Doug Noland: America First and the Decapitation of King Dollar

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Huge tax cuts at this late stage in the Bubble come with unexpected consequences, including those associated with stoking acutely speculative risk markets. There are major risks in feeding an investment boom now, following years of extraordinarily loose financial conditions and today's 4.1% unemployment rate. It's reckless running huge fiscal deficits at this late stage of a boom cycle -- with federal debt having already inflated from $6.074 TN to $16.463 TN in less than ten years. And, this week, openly lauding the benefits of a weaker dollar with foreign holdings of U.S. debt securities at $11.370 TN (up 57% since the crisis!).

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There are few matters that keep central bankers awake at night like the prospect of dislocation in the currency markets. These are massive markets, generally well-behaved but not easily controlled when they're not. Disorderly selling of the dollar -- with all the leveraged currency trades and unfathomable derivative exposures that have accumulated for decades and mushroomed since the crisis - now that's lush habitat for the proverbial black swan.

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The dollar's worst start to a year since 1987. Wildly speculative stock markets, rising bond yields, Fed rate hikes, dollar weakness and acrimony, and general currency market instability. Today's backdrop recalls 1987, though with some important differences. The world has so much more debt these days. Global equities markets are so much bigger and interconnected -- derivatives markets incredibly so. Did China even have a stock market in '87?