Monday, September 21, 2009

Strong or Weak Dollar? Inflation or Deflation?

The Dollar has been weak lately and if you listen closely enough you can hear the printing presses at the Fed working overtime. This would of course mean that the dollar is about to collapse and no longer be the reserve currency of the world, it also means hyperinflation unlike anything the US has witnesses since the Civil War.....or does it?

Let me first state that I am concerned about the dollar weakening. I am concerned about inflation and the national debt makes me sick to my stomach. Having said that, I'm also concerned about deflation. I can make plausible arguments for both a strong dollar and a weak dollar, as well as for both inflation and deflation.....and that is the problem.

The future is impossible to predict, but there are always signs that lead you into the right direction, avoiding the forks in the road is the tough part.

I can paint a plausible scenario of a dollar collapse, except that I can't figure out just what currency would take the place of the dollar. What currency in the world is deep enough (in terms of availability) and stable enough (in terms of the economy and debt) to overtake the dollar? Certainly not China's. The world is not about to trust their reserve currency to a communist nation, even one that has become dominant utilizing some capitalist themes. The U.K. is weaker than the U.S. and the Euro is just not strong enough....yet. We could see a dollar devaluation, but not a collapse against other currencies, the dollar could continue to be the reserve currency, but we could witness a collapse of the dollar against certain commodities....instituting a "commodities" standard.

We could see deflation for several years, then followed by inflation. What is clear is that nothing is clear right now.

What I do know is that the Fed is attempting to re-create the bubble in asset prices. What I do know is that the financial system we have currently is in shambles and by not letting it fail, we've essentially made the price much higher when it does.

The Federal Reserve Chairman has been paraded as a hero, the captain of a marvelous vessel. This vessel may very well be the Titanic.

The stock market may very well continue to rise, that is not something I can predict. Interest rates may stay low as people hoard cash and create such demand that interest rates stay low. It may take many years before the problems that were solved with band-aids rip open again and reveal that major surgery was needed.

In the meantime, the bulls are running, the recession is's to the new bull market!!

As for the 23% of un or under-employed people in California and in other states, its time to celebrate.

If you get the feeling that I'm a bit pessimistic, you are probably correct. I am a life long optimist, however I try to temper my optimism with a bit of realism, there are paths out of these problems. The paths are not easy, they will hurt - this current path is not sustainable.

Scott Dauenhauer CFP, MSFP, AIF