I remember on the plane meeting an elderly British lady on holiday. She was telling me about the “good old days” of the early Thatcher years with sky-high interest rates. Remember 18% mortgages? That scenario is great for elderly retirees who own their houses free and clear. They can simply leave their savings in the bank and go on holidays.

I don’t understand how Schiffer is implying that rising interest rates will cause the dollar to fall. Currency traders are most sensitive to interest rates. The dollar fell 40% vs Euro in 3 years before the Fed started raising rates and since then it has stayed its ground vs Euro in almost 2 years. The budget deficit in the mean time has grown and grown but hasn’t been able to hurt dollar while rates have been rising. Also, if the dollar falls, then after a transitory period, US exports will grow reducing the trade deficit. This will help dollar as well as economy. Moreover, falling dollar will boost real assets like housing keeping the prices up though value may go down. There are just too many confusions for me in this post.

Also, traders and hedge fund managers have been betting on a dollar decline for nearly 4 years now. Consider that as there is huge amount of money shorting dollar. Any short squeeze can result in unexpectedly boosting the dollar. Same happened to Yen in 1996-1998 when everyone was short on Yen.

US economy, dollar, housing, bond and stock markets are all very delicately poised. Things are definitel going to get ugly but by how much, is difficult to say. Whether we hit stagnant economy and rampant inflation is potential possibility but not a sure bet.

It is assumed (at least in a market system) that producers produce enough product to be purchased within a reasonable amount of time. The costs to carry excess inventory, in most cases, outweighs the benefits. Or so this is the thinking. In other words, producers produce just enough goods that will be purchased by willing buyers, hence they are scarce and will go to the highest bidder. Then again, I am not an economist.

This is what the post reads:
“As the U.S. economy contracts, the Federal budget deficit will grow and the perceived appeal of U.S. financial assets will be lost. As a result, foreign capital will flee at precisely the time it is needed the most. This will put additional upward pressure on interest rates, further increasing mortgage rates, suppressing real estate prices and consumer spending. More importantly, it will also cause the dollar to fall”

It seems like he is implying that as foreign capital runs away from the US markets it will cause 1)higher rates 2)weak dollar. Sorry but I don’t believe both can happen at the same time right now. BTW, what will happen to housing prices when dollar falls to dear lows? Also, bearish housing sentiment and stagflation expectations are kind of contradictory as housing assets will beneft from falling dollar.

People looking backward at the 70s stagflation generalize too easily. If you let inflation go out of hand then you can have stagflation where you have to raise rates despite economy already reeling from high prices stripping consumers. So the key is not to let inflation run rampant and I believe as long as Fed REALLY prioritizes controlling inflation as top priority then we probably won’t hit stagflation. As I said before, there is more downside risk but there are no sure bets.