The Dollar

The US is following a course of dollar devaluation. Given the massive dollar outflows recently, this seems a puzzling course of action. Won't foreign central banks dump their dollar holdings? Won't this cause capital to exit the US at a time when it is most needed? This danger is indeed more real than the spector of foreign banks dumping the dollar. FCB's won't dump the dollar, but they may diversify out of the dollar. Capital flight cannot be avoided. The US standard of living will be dropped in order to pay off our debts. Interest rates will be lowered as much as is needed to make debts easier to pay off. In the meantime, the US is trying to take China down with us. By devaluing the dollar, we've gotten the European Central Bank on our side. Now they know that they cannot match it because we've got the head start, but they can put pressure on China to revalue their currency upwards.

I believe that the only way to save the US banking system is to devalue the dollar until the banks can be made whole. We will see very low interest rates over the next year or two.