You mentioned the falling dollar: should I be concerned that this may trigger a crisis?

The weak U.S. dollar means the global economy is over-invested in dollars. These excess dollars need to be removed as demand for them is slowing. We believe that this reduction in demand is largely the result of the unwinding of the "flight to quality" that occurred over the past decade as the U.S. was the stable growth engine when many economies faltered or collapsed. Now that other economies have begun to turn around, a normal diversification into other markets and currencies is occurring, as it should.

We believe the Fed should respond by selling bonds into the marketplace and reduce the supply of dollars in circulation. The excess dollars, if not addressed quickly, will cause undue inflation. Some classic inflation warning signs are already occurring, as evidenced by surging prices in oil, commodities, and precious metals. We are clearly in the reflationary phase of the economic cycle and can fall into an overly inflationary phase if the Fed does not act soon.

Although mild inflation is good for the U.S. currently, the weaker dollar could have some negative global implications. If Europe and Japan feel the U.S. is using a weak dollar to gain a competitive trade position, they may pursue beggar-thy-neighbor policies with competitive devaluations: this is a dangerous proposition that ultimately benefits no-one.

Since Japan and Europe are more export-dependent economies, the weakening dollar poses immediate problems, and they may be quick to blame the U.S. for their woes. Ideally, these countries should adopt fiscal policies targeting growth while U.S. policy makers support the dollar and drain excess dollars from the economy.

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