We had the bond vigilantes in the 90's during the Clinton administration and now we have currency vigilantes during the Bernanke period who will dump a currency if the fiscal house is not in order.
The bond vigilantes were worried about rising interest rates from increases in government debt. The currency vigilante are worried about expected inflation from a rise in fiscal debt. Sovereign risk increases from the threat of debasing debt held by outside investors causes currency holders to get out of foreign exchange. We saw this action with the euro during the PIG crisis in the spring. We are now seeing this with dollar. The threat of higher inflation from QE II is causing investors to dump the dollars. The same will be seen with any other currencies which have loose monetary policy and high debt.
The bond vigilantes were worried about rising interest rates from increases in government debt. The currency vigilante are worried about expected inflation from a rise in fiscal debt. Sovereign risk increases from the threat of debasing debt held by outside investors causes currency holders to get out of foreign exchange. We saw this action with the euro during the PIG crisis in the spring. We are now seeing this with dollar. The threat of higher inflation from QE II is causing investors to dump the dollars. The same will be seen with any other currencies which have loose monetary policy and high debt.
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