Dan (I called you UR so people would know which post I was responding to) —
Basically, I think the Krugmans of the world are looking at things like low capacity utilization, low velocity, etc, and assuming that purchasing power cannot decline. This conclusion rests on the assumption that foreigners will continue to lend us simply vast amounts of money, despite the fact that we are so deeply in debt that there really isn’t a credible and politically feasible way to pay it off in real terms. I just disagree with this conclusion because the math doesn’t add up. Neither the USD nor Treasuries are a viable store of value; I just think it’s a matter of time before the world realizes that.
I think there is a US funding crisis in the offing (not necessarily imminent, just to be clear about that). The results of a funding crisis would be a weaker dollar (higher import and commodity prices in US$ terms) and higher rates. There is already precedent for the Fed monetizing debt to bring down rates and fill the gap where foreign inflows have not been sufficient to finance our deficit; I think this will increase into any funding crisis, especially if it happens against the backdrop of weak employment. If that were the case, rates might not rise as much, but it would result in an even weaker dollar.
I apologize, I don’t have much time today so I can’t give the response it deserves… hopefully the above at least gives an inkling of where I am coming from.
