However, if other central banks print money to keep their currencies from appreciating against the dollar – a likely scenario – other currencies would experience downward pressure. The equilibrium for the global currency market could end up being rotating devaluation, which would anchor inflation in all major economies. I still think that the central path for the global economy is stagflation. Fiscal stimulus and inflation may trigger a bounce in the global economy in the second half of 2009. However, it is a head fake. The global economy could have a second dip in 2010 when inflation emerges to blunt the effectiveness of monetary stimulus. In particular, bond yields could surge around the world. The real bottom for asset prices may be in 2010.

After the Fed announcement the dollar made a record weekly drop, treasury yield and mortgage interest rate dropped sharply. The market responses were what the Fed intended. As long as the market think that the Fed’s monetary expansion is bound by its announcement, i.e., the dilution of the dollar is limited, the market can price in the new value of the dollar. Other asset prices move according to what the Fed does with the money from diluting the dollar.