Reply #13: The error is in the assumptions

[notesdev]

Our economy is not improving. At best, the rate of decline may have dropped slightly. This bear market rally is fueled by speculation as to who is going to get government money, but the reality is the government cannot raise anywhere near the amount of money to cover all the bad bets that were made. Banks who hold securities backed by no-doc loans, for example, cannot be made whole. Nor can the people who used a pay-option ARM to live well beyond their means.

The big picture of what is happening is that we are headed straight for a major bond market dislocation. What this means is real terms is that the US government may run out of the ability to borrow money at any reasonable rate. The government would immediately have to shrink to 60% or even less of its present size. An attempt to print our way out of it will only make things worse, adding high inflation to the mix, which in turn would require printing more money in a never-ending cycle (as in Zimbabwe and Weimar Germany).

Here's where those rising interest rates really hurt: there are still millions of people in exotic, underwater mortgages out there at 2002-2008 interest rates (the artificially low ones caused by the Federal Reserve under Greenspan and Bernanke). For the beginning of this year, interest rates were even lower than that time span, and there was the opportunity for some of those people to refinance at lower rates, to turn some of these defaults and potential defaults into functioning, regularly paid mortgages. These are the same types of mortgages that became 'reserve capital' through the credit default swaps with AIG.

So... back to the dollar vs. other currencies. The dollar is dropping on the expectation of future hyperinflation, which is basically the course that Congress and the Federal Reserve and the administration and decades of mounting obligations have put us on. People aren't too hot to have dollars anymore, since administrations and Congressmen from both parties, as well as the Federal Reserve, have been openly flouting established law and practice. Nobody knows what limits, if any, there will be to policy, and this is undermining the stability, and thus the value, of the US dollar.