Greetings: After his speech today, it appears that Greenspan seems to be concerned more by the prospects of inflation, than the current real estate bubble. I think he is very right. Imagine Greenspan at a baseball game. He is next at the bat. His first ball: The Euro. As most of you know, and if you don't, you should be reading more, Europe's economy is in tatters, it's politicians forgot that it was about "the economy", The whole concept of unification is being questioned. The Euro has no other place to go but down. As it goes down, so does the US$ go up.....Strike one..... Second ball: The Yuan. As America and soon the world start making the Chinese revalue it's currency, so things do become a little more expensive here......Strike two..... Third ball: Oil. As supplies are tight, and together China, India and Eastern Europe move into capitalism at the same time oil has no other way but to go up up.......Strike three..... OUT ! Rates are raised strongly to fight inflation, mtg interest rates go much higher, so go the dreams of real estate and stock investors.....puffff. Comments ? and where will the good money go ?
A strong currency does quite the opposite of what you say, in that it fights inflation. What causes inflation? Well, a couple of things, but one important thing is an increase in the money supply. Basic economics is if you have an increase in the supply of something all other factors being constant what happens to price? Therefore if we have inflation because of too large a money supply what should happen to the exchange rate (price) of the dollar? A classic example of large scale, rampant, and very bad inflation is pre-WW2 Germany. When you have a situation where 50,000 deutschemarks buys you a loaf of bread, would you call that a strong currency? Or you could subcribe to the PPP, purchasing price parity theorem, which comes to the same conclusion an increase in the price of goods must depreciate the currency. You said that a strong dollar causes inflation whereas I've mostly stated here that inflation causes a weak dollar (rather than the poper contra argument which would be a weak dollar causes inflation). However, these relationships are reflexive in that a depreciation in the currency can cause inflation or inflation can cause a depreciation in the currency, so either way.
You say a strong currency fights inflation, a weak one helps it. That makes complete sense but.... If we are to have a stronger dollar, would that not make the Yuan even stronger and thus making Chinese imports more expensive, specially if they revalue their currency ?
dollar appreciation makes imports cheaper (to the US) and US exports more expensive (to the rest of the world). Both are anti-inflationary.
That's all good, but the "good" money will go where the markets go.....whether up or down...........and inspite of the Macro Socioeconomic RE Bubble Import/Export Euro Theorem.......unless of course your looking long - term, maybe 4500 minutes out.