The market seems to have accepted that the FED is raising rates to defend the dollar from the massive debt and deficits of the Bush/Cheney White House...
But, there is an even more horrible outcome possible...one that is seldom considered in the media.
WHAT IF...
THE FED RAISES RATES...AND THE DOLLAR DROPS...BECAUSE OF A WEAKER US ECONOMY; AND THUS AN INABILITY TO PAY FOR THE TWIN DEFICITS...?
It's no secret that the American Economy is running on borrowed money and borrowed time.
The incompetence of the Republicans has only made that worse over the last six years.
BY RAISING RATES, BERNANKE COULD CAUSE A DANGEROUS STAGFLATION...
WHEREIN THE DOLLAR FALLS, AND OIL AND OTHER COMMODITIES THEREBY RISE...!
REMEMBER, THE LAST TIME THE FED HAD TO USE RATE HIKES TO "CURE" AN OUT OF CONTROL WAR...AND WILD DOMESTIC SPENDING WAS DURING THE 70's...
That dismal episode took a long, long time to resolve itself....much longer than our current 48 hour news cycles permit nowadays.
I see a situation where "stopping the economy" with rate hikes results in a dangerous decline in the dollar...BUT NOT STOPPING the economy also devalues the dollar.
THE PERFECT CATCH-22!
Remember back in the 70' s the US economy was much more central to the worlds PRODUCTION CYCLES....
Today, the US economy is merely the consumer of last resort for Asia and other low wage regions...
Put another way....the US economy then was more balanced, more internally strong, and less "hollow"...than the US economy is today.
Today debt, deficts, and speculative bubbles are at the very heart of the US economic system.
In the 70's, plant, equipment and manufacturing were still the core competency of the American economy...that's long gone now.
I would not be surprised if there is a different reaction and outcome to rate hikes in 2006...than what occurred in 1976...the last time the FED started raising rates to "save the dollar.'
IN SHORT, THE DOLLAR MAY BE "UNSAVABLE" THIS TIME.
...AT LEAST IN THE SENSE THAT WE WOULD NORMALLY VIEW IT.
IT MAY BE TIME FOR AMERICANS TO TAKE THEIR "NEW POSITION" IN THE WORLD...
WITH A DEVALUED CURRENCY AND ALL THAT COMES FROM IT.
THIS COULD BE HOW THE "CHINESE CENTURY" BEGINS...AND THE AMERICAN CENTURY ENDS...
Because stupidity and greed in high places really do have consequences.
