Fed Ease Means Dollar Strength

NRO Financial ^ | August 24, 2007 | John Tamny & Paul Hoffmeister

[mysterio]

Do you understand how reducing deficit spending would increase the strength of the dollar?

[Toddsterpatriot]

Explain it to me.

[1rudeboy]

Yes. But I also realize that I assumed that you were talking about the sub-prime “crisis” when you may not have been.

[mysterio]

Because deficit spending can and often does lead to inflation.

[Toddsterpatriot]

Because deficit spending can and often does lead to inflation.

Only if the shortfall is printed rather than borrowed. We don't do that here. Try again?

You don't belong to the Clinton/Rubin school, do you? Do you believe a lower deficit will reduce interest rates?

[mysterio]

No, I wasn’t talking about that.

[SAJ]

Right. The greatest deflation in US history occurred from Jan 1930 through about Jun 1932. Care to guess which way equity/asset prices were going during that period? In plain English, that statement is balderdash.

Deflation causes and is caused by a collapse of credit, which leads almost immediately to a shrinking of the money supply, typically at some point after credit has expanded too quickly for too long -- the original vicious circle.

However, you can do better, far better, because Mr. Friedman had it right. ''Inflation is everywhere and always a monetary phenomenon''.

Guess what? So is deflation. Sharp contractions in credit by definition cause contractions in the available money supply.

Gold has sod-all to do with this process, as the world once ''learned'' to its regret...and, kept repeating this error via Bretton Woods, which was just an attempt to postpone the next evil day of reckoning.

The net of it all is: both inflation and deflation are ONLY ever the result of various gov't policies. Right now, there's an enormous gov't bias against deflation and for inflation, because politicians will LOSE their jobs during a severe deflation, but might be able to keep them (viz, the Regress during 1974-1980) during a severe inflation.

[mysterio]

The money being borrowed is actually being spent for something, right? I'm not sure how you can argue that extended deficit spending is not going to lead to inflation.

[Toddsterpatriot]

The money being borrowed is actually being spent for something, right?

Right.

I'm not sure how you can argue that extended deficit spending is not going to lead to inflation.

I'm still waiting for you to show that it does.

[mysterio]

Because you are diluting the supply of money with spending that isn’t backed by revenue.

[Toddsterpatriot]

Because you are diluting the supply of money with spending that isn’t backed by revenue.

I knew this would happen if your ever tried to have a serious discussion about economics.

That is one of the dumbest things I've ever heard.

[durasell]

Hey Todd! Everything okey-dokey?

[mysterio]

So go ahead and explain to me how we can deficit spend our way to a strong dollar and prosperous America.

If it's that easy, then let's go for it!

[Toddsterpatriot]

Because you are diluting the supply of money

If you're not printing money to cover the deficit, and we're not, deficit spending has no impact on the money supply.

[Toddsterpatriot]

No, you’re still doomed.

[durasell]

Dang!

[mysterio]

Deficit spending should be used in times of a serious recession to stimulate economic activity. Not in a time of full employment and extended growth.

[Toddsterpatriot]

I don’t like deficit spending either. I’m still waiting for you to show how it causes inflation.

[mysterio]

It also contributes to inflation by stimulating consumer demand.

[Toddsterpatriot]

It also contributes to inflation by stimulating consumer demand.

How do you explain these charts?