Quote:
Originally Posted by kane
I had read that on CNN.com. Here is what the story said: "If Congress fails to raise the $14.3 trillion debt limit by August 2, Americans could face rising interest rates, a declining dollar and increasingly jittery financial markets, among other problems."
I would guess that if the value of the dollar continues to drop and interest rates go up we would see inflation correct? I may be wrong about that though.
Although I am curious. I you are one of the guys on this board that really seem to understand the markets and financial sector. If default happens what do you think would take place?
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The way they have it phrased is possible, but it doesn't read as cause and effect. I probably took your statement the wrong way (as one causing the other). Weakness in currency is definitely part of the inflation picture. Of course, specific prices may rise on normal supply and demand factors, even with a strengthening currency.
Rising interest rates are normally associated with reducing inflation because it is designed to slow down demand in a heating economy, thus reducing prices.
My take on what would happen (actually, this is what I think is likely anyway over the next 6-12 months) is that defaulting on the debt will put additional pressure on an already limp economy and actually have the temporary effect of another "flight to quality" where the Dollar strengthens (or remains range bound) and treasuries have a decent bid under them.
Under this scenario, I expect what minimal inflation we have to peter out and a general disinflation (possibly slipping into deflation) to take hold. Basically, the same type of pressures that occurred in 2008 when we saw broad assets declines in everything except the US$ and Bonds (although the longer this goes on the more difficult it will be for the long end to hold yields this low).
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