The Fed is now a synonym for collective insanity. The US will soon find their standard of living permanently dented as their currency collapses, and interest rates rise to combat the hyper-inflation of another government bubble.

Why would anyone hold US dollars in the face of policies like this?

If the US dollar does collapse at some time over the next two years, what happens to our dairy trade/Fonterra?

Mark

As I see it they have no alternative, they have to slow the rate of collapse so that the hoi polloi can mentally catch up, The unintended consequence is that they have financed and been unable to suppress the rotteness of the perpetrators (ala AIG Bonus scandal, Sir Fred Goodmans pension etc) which is making the great unwashed very ugly

The alternative would be mass (and i mean MASS) unemployment, social disorder (riots) and widespread systematic collapse this year, as is I don't think this will happen until next year

Neven

Let's hope the RBNZ and NZ Treasury are on top the situation. All open unhedged short NZD/USD currency pair positions should be closed and USD reserves exchanged for other currencies.

Can anyone predict what will happen to the rest of the world, and in particular New Zealand if the US has high or extremely high inflation? Will we in turn get high inflation as a result?

dazza, Mark,

If the US has a low dollar a large US dairy industry will become a very price effective export competitor. Under that scenario none of the milk in world coffee is likely to be NZ milk. Long term there will be a greatly reduced NZ dairy trade. Fonterra won't be there in its current form, but that is independent of recessions or the USD.

In the medium term, the local value of existing forward contracts for dairy products in USD will decline. Dairy payouts will fall even further.

The higher recent NZD/USD will have already dropped the NZD value of dairy commodities.

Everyone take a deep breath.

The BOE, BOJ and the Swiss are already implementing QE measures and their currencies havent collapsed (corrected yes, collapsed no). Similarily, after a healthy period of correction the USD will again return to favor once fear/panic re-enters the market (possibly around 1Q09 reporting time).

USD collapse and subsequent inflation is preconditioned on two factors (a) that the Fed can print dollars faster than the rate of debt and credit destruction (which I believe is ~3.5 Trilion to date - one hell of a headstart) and (b) there must be a market for the extra debt (again, not likely with employment rates likely to continue to deteriorate and households already significantly overleveraged) - remember, money NOT circulating in the market (ie. sitting idle in a bank vault) is NOT inflationary.

Despite the best efforts of the Fed to inflate away their problems, I believe we are entering a period of global deflation as opposed to (hyper)-inflation.

Scott,

Agree entirely with your logic. The scale of asset deflation is close to the size of GDP, and inflation requires a willingness to take on debt.

Lower exchange rates though are being expected by most countries (NZ especially) to save their economies. Exchange rates are relative, so for every country gaining another has to lose. For today at least, NZ's hope has been trumped by the US.

Back @ Janet - Didnt work for the Japanese in the 1990's and Im not sure why the US would be any different. Maybe someone with a cultural studies background could argue differently.

Back @ PeterR - I believe the US is our no. 3 or no. 4 export destination so the strength of NZD/USD is of less importance to our exporting sector than say, the strength of NZD/AUD (no. 1 export destination). But you are right, it will be very interesting to see how this global race to devalue will play out. I heard that the BOE was discussing ways in which they could undermine the pound. Im not talking about lowering interest rates or QE etc, Im talking about actively creating doubt as to the viability of the currency. Amazing times that we live in.

http://www.leap2020.eu/GEAB-N-33-is-available!-Growing-Transatlantic-tensions-on-the-eve-of-the-G20-summit-An-illustration-of-Wall-Street-s-and_a2940.html

"...London's G20 summit at the crossroads: Heading towards a crisis resolved in 3 to 5 years or towards a decade long uncontrolled crisis
According to LEAP/E2020, there are only two options left for the G20 leaders who gather next April 2nd in London: either they rebuild a new international monetary system, creating the conditions for a new global system that involves all the main global players, and reducing the crisis to a maximum of 3 to 5 years; or they strive to prolong the current system, thrusting the world into a decade long tragic crisis starting at the end of 2009..."

Eva notes:

G20 has two choices as set out above.

I believe the choice to rebuild a new international money system was taken yesterday by the US Federal Reserve when they announced the outright purchase of US Treasury debt.

The integrity of the Fed's balance sheet will be restored while the previous purchases of worthless mortgage securities will be returned to their rightful owners at some point in the future.

The day that transaction stream is enacted, and it may take a while, the existing banking structure will rollover and a new structure will be erected in it's place.

The madness of exploding the Fed's balance sheet with worthless assets as depicted in the following graphic will stop:

http://www.omo.co.nz/historical_aggregate_vs_s&p_500.htm