EVERYTHING IS GOING SWIMMINGLY: Stock plunge could become dollar death spiral. “America’s soaring trade deficit, now running at a record $1.32 trillion annual rate, requires the US to sell paper to its foreign suppliers in return for goods. Most of the paper the US sold to foreigners during the past few years was equity in US corporations, rather than government or corporate bonds. Valuations in the US stock market soared as the Federal Reserve forced interest rates lower, by reducing its short-term lending rate to zero and by purchasing $6 trillion of Treasury securities. The result of this exercise is the worst inflation in forty years and a collapse of labor productivity that portends shrinking corporate profits. As the Fed raises interest rates (in the mistaken belief that higher rates will reduce inflation) and inflation eats into profits, the valuation of US stocks is falling. That raises the ugly prospect of a deficit death spiral. With a net foreign asset position of $18 trillion, the United States can’t go on selling its assets to foreigners indefinitely. At some point the orderly sale of US assets might turn into a fire sale.”