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October 08, 2007

"Like shoppers to a fire sale"

You've heard of voo-doo economics. Now courtesy of George W. Bush we have fire sale economics. Say hello to shrinking GDP in real dollars.

From CNN:

The Federal Reserve's decision last month to cut interest rates by a larger- than-expected half-percent point sent the already-weakening greenback to an all- time record low against a basket of six major currencies. In the third quarter, the euro appreciated more than 5% against the dollar, most of the gains coming in September alone.

Weakness in the dollar means prices of imported goods, particularly oil, will go up, raising the risk of inflation. American consumers will be paying more soon, with the looming threat of paying even more later on.

"The inflation risk from higher import prices will be the dominant initial effect," said Howard Chernick, an economics professor at Hunter College in New York. "The most immediate effect is imports denominated in dollars -- mainly oil. We already saw a spike in oil prices. So a bit down the line, that's 10 to 15 cents more per gallon of gas at the pump."

...Moreover, while the weakening dollar and inflation threat will deter some foreign investors, once the greenback stabilizes, bargain hunters will flock to U.S. assets like shoppers to a fire sale.

Cross-border transactions are already picking up pace in the financial sector, which was battered by this summer's credit crisis. A big factor is the surging Canadian dollar, which in September reached parity with its U.S. counterpart for the first time since 1976.

Posted by Mike at October 8, 2007 11:07 PM

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