Europe's experience reminds us that the United States probably has less time than commonly supposed to avert the eurozone's fate.
Since investors look forward, they will want to close out their dollar positions as soon as they recognize this path as inevitable "” and hence long before this inflation actually happens.
U.S. interest rates could rise by a full percentage point, if foreign investors refuse to accumulate additional dollar securities as they flow onto the market. More alarmingly, foreign investors could become unwilling to hold dollar securities, period. Selling their holdings will have even larger interest-rate and exchange-rate effects than simply refusing to absorb additional issues.
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