10-30 16:40|| Front Page Top

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