Monday, February 16, 2009

will our economic recovery be slowed by our economic recovery?

One of the big themes for the last several months has been that no matter how bad the news in the US is, the dollar keeps going up in value and investors are still tripping over each other to buy US treasuries.

In fact, the worse the news is, the more interest there is in the USD and treasuries. The USD has gone up by around 30% vs most other currencies in the last several months and the buyers of government issued treasuries are willing to accept essentially zero (and in some cases actually zero) return on their money.

The common explanation is that the USD and treasuries are the world's most secure investments during economic hard times. People are buying them in the hope they'll actually be worth something next year. Nobody wants to get stuck holding the next Icelandic Krona (which recently became nearly worthless as part of this whole crisis).

So what happens when the financial crisis ends and investors start to favor the higher returns of basically any other investment over the USD and treasuries?

Seems to me, it'll lead to a falling USD and demand for higher interest rates on treasuries. Falling USD means rising import prices (most importantly rising fuel costs). Demand for higher interest rates on treasuries will make servicing our national debt more expensive, and increase borrowing costs generally.

None of which is good news for a country trying to recover from a recession.

No comments: