“Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar”
John P. Hussman, Ph.D.
In short, quantitative easing is likely to induce what the late MIT economist Rudiger Dornbusch described as “exchange rate overshooting” - a large and abrupt shift in the spot exchange rate that occurs in order to align long-term equilibrium in the market for goods and services with short-term equilibrium in the capital markets.
This adjustment is depicted in the diagram below. In response to the monetary shock, a modest but long-term depreciation in the dollar (a rise in the U.S. dollar price of foreign currency) is required, depicted by the blue line. However, since nominal interest rates in the U.S. actually decline, ongoing equilibrium in the capital market requires that the U.S. dollar must be expected to appreciate over time by enough to offset the lost interest. As a result, quantitative easing is likely to result in an abrupt “jump depreciation” of the U.S. dollar (that is, a spike in the value of foreign currencies)."
As sure as 2 + 2 = 4. Hope y’all are ready.