[axstone]

http://www.financialsense.com/fsn/BP/2007/0915.html

JIM: Well, there’s the risk that they run. They run the risk if they cut interest rates too much to save the economy, they sacrifice the dollar. And if the dollar falls off a cliff and really begins to tank then what you’ll have is another repricing of risk in the market place. Credit spreads will widen, long term interest rates will go up – that’s going to impact the housing market – so they really need to get the cooperation of other foreign central banks. I think they'll get the cooperation of the Japanese, I think they’ll get the cooperation of the Chinese but at a price, and then I think reluctantly the last people to cooperate will be the Europeans.


But in order to pull this off for the next reinflation, because let’s face it, if we go into a severe recession, it is going to impact China, it is going to impact Japan, and it is going to impact Europe. So they're going to have to get the support of other central banks to come in and buy our paper and support the dollar, either by buying our paper or massive intervention. And if they do that to support the dollar that means they will have to print a large amount of their own currency to neutralize that currency’s appreciation against the dollar; which means they will be expanding their money supply as well. But I do think you're going to see revaluation of the Chinese currency. It will be one way for some of the Asian central banks to control inflation in their country.


But unless the Fed can talk other central banks into cooperation and they all work together, if they can’t do that, then what will happen is you will see a collapse in the dollar. So that’s what I think they’re working on now, which is trying to put together some kind of coordinated intervention in the currency markets and the interest rate market, because the Fed is going to have to reflate. And it’s going to reflate massively. As it reflates, your going to see other central banks around the globe reflate massively – as they have been doing because we’ve been getting double digit money supply growth in all foreign top central banks of the world who are all doing that simultaneously. And because of that you are going to see inflation rates rise.


And the one thing that’s going to be more difficult for them this time is you've got inflation that is baked in the cake with food, energy and agricultural prices. And that’s going to be the thing that’s going to be more difficult this time. And I think they’re going to have a serious battle. They’re going to be able to reinflate the markets. I do expect stock prices to go higher. They will be buying everything on the Street if they have to, but it is going to take coordination because the US central bank is no longer in a power position where they can do this by themselves. And I also think you’re going to see, as we get closer to the end of the year as the economy weakens even further, I’m not sure we can even avoid a recession at this point. Maybe the best that they can do is contain it, and make it a mild one before the real problems come home to roost. And once again, John, we go back to our window period where this really begins to unravel beginning in 2009. [25:37]