International trade and finance relationships also come unglued. In particular, the currency appreciates and the trade deficit balloons. The danger is that, despite apparently strong growth in economic activity and employment, the economy is financially fragile. It faces the very real possibility of a sharp decline in its currency and an unraveling of the dynamics that previously propelled its growth. Capital inflows are replaced by capital outflows and foreign funds are withdrawn from the U.S. stock market.
Share prices fall, as do real estate and other asset values.
The trade deficit is suddenly unsustainable. The country finds itself on the horns of a dilemma. Either a financial crisis is allowed to unfold, or the Fed raises the interest rate sharply to prop up the dollar and the real economy goes into a nose dive and income and employment fall. It sounds eerily like the United States. The growth of the stock market is slowing.