The justification by many experts for the strong dollar recovery that began last summer was based on an assumption that the U.S. Central Bank was making all the right moves and being more proactive than Europe and Asia. The thinking went, the U.S. economy is bad, but it is worse everywhere else and we will recover first.
Now we are seeing signs that Asian and European economies appear closer to turning things around than the U.S. economy. This has bad implications for the dollar.
The Financial Times reported on its front page yesterday that there are signs of recovery in China and Europe but “U.S. slowdown continues.”
In addition to comments by European Central Bank President Jean-Claude Trichet suggesting a bottom was in, the FT cited a report by the Organisation for Economic Cooperation and Development showing improving conditions in China, France and the UK. The OECD composite leading indicators improved in March for those countries but continued to decline in the United States.
There have been a lot of people worried about the inflationary implications of TARP and the stimulus package. Many are worried that it would ignite significant inflationary pressures, perhaps even a dangerous hyper inflation. No one can argue the potential inflationary dangers of the massive spending in the various bailout and stimulus packages, but Federal Reserve Chairman Bernanke seemed to be banking on the idea that deflation was a bigger danger and would ward off inflationary pressures for a time and that the Fed would fight the inflation fight once the economy was on more solid grounds. But if we continue to contract while others recover we would be faced with 1970s style stagflation.
You already can see this potential in the price of crude oil, which touched $60 yesterday. One could argue that today’s $60 dollar crude is more detached from fundamentals than last summer’s peak given supply levels and the demand destruction caused by the global recession. Some analysts believe the market is responding to inflation fundamentals instead of the traditional supply/demand numbers that continue to be bearish for crude oil.
If widespread price inflation precedes a meaningful economic recovery, that light many analysts see could very well be an oncoming train.
Tags: hyper inflation, inflation, TARP
