Tuesday, July 24, 2007

The US Dollar

Ok so this chart should let you know how bad the drop has been for the US Dollar over the last few years. I have said that a weaker dollar can be a good thing for our exporting industries and possible investment in production in the US due to relative cheap labor. Moving this far down this quickly does not sit well though.

The goal of the FED is not to have a strong currency but to have a strong economy. Inflation = bad. Pretty much everyone agress to that. Other countries and regions have made moves to increase interest rates in the face of inflation. The FED is probably forced to raise interest rates the next time around, as the US dollar loses more ground and inflation still has not been tamed. As the FED has met this year and held rates steady, I have not been happy. I see inflation as a big danger as it is taxation without legislation. Raise rates, take some of the punch bowl away, and let the Phoenix that is the business cycle die and be reborn.

The downside to raising rates is that it would cause more trouble in the housing market. Jack asses who got ARMs, yes you are a jack ass for doing so and I will explain why later, would have their adjustable rates inch up in response. It would cause more folks to fall behind, stop paying the lenders, and investors on Wall St. would lose out as well. Look, foreclosure is a sad process and usually has some sad story behind it: illness, divorce, job loss, etc. If you ar foreclosed on now because you took a 2/28 ARM for that low teaser rate payment not thinking about the adjustment, I have little sympathy for you. You are an idiot for taking an ARM anyway as the mortgage rates on fixed mortgages were at historic lows at that time. In an adjustable mortgage, rates go up or down. When the current rates are at historic lows, there is generally speaking, only one way for rates to go: up. People who claim that "the mortgage man told me rates could go down" while they had a 4-5% fixed rate staring at them in the face as an option but chose that teasrer 1.25% are bold faced lying. Where was your rate going to go, -3%? If you factor in inflation, that teaser rate of 1.25% probably was like negative 3% to being with.

I'm going to go out on a limb since I do not make many predictions as I think they are generally dumb. The future by definition is undefined. I will state that if 2nd quarter GDP comes in at a solid number and inflation continues rolling along slightly above the 1-2% comfort range, the FED will raise rates. If the USDX drops below 75, the FED will raise rates. I see the FED funs rate at 5.75% by the end of 2007.

1 comment:

Working Class Schlep said...

Predictions are OK when they are educated guesses. : )