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Comment by mattobrien | Hacker News Reader

Small point: Dubai is finished. It is bankrupt. It was a classic boomtown. All of the building was done on debt. Foreigners are leaving their cars at the airport, flying out, so that they do not end up in debtor's prison (yes, Dubai has debtor's prison). Not exactly friendly to entrepreneurs - take a risk, take on some debt, and land in jail.

Every major country is going to have to spend to stop from falling into complete depression. Taxes will be higher everywhere. And the US will likely get through this crisis better than anywhere else. Having the reserve currency has its benefits after all. I really do not think going somewhere else to avoid higher taxes will make sense in the future.

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You've just got to pray that everyone keeps using Dollars to buy/sell oil and doesn't switch to the Euro.

The euro??? The euro has a much, much better chance of ceasing to exist than it does of replacing the dollar as the reserve currency. Countries like Spain and Italy that are near depression will have huge incentives to leave the euro so they can conduct their own monetary policy. If Eastern Europe is not bailed out before it goes bust, then more Western European banks will go bankrupt - and many countries in Europe are too small to bail out their banks. There will be immense pressure on the eurozone countries to leave the monetary union.

In the land of the blind, the one-eyed man is king. The dollar does not look good, but compared to the euro or the yen, it looks great. We don't have to worry about losing reserve currency status anytime soon. We just need to figure out what to do with insolvent banks.

I agree with you, and wanted to add this Marginal Revolution post which is tangentially related. Are the banks insolvent or illiquid?

http://www.marginalrevolution.com/marginalrevolution/2009/03...

The banks are insolvent. Mortgages and auto loans and credit cards are all going bust. There is nothing panic driven about the depressed value of those assets. Studies they've done on CDOs show that they are worth even less than what the pessimists projected (30 cents on the dollar for super senior tranches and 5 cents for mezzanine).

If this were a matter of illiquidity, the massive liquidity the Fed has injected into the system in the last six months would have ended the crisis.

here's more: http://hedgedbet.blogspot.com/2009/03/friedman-toxic-assets-...

Again, I tend to agree with you, although associating the illiquidity opinion with TF is just an unnecessary swipe. Much smarter people than he support the illiquidity theory, which was what I intended to point out.

Fair enough on TF. But plenty of smart people also thought housing prices would never go down...

As much as I would like to see the end of the EU (or at least the Euro), Spain and Italy can't leave; they can't afford to. Imagine what the speculators would do to a new currency Spain/Italy introduced after not being able to survive in the EU.

If anyone leaves it's going to be France or Germany.

>The dollar does not look good, but compared to the euro or the yen, it looks great.

There are more currencies out there then these. The British pound seems to be down at the moment, but I expect it to recover. The swiss franc isn't looking bad either. Personally I expect the dollar to go down, but there are way too many variables out there to actually bet on it.

Oh, they'll switch. I don't know if it'll be to the Euro, but they'll switch. Right now our policymakers are throwing the kitchen sink at stopping asset price deflation. Employing inflationary policies to counter both moderates the severity, and delays the turn. But since we're in crisis mode, we're not doing any planning around how we're going to remove the inflationary policies when the time comes.

Combine that with massive fiscal deficit, and you have a recipe for inflation and dollar devaluation. It's played out exactly this way many times in many parts of the world throughout history.

Here's the thing: everyone else is doing the exact same things. And we're starting from a better place than most everyone else (lower government debt-to-GDP ratio). All currencies will likely lose value against real assets. But as far as currencies go, the dollar will probably do the best.

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