emilyr said:
It is not just because the dollar is the currency of reserve but also because US Treasury bonds are still the safest investment worldwide, even when the US economy was in crisis. And this does have to do with investors’ perceptions of the stability of the US economy, though not necessarily its growth potential.
All of this means, we can’t just look at the way currencies are trading or government fiscal policies or even stock markets as a long run indicator of an economy; we certainly can’t make doomsday predictions about the fundamentals of an economy based on them.
Emily – thanks for your input. Orwellian already made some good points in his post but I’ll try to add some of mine as well.
While I can appreciate that you are taking a macro econ class at uba, I’m quite certain that what you are being taught is classic Keynesian economics and not Austrian School economics. If you are not familiar with the Austrian School then I suggest googling a fellow named Ludwig Von Mises.
Unfortunately Keynesian economics is the standard by which the US and most of the world implements as the underlying guiding principles for monetary and fiscal policy. I think today however it’s widely being seen for what it truly is, mainly junk economics. It’s the chief reason why the housing market crash took place and many crashes before it. It espouses that one should keep interest rates artificially low in order to increase spending and stimulate the economy. We all know too painfully well now that spending our way to prosperity is not a viable, working economic model.
I agree with you that US T bonds WERE the safest investment around because that’s all it is – a game of confidence. The US has always been seen as the world’s largest and most stable economy. Once investors lose that confidence however, the money goes out quickly and the values drop drastically. All you need to do is look at our national debt to understand how grave the situation is. China will not be there to bail us out for long. They’ve been taking steps for some time now to decouple themselves from being dependent on us.
If we examine it logically, it really doesn’t take a genius to figure it out. Our gdp is largely made up of spending, consumer and government respectively. If we don’t have jobs then how will consumers earn money to spend and pay taxes to the government for them to spend as well. Unlike china, we don’t have any savings to tap into. We as a nation are flat broke and we’re functioning on borrowed time. We’re living off of a credit card and at some point our credit line is going to be maxed out.
The govt. lies, plain and simple. It said we created X amount of jobs or whatever in the last quarter. What it doesn’t tell you is that most of those were census taker jobs that are govt. created(i.e. not a real job) and only temporary. Soon those workers will be back in the unemployed pool. There will be no economic recovery. At some point, they will start to announce that we are in a depression, perhaps sometime next year.
You get different numbers on the web but if you look at our unfunded liabilities such as social security and medicare, that pushes our national debt into the $70 to $80 trillion range. It’s a debt so large that we cannot possibly expect to pay back or grow our way out of, especially with the unfriendly business environment that our govt. seems prone to these days. Capital and business will go where it is treated best. It will flee high govt. taxes and regulations.
Long term predictions are made using a number of factors however currencies are the lifeblood of any country’s economy. A currency is just like that country’s stock. It can be high or it can be low relative to others. A currency with a higher value usually means a higher standard of living for that country’s inhabitants. The austerity measures currently facing countries like Greece and others will one day hit the US and thus our standard of living will go down.
Is it the only criteria we look at in order to gauge economic health? Of course not. We look at the LEIs or leading economic indicators(gdp, cpi, ppi, durable goods, the beige book..etc). Orwellian mentioned in his post that we’ve been living off of the stimulus money since the housing crash. Stimulus money is generally seen in the financial markets first. once that runs out of steam, the fed will most likely announce another round of economic easing in order to prop it back up and get more suckers into the marketplace.
All of this economic easing is only delaying the inevitable of course, and making it much more painful for when we come to the realization that we have no more rope.
These are not doomsday predictions. This is the road we are currently on. This is the hard cold reality. A person can choose to make some preparations or they cannot. I will say again that holding some gold/silver as a hedge and not being overly leveraged in cash or cash denominated assets is good general advice for these strange times we live in.
