It seems the question I asked early in the year has been soundly answered, for now. Deflation is the name of the current game, not inflation. Money supply has been demolished through credit collapse and hording of the leftovers. The surprising thing in all of this to me is how strong the US dollar has stayed relative to other currencies. This seems to be because of three things:
- In some cases the US wasn’t as exposed to its own bad investments as the rest of the world was
- The rest of the world is not decoupling from the US economy, this is a global downturn
- There is still a perception that there are few places to stash a lot of cash safely other than US bonds
The third point is surprising to me. I would have expected the market to hunt out new strongholds to stash their cash. Perhaps that shift will only happen gradually.
Long term the value of the dollar depends on what happens with the economy. As the CS Monitor asks – Who will bail out the US Govt? Currently it is foreign investors buying US bonds and others looking for safe haven. However, if stimulus after stimulus are given or the upcoming debt obligations with Social Security and Medicare obligations are not handled, I don’t see how the US dollar is going to stay stable. At some point the debt load for the US will become critical – once that happens there is a very real risk of the US defaulting or trying to inflate its way out of obligations. Both would be catastrophic.