One quick and good solution for the capital flows problem in the world

Well, strange as it may seem, America has one only solution at this time, to recover from this severe crisis that may wipe out their supremacy as world power and the dollar as the world currency, as established in Bretton Woods so many years ago. Raise interest rates, to levels that represent the current risk America is at this moment. Raise short term interest rates to 6 or 7%. It is the only solution at this time, even if it will be a burden to the treasury to service its enormous debt, but, it will bring capital flows back to the United States. America has exported its industries and employments to other nations, now, it has to import eveything that it consumes. That is something that cannot be reversed in the short term. It has to recreate itself and it needs a truce period. The risk is huge, but, paying 0,25% a year on fixed income bonds will not reverse the flow. Raising interest rates will be costly, but can save the game. Other nations have done it in the past and did manage to get out. The inflation has been going up steadly and the current interest rates are not maintaining the purchasing power of the dollar. As a result, cash has been rushing out of the country to buy Gold, Euros, Brazilian Reais, and anything else that might preserve the value of the capital.

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4 Responses to One quick and good solution for the capital flows problem in the world

  1. Tulio says:

    Ricardo, assuming a scenario where the US would raise its interest rates, wouldn’t that benefit Brazil in the short term as it could reduce the level of foreign investment and, thus, reducing the dollar exchange rates?

    • tradingcafe says:

      That is exactly what will happen. The capital will start flowing back to the US, eager to be invested there at higher interest rates. The effect for Brazil will be slightly different, short term capital will start to go out, forcing FX rates higher. Foreign direct investments are not going to stop, because they are long term and for different dynamics of decision making. Cheers, Tulio.

  2. Nathalia says:

    Olá Ricardo! Happy Monday.
    Olha só: “Standard & Poor’s put a “negative” outlook on the U.S. AAA credit rating, citing rising budget deficits and debt.”
    (http://www.bloomberg.com/news/2011-04-18/standard-poor-s-puts-negative-outlook-on-u-s-aaa-rating.html)
    Será que a S&P iniciará a cadência de revisão de rating para EUA?

    • J.R. Vensan says:

      Ricardo, do you think S&P mentioning the lack of agreement on the annual budget is a timely excuse to downgrade the US economy? I mean, hadn’t they just found an “honorable exit” to play this as smoothly as possible?
      JR

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