EconomicCrisis.US

After receiving billions of dollars in government bailouts, U.S. banks are under increasing pressure to start lending money again. With banks paying back emergency government loans faster than expected, President Obama is reminding bank executives that it is their turn to help the U.S. economy. But as 2009 comes to a close, some analysts warn the banking crisis is far from over.

As U.S. banks repay billions of dollars in government bailout funds, President Obama held meetings with top bank executives in December, telling them it is time to return the favor.

“The way I see it, having recovered with the help of the American government and the American taxpayer, our banks now have a greater obligation to the goal of a wider recovery,” President Obama said.
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History tells us that it is the exit strategy from a crisis that paves the way to the next one. The most recent instance has been the US exit strategy from the double shock of the dot.com bubble and the Twin Towers attack.

At present we already know where the fuel of the next big fire is: public debt in the more advanced countries. This is all the more obvious since the ongoing massive swap from (almost) worthless private debt to (almost) guaranteed public debt will be the lasting bequest of the current crisis. Latest forecasts say that the average debt/GDP ratio of OECD countries will soar from less than 70% to more than 100% in the next few years. For some of these countries this ratio is already climbing fast and will probably reach unprecedented heights, unless fiscal stabilization interventions are taken rapidly regardless of the state of the real economy.
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It’s wildly fashionable among investment circles to bash the US Dollar’s prospects. Profligate US Government spending, our Federal Reserve’s easy money policies, and the soaring gold price are heralded as proof of the Dollar’s weak outlook. Investors are concerned that a weak Dollar will result in inflation, more expensive imports, capital leaving our shores and depreciation of Dollar denominated assets. While there are few things all investors can agree upon, many see the Dollar headed for ruin.

Bottom Line

Many investors are structuring their portfolios with an underlying assumption that the Dollar can only fall. They are flocking to commodities, foreign currencies, gold, overseas stocks and bonds and similar amid a widely held view that a continued collapse of the US Dollar will make them profitable. Similarly, they shun domestic stocks, particularly those with little or no foreign exposure, US Treasury debt, and Dollar oriented instruments because they’re viewed as providing little protection against Dollar weakness.
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The U.S. dollar has fallen in value vs. most other currencies for most of the last nine months and is now flirting with multi-year lows. More U.S. dollar weakness should be expected but not necessarily feared. Contrary to many proclamations from official and private sources, a “strong” dollar is not necessarily in the U.S. or collective global economic interest. Attempts to prevent a continued orderly dollar decline may further perpetuate global imbalances, slow U.S. economic recovery and prevent a stabilization in the U.S. debt dynamic that is badly needed.

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