Saturday, December 6, 2008

When is the next wave?

Is it really over? Or is the next wave around the corner? I am talking sub prime here. Yes, the damn thing isnt yet done with us. There are still plenty of unexploded grenades sitting out there in balance sheets of financial institutions in the US. It looks like the economies of the world are going to flounder for some more time.

Meanwhile the US dollar is balancing precariously on the back of the massive US fiscal deficit. With oil prices falling, less petro dollars are going into the coffers of the sheikhs and consequently less money flowing into traditional safe investment havens - US treasury bonds. With less demand for dollars to buy oil, there should be a fall of the dollar versus more stable currencies. However, given the economic scenario of avoiding risk at all costs, there is no equity market worth its salt now. In that scenario, money flows to the perceived safest investment in this climate, which historically is US treasury bonds. So the dollar might be stable because of this balance. Till the time that US fiscal imprudence crosses all boundaries and the pathetic fiscal situation causes a collapse in the dollar. Then we might well see a new world order in currency. In 2009? or 2010?

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