Regarding the original post, I would not draw such strong conclusions from the exchange rates. As I understand it, we are seeing both a flight to quality – buying the safest investments around – and, in other countries, unwinding “carry trades”. Neither of these is deflation.
It seems that deflation is likely, as the shrinking of the debt and asset bubble sucks cash from the economy, and slows it down further as it sucks out cash. But I saw it noted that Japan only got into deflation four years into its crash. Maybe things move faster nowadays.
I cannot understand why Ben is keeping the FFR anywhere above 0%. Maybe he is so preoccupied with the financial system he is not noticing the rapid slowdown in the economy.
The dollar’s strength is likely temporary, as bad news will continue to emerge from the U.S. economy, and the Fed and Treasury will support a weakened dollar in order to prop up our export economy. The current situation seems unsustainable.
Disclaimer: I have a vested interest in a weaker dollar, as I diversified from U.S.$ about four months ago, and have lost heavily since then. Well, it seemed like a good idea at the time.
