2. The level of US debts, and the governments subdued capacity to raise tax receipts without increases in tax rates
I am still waiting for my energy tax. I suspect the US government is waiting for some resolution to climate change. They are waiting I think for scientists to get some consensus that there is no climate change consensus, before they step in and say, well just to be sure, we'll tax all energy, so in case there is a problem, we'll have our backs covered by spending on health care, etc.
Despite the fact that we are looking at a stronger US in future thanks to higher interest rates, I think we can expect further weakness in the short term. The cause of this is likely to be weaker economic indicators out of the USA. I am expecting the USD to find support against the Yen at its previous 15-year low of 81.6-83.6 yen. Currently the USD is trading at 89.32Yen, so there is room for a further 10% fall in the USD. I think it will be a quick recovery, and it might even be prompted by a global consensus to support the USD.
We must remember that Obama was in Japan, China and Korea last week, and there is every reason to think currency issues were discussed. No doubt those countries were looking for an assurance that the USD would not be allowed to fall, since they have large holdings of US treasuries. The US cannot expect these countries to support the USD unless they are prepared to raise rates. The chart below shows the trading history of the USD-JPY:
Andrew Sheldon www.sheldonthinks.com