Anyone who has glanced at the business pages of current newspapers would have
to conclude that the falling dollar is a panacea for the American economy,
and the metaphorical equivalent of rat poison for the economies of Europe and
Japan.

In reality, a weak dollar is an enormous problem for America, and is not a
problem for Japan or Europe. Sure, some foreign companies may have problems
because their American customers can no longer afford to by their products,
but over all, most Europeans and Japanese will benefit from the rising standards
of living that the enhanced purchasing power of their currencies will provide.
Americans, on the other hand, will suffer falling standards of living, as their
diminished purchasing power raises the prices of ubiquitous imported products
that have become the mainstay of American life. In fact, Americas will even
find it difficult to afford many domestically produced products (what few remain),
as many such products will be exported to wealthier foreign consumers who will
than be able to out bid poorer Americans.

What current reporting doesn’t mention is the many reasons why the U.S. “bubble
economy” is so dependent on a strong dollar, which is necessary to pay
for imports, and to entice foreign creditors into lending the money necessary
to pay for those imports, and into buying the mortgage backed securities that
keep interest rates low and make “home equity extractions” possible.
Just because the dollar’s recent weakness has not caused interest rates to
rise yet does not mean that it won’t happen eventually. In the short run, particularly
in a mania where fundamentals and common sense go out the window, anything
is possible.

It seems that investors have learned little from the recent stock market bubble,
when “investors” ignored fundamentals and bid stocks prices higher
than any reasonable person could justify. Even when the fed began tightening,
it was argued that rising interest rates would not be bad for “new economy” stocks.
Despite all the overwhelming negative fundamentals, stocks prices initially
kept rising. Towards the end, many people argued that in the new era fundamentals
no longer mattered. However, eventually the bubble burst (though currently
far from fully deflated) and people realized that fundamentals do in fact matter.

The same “this time its different” arguments are being made about
interest rates. Even thought the dollar is weak and likely to continue falling,
even though gold, oil and other commodity prices are rising, even thought federal
and state budget deficits are exploding out of control, and even though domestic
savings are substantially inadequate, the market is convinced that interest
rates will stay low (or even drop), and bond prices therefore continue to rise.
However, this can not go on for ever. At some point, perhaps within the next
3-12 months, as with the stock market bubble, the fundamentals will overwhelm
the momentum. Bond prices will collapse and interest rates will soar. Then
it will be obvious just how bad a week dollar really is