The best thing Washington can do right now is nothing. Ignore the fiscal cliff. Ignore the expiration of the Bush era tax cuts. Ignore sequestration. Hell, Congress should ignore everything officially and take the lame duck session off for a vacation.
This will cause the dollar to fall like a rock. Wall street will stumble for a few days, but they place a lot of value on stability. Once it becomes clear Washington will not be doing anything; well, that’s stability.
You and I know it’s not really stability. The computer trading programs don’t. They perceive lack of change as stability. That’s good. That keeps the dice rolling. Wall street loves a log-jammed Congress, always has.
The dollar falls because our GDP-to-debt ration is going wonky. The dollar falls when sequestration is voided by Congressional fiat because sequestration is the bargain we made with the devil to keep our AAA credit rating.
Let them downgrade our debt. It only increases the cost of future borrowing. It doesn’t change the interest rate on the $17 trillion already borrowed. Most of our borrowing for the last year has been paid for by printing money anyway. We don’t need to borrow from anybody.
Okay, so the dollar falls, our credit rating is downgraded and fiscal irresponsibility in Washington reigns supreme. As the dollar falls, the price of foreign goods increases. Gasoline goes up, but people compensate by buying less gasoline. We’re used to that already.
Europe only pays 63% more than we do. They’re doing just fine.
The only way we can take a bite out of China’s floating their currency at a 40% premium to ours without getting in a trade war (which is what will happen if we officially label them a currency manipulat0r) is to let the dollar fall like a rock.
Prices of goods Made in China will go up – well, 40% – and the tables will be balanced.
Once the currency imbalance with China is nullified it will be a lot cheaper to make things in America because there are no transportation costs. Jobs will explode in the U.S.
Once we float the dollar to the minus 40% level versus China, inflation kicks in. We can pay off our debt faster and get that albatross off our fiscal neck.
Factories will close in China like wildfire and their government will be so unstable they’ll back off pegging their currency at a 40% premium to ours and balance things out. (China has to create a million jobs a month to keep their government stable.)
There will be some pain along the way, but not nearly as much as if we try to compete with China’s currency manipulation.
