[quote=4plexowner]…so how much “quantitative easing” can the Fed perform before we reach the “extremis” state?[/quote]
Quite a bit, 4plex. Before the Fed stepped in earlier this year with direct purchases of Treasuries, the 10T rate was less than 3%. Back in the early 1980’s, that rate was in the mid-teens. That’s a lot of room on just that element alone. Then there’s the exchange rate. A drop of 30% in the dollar would be seen as huge, and would likely halt movement until it was absorbed. Maybe a year, or more. Further movements could then happen, but these things take time. A complete collapse has occurred for only a few countries in the last several decades, and those countries were generally quite a bit less advantaged than the US.
So it is certainly true that we could see a lot of pressures driving down the exchange value of the dollar, but I see no practical chance of its foreign exchange value actually dropping to near-zero, as for Weimar Germany’s Mark.
Just consider if the dollar lost 50% of it’s foreign exchange value tomorrow. We’d have to buy a lot less BMWs and other European goods, and a lot fewer appliances from China. We’d still want nice things, so someone here would make a profit from making substitutes for us. And there are some things we make that other people around the world would love to buy from us at half the price in their own currency. It’s hard for me to see how a 50% devaluation wouldn’t eliminate our trade deficit. So in reality a less than 50% devaluation would get us there. It’s not all about catastrophe, black and white, do or die, all or nothing.
And yes, I have zero faith that US debts will be paid off in full value. Inflation will be engineered to reduce the true value of the debt. But the managers of the Chinese economy knew that 10 years ago. They accepted a likely future writedown of a trillion or two in accumulated savings as a price they would have to pay to go from being an undeveloped country to a global powerhouse full of real industry, educated people, and business knowledge for the future. The increase in the real value of their economy, powered by export growth, far exceeds the losses they will incur from US bad debt.
