Long term trend watch: In today’s WSJ, Judy Shelton writes an interesting opinion piece [subscription requred] about the perils of a fluctuating value of the dollar.  She basically endorses Robert Mundell’s call for the world to get together and create a global currency system, likely based on gold.  As I suspect that near the end of this decade the currency-manipulation, inflation and trade chickens will come home to roost, I can see the US taking the lead on creating a new Bretton Woods-type currency system. 

Of course, I believe there is no true panacea out there, and that we will end up trading one set of issues for another.  But that is just the way the cycle turns…

Business Cycle Watch:  In this week’s Outside the Box from John Mauldin, he gives us a report from GaveKal on how those betting on renewed inflation after the Fed rate cut may be thrown off guard by declining velocity of money.  This makes sense given the collapse of the CLO market and the billions of hung LBO financings.  It is also something that no economist focuses on or even understands, as far as I can tell.

I am torn.  My suspicion is that we will see something similar to what we got in the last cycle: a falling dollar and rising commodity prices (although probably not as much as in the last 5 years), but mild headline inflation due to increasing manufacturing productivity and globalizaiton.  The big difference will be dealing with housing deflation instead of inflation.  The balance of risks supports the Fed’s move for now, since the cuts can always be taken back.

By the way, I recommend reading Our Brave New World from the guys at GaveKal.  Very interesting take on how our economic world has evolved in the information age.  Its a short book and well worth the time.