Thursday, July 24, 2014

US Dollar crisis can occur under the following scenario

I believe that the following scenario could actually lead to a dollar crisis. Let us assume that the stock market continues to go up and the economy does not respond much, but prices begin to rise and so rents, insurance costs, medical costs, food costs and energy costs rise.

The Fed will at that time have to choose if they increase interest rates and tighten monetary conditions in order to combat inflation, or continue to ease and print money in order to avoid asset markets from declining. At that point, there could be a crisis of confidence in the US dollar which would then weaken the US dollar considerably.