How Long Can the U.S. Dollar Defy the Law of Gravity?

In the midst of the longest and deepest, post World War II recession, America’s financial position with the rest of the world has deteriorated sharply. Three decades of massive trade deficits have turned the United States from the world’s top lender to the world’s largest debtor, and dependent upon the whims of the so called emerging nations, laden with huge foreign currency reserves, to finance the bailout of Wall Street Oligarchs, and President Barack Obama’s social programs.

Foreigners own roughly half of the US government’s publicly traded debt, or $3.47 trillion, representing nearly 25% of the size of the US economy, the highest level in history. If foreign lenders were to significantly reduce their purchases of US Treasury notes, without even dumping their current holdings, US long term interest rates could zoom higher, and the US dollar could crumble.

That would deal a double whammy to the US economy. Higher yields on Treasury debt could translate into higher mortgage borrowing rates for homebuyers, weighing on the housing market, while a weaker US dollar could lift the price of crude oil to above $70 per barrel, inducing an “Oil Shock” to the world economy. This nightmare scenario has been relegated to the den of doomsayers and fear mongrels, yet is starting to become an increasingly realistic proposition.

Increasingly, some of the biggest foreign lenders to the US Treasury, such as Brazil, China, India, Russia, and Qatar, are grumbling aloud, about the endless string of trillion dollar US budget deficits projected in the years ahead. Lenders are crying foul over the Federal Reserve’s radical experiment with “Quantitative Easing” (QE) the printing vast quantities of US dollars, and monetizing the US government’s debt.

“America, through this financial crisis, is accumulating a huge amount of debt. It’s a heavy burden on the US dollar,” warned Jassem al Mannai, chief of the Abu Dhabi based Arab Monetary Fund on June 28th. “You have China and Russia proposing an international reserve currency other than the US dollar. These developments could affect negatively the dollar, and you cannot just ignore them,” he warned.

“We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets,” warned Chinese PM Wen Jiaboa on March 13th. To speak truthfully, I do indeed have some worries. So I call on the United States to maintain its creditworthiness, and abide by its commitments and insure the security of China’s assets. We have already adopted a management policy of diversifying our ($2 trillion) foreign exchange reserves,” Wen warned.

The Congressional Budget Office has recently forecast the US budget deficit for fiscal 2009, to reach a mind boggling $1.825 trillion, or approximately 13% of GDP. Next year, the budget deficit is expected to total $1.43 trillion under Obama’s budget plan. Furthermore, the CBO sees the US deficits between 2010 and 2019 totaling $9.1 trillion, thereby raising doubts about America’s ability to finance its debt at low interest rates, and whether it can maintain its top tier AAA credit rating.

The exploding US budget deficit and the Fed’s policy of flooding the financial markets with US dollars, knocked the value of the greenback 7% lower in the second quarter, and heightened fears on global bond markets about a surge in inflation. This had the effect of eroding the value of China’s holdings of US Treasury notes, estimated at roughly $1.45 trillion, putting Beijing on the offensive with Washington.

Since the Fed shocked the global markets on March 18th, by unleashing the “nuclear option” for monetary policy “QE,” or printing an extra $1.1 trillion US dollars, in order to buy US T Notes and mortgage backed bonds, there has been a new dynamic influencing the psychology of the US credit markets, namely, latent paranoia over foreign flight from the US dollar and Treasury Notes.

On March 24th, the People’s Bank of China’s (PBoC) chief Zhou Xiaochuan, emphasized his worry over the inflationary risks from the Fed’s money printing scheme, by proposing to replacing the US dollar with the SDR currency, that is controlled by the IMF, as the new global reserve currency. Suresh Tendulkar, an adviser to Indian Prime Minister Manmohan Singh, is urging New Delhi to diversify its $265 billion foreign exchange reserves and hold fewer US dollars.

China’s holdings of US Treasury debt have soared by $257 billion from a year ago, to $763 billion today, exceeding Japan’s holdings of $686 billion. Increasingly, the functioning of the massively indebted American economy is dependent upon China’s willingness to recycle much of its export earnings (largely dependent on sales to the US consumer), to provide loans to the US government.

Yet, any precipitous move by Beijing to become a net seller of US Treasury debt, runs the risk of igniting a US dollar selling panic, triggering massive losses in China’s own portfolio of Treasuries, and the collapse of its main export market, the United States. India’s economic adviser Tendulkar says US dollar holders face a “prisoner’s dilemma” in terms of managing their bond holdings.

Recent saber rattling by Beijing over Washington’s mismanagement of its fiscal and monetary affairs began to conjure up fears in the global bond market that Beijing was discreetly selling off some of its US bond holdings. The benchmark Treasury’s 10 year yield, which influences the direction of home mortgage rates, zoomed higher in the second quarter, briefly penetrating the psychological 4.00% area, up from 2.50% when the Fed began its mad experiment with “nuclear QE.” The surge in yields caught the Fed and the US Treasury by complete surprise.

Selling hysteria in the Treasury bond market reached a fever pitch on May 27th, when Dallas Fed chief Richard Fisher told the Wall Street Journal, “senior officials of the Chinese government grilled me about a hundred times, on whether we are going to monetize the actions of our legislature. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that invested their surpluses in the United States,” he said.

With the Treasury’s 10 year yield bumping against the 4.00% level, the US Treasury chief Timothy Geithner began a two day visit to Beijing, amid speculation that China might scale back its purchases of US Treasury notes. Geithner’s main objective was reassure top Chinese officials that the Obama team will safeguard Beijing’s holdings of US debt by bringing down the federal budget deficit and phasing out the Fed’s policy of flooding the financial markets with US dollars.

The next day, on June 2nd, Fed chief Benjamin Bernanke, boxed into a tight corner by Beijing’s saber rattling, warned the US Congress that there is a limit to how many US dollars the central bank can print. “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke warned US lawmakers.

“Maintaining the confidence of the financial markets requires that we begin planning now for the restoration of fiscal balance. Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation. The Fed will not monetize the debt!” Bernanke’s pledge to stop the printing presses after August was a grand omission of Washington’s subservience to its paymasters in Beijing.

After Bernanke signaled the outer limits of the Fed’s experimentation with “nuclear QE”, the Treasury bond vigilantes loosened their vice grip, and yields on the 10 year note tumbled by 50 basis points over the next four weeks to 3.50 percent. On June 16th, Fed governor Kevin Warsh backed up the Fed chief, declaring, “we will not compromise price stability buy monetizing large US budget deficits,” explaining that “financial markets may extract penalty pricing, if fiscal authorities are unable to demonstrate a credible return to sustainable budgets.”

Sure enough, on June 24th, the Fed held to its pledge to limit its purchases to $1.45 trillion in mortgage related debt by year end, and $300 billion in Treasury notes by the end of August. Beijing taught the Fed learned a valuable lesson, trying to peg long term interest rates at artificially low levels, through massive money printing, can backfire, by igniting inflation fears and sending yields sharply higher.

ECB Rescues of US$ vs Euro, Deflation weighs on Gold

The Fed’s promise to put nuclear “QE” on ice after August, helped to block the Euro’s advance at $1.4200. But trying to push the Euro lower was like pushing a helium balloon under water, after the Fed had already injected $1.5 trillion into the world money markets. The Fed was caught in a desperate position, and needed outside support to prevent the greenback from plummeting. Luckily, the European Central Bank (ECB) came to the rescue on June 26th, by pouring 442 billion Euros ($613 billion) into one year deposits, to encourage banks to start lending again.

Surprisingly, the ECB’s injection of 442 billion Euros barely moved the gold market, which stayed locked within a tight trading range between 645 euros and 690 euros /ounce. In fact, gold stayed flat in the second quarter, lagging behind the broader commodities markets, when crude oil gained +45%, London copper added 27%, and wheat rose almost 30 percent. Overall, the Reuters/Jefferies CRB index of 17 exchange traded commodities posted a 15% gain in the second quarter.

There is a tug of war underway in the European gold market. On the one hand, the ECB’s ultra low interest rates, and massive money injections are buoying the yellow metal. However, on the other side of the coin, Euro zone bank lending and money supply growth are plummeting, into what can best be characterized as a deflationary spiral that’s crippling the Euro zone economy, and weighing on gold.

Euro zone bank loans to businesses and households grew at a paltry +1.8% pace in May, the slowest on record. Euro zone banks are hoarding the cash from the ECB, to plug up the holes in their balance sheets, from losses on bad loans, which expected to reach 265 billion euros in the year ahead. Likewise, the Euro M3 money supply slowed to a +3.7% annual growth rate in May, down from +10.5% in April 2008. Consumer prices turned negative last month, also keeping a lid on gold.

China Inflates Money Supply, buoying Gold,

Gold is foremost an international currency, and traders from wide ranging parts of the world, view the yellow metal from different perspectives. And while Chinese leaders are scolding the Fed over its penchant for printing vast quantities of US dollars, the PBoC is expanding the Chinese M2 money supply at a blistering +25.5% annual clip, sparking fears of faster inflation, and buoying Shanghai gold. Monetary conditions in China appear to be the exact opposite of Europe and Japan.

New lending by Chinese banks is likely to hit 7 trillion yuan ($1.1 trillion) in the first six months of this year, easily topping Beijing’s full year target of 5 trillion yuan. Banking regulators are now warning that credit is being channeled into the property sector and the stock market, creating asset bubbles instead of supporting small businesses and the broader economy. New lending by Chinese banks is likely to exceed 10 trillion yuan ($1.46 trillion) this year, or roughly equal to one third of the size of China’s economy, the Shanghai Securities News reported on July 3rd.

The surge in Chinese bank lending has resulted in a large increase in real estate transactions of a speculative nature, and into projects that are wasteful, making it hard for investors to repay bank loans in the future, China’s central bank chief warned on July 4th. The Shanghai Composite Index has risen by over 50% this year, reflecting not so much the strength of the underlying economy, but rather, the large amounts of speculative capital flowing into equity markets.

About 1.16 trillion yuan ($170 billion) of Chinese bank loans are estimated to have been funneled into the Shanghai stock market in the first five months of 2009, China Business News reported. That is 20% of the 5.8 trillion yuan loans banks made in that time period. Thus, Chinese leaders are essentially following the playbook of Fed chief Ben “Bubbles” Bernanke, and “Easy” Al Greenspan, which calls for flooding the banking system with paper currency, in order to forestall a normal economic recession, which in turn, creates new bubbles.

China is the world’s second largest exporter, and suffered a record year on year fall in exports of 26.4% in May, following similar trends in other export led Asian economies including Japan, South Korea and Taiwan, indicating weak global demand. The collapse in Chinese exports also follows a 21% devaluation of the US dollar against the yuan, which Chinese leaders partly blame for the slump.

Beijing has ramped up the growth of its money supply, to prevent the US dollar from falling below 6.80 yuan, in a bid to remain competitive with other central bankers around the world, who seek advantages in global trade through weaker currency exchange rates. Beijing aims to reduce its exposure to the US dollar through the use of currency swaps with key trading partners, such as Argentina, Malaysia, Indonesia, Brazil, and Russia. The PBoC signed an agreement with Hong Kong to allow the settlement of cross border trade in yuan.

Japan fights Deflation by defending US dollar

Japan does not disclose the currency breakdown of its $1 trillion of foreign reserves but most of its FX stash is parked in US dollars. Tokyo doesn’t favor a change in the dollar’s status as the key currency, since it’s comfortable with a gentleman’s arrangement with the US Treasury that allows it to manipulate the yen’s value. The Bank of Japan (BoJ) still commands a lot of respect as a tough currency manipulator, when its economic interests are threatened by speculators.

The BoJ’s reputation for hard nosed intervention was etched in stone during the 15 months ending March 31, 2004, when it sold 35 trillion yen ($327 billion) in the currency market to support Nikkei 225 multinationals and exporters, and prevent the dollar from falling below 100 yen. As a result, Japan’s FX stash ballooned to a record $826 billion, with the US dollars acquired, recycled into US Treasuries.

Japan is now facing the threat that deflation will become deeply entrenched in its economy, preventing a rebound from its worst postwar recession. Japanese wholesale prices were 5.4% lower in May from a year earlier, the sharpest decrease since 1971, reflecting the collapse of key commodities, in the second half of 2008. Deflation is a vicious cycle, where companies start cutting prices to attract customers, as falling wages and the worsening job outlook dampen spending.

The primary tool that Tokyo has at its disposal to fight deflation, is pressure on the Bank of Japan (BoJ) to print more yen, in order to prevent the dollar from moving lower, and exerting more downward pressure on commodity prices, in yen terms. On March 18th, the BoJ increased its monthly purchases of government bonds (JGB’s) by a third to 1.8 trillion yen ($18.3 billion) from 1.4 trillion yen, in order to inflate the supply of its currency. The BoJ pegs interest rates at 0.1 percent.

Japan’s export slump deepened in May, casting doubt on its ability to emerge from its worst postwar recession. Overall, shipments abroad dropped 41% from a year earlier, while exports to the US and Europe fell by 45%, from a year ago. Tackling two threats with one stone, the BoJ is trying to fend of deflation and weaker exports, by aiming to establish an artificial floor under the US dollar at 94 yen, through covert intervention, mainly through money printing operations.

Ironically, the yen has become a so called safe haven currency, during times of strife in the global banking sector. While European and US banks are writing down more than $1 trillion in subprime losses, Japanese banks have been surprisingly stable. Japanese banks, hammered by the collapse of a real estate bubble in the early 1990’s, haven’t reported gigantic losses related to the collapse of the American real estate bubble since its peak in August 2006.

Instead, Japan’s megabanks, Mitsubishi UFJ Financial, Mizuho Financial, and Sumitomo Mitsui Financial, have admitted to only $5 billion of sub prime losses so far. “The maximum losses of Japanese financial institutions are 1 trillion yen ($9.4 billion), not big enough for the government to act,” said Kaoru Yosano, former chairman of the ruling Liberal Democratic Party’s fiscal reform panel.

Tokyo has laid out plans to sell a record 44 trillion yen ($460 billion) of new debt in the fiscal year thru March 2010, to finance regular and stimulus spending to ease the pain of recession. Yet despite the record issuance, Japanese 10 year bond yields still remain depressed near historic lows. The Tokyo bond market is the world’s second largest, with $8.5 trillion outstanding, yet 10 year JGB yields have been locked in a super tight range between 1.15% and 2.00% for the past eight years.

The BoJ will monetize roughly half of the supply of new debt to hit the market this year. Yet massive yen printing and record debt sales haven’t translated into sharply higher JGB yields. Instead, Japanese 10 year yields are trending lower, weighed down by the specter of deflation. The Fed hasn’t been able to duplicate the BoJ’s mastery over the Tokyo bond market, because the US has the distinction of being the world’s largest debtor nation, and dependent upon the whims of other lender nations, while Japan is the opposite – the largest creditor.

Japan became a creditor nation about thirty years ago, when Japanese investors held $11.5 billion more in foreign assets than foreigners held in Japan. By 2007 however, Japan’s overseas assets rose to a record 610 trillion yen ($5.9 trillion), making it the world’s largest creditor nation for the 17th year running.

Comments

[yellowhoard:]

Everyone in the world knows that Congress and the White House are writing checks that they cannot cover.

When we are eventually bankrupted, stronger hands will come in and buy, and take, the assets that they choose.

Our nation is very close to offering the largest garage sale in history.

Jul 08 08:49 AM

[jeandit75:]

Now all of the gold bugs are gonna jump on this post to promote the coming crash in the dollar and the gold price lift-off. The sad truth is the dollar has to crash against some more valuable currency. Unless there is some kind of non-human currency, I don't see against what the dollar could lose its value.

Look gold bugs, there is no money velocity, we are in a declining price environment, the recent drop in the dollar value was driven by an inventory rebuilt in China and a speculative increase in risk appetite. Once speculators' appetite for risk is fulfilled (just about now), the dollar will rebound, the commodities will come back to their downtrend, so as the equities generally speaking. That's it. There is absolutely no strong case on gold and won't be until the demand for gold increase (which is not for soon).

Jul 08 09:13 AM

[DWStein:]

Did you answer your headline question?

I read it as loaded and took the strong implication that it won't be long before we're buying loafs of bread with wheelbarrows full of USD.

Couple of things work against this idea, some of which you yourself articulated.

1) during the most acute phase of the crisis, the strongest asset in the world was the 3 month US treasury bill. The yields were pushed negative as panicked investors knew the only safe harbor was the US and it's massive capital base (natural resources, human capital, rule of law). When the chips were down, the world knew where to look. Can we screw this up? Yes. But the most recent evidence suggests the US is still safest place in the world to keep your capital.

2) The new version of MAD (mutual assured destruction) is between the US and it's creditors. There is an adage in real estate that, if you borrow $1 million from a bank and can't pay it back, you are in trouble. If you borrow $100 million from a bank and can't pay it back, the bank is in trouble. Well, the US is the borrower and the world is the bank (plus a few zeros). As you pointed out, if China doesn't feed the beast and the USD truly collapses, they will hoist themselves by their own petard. Probably the chief benefit of being able to borrow in your own currency.

3) Money, in the economic sense, is much more that the currency, deposits...etc. The creation or destruction of money is a very dynamic, organic phenomenon; over which, the Fed only has a Rube-Goldberg like control. Can they drop cash from helicopters? I guess. But within reason, it may prove very hard to manufacture an increase in asset prices.

4) where else are players going to put their capital? Europe? A land where some banks have balance sheets larger than the GDP of their home country? And if you think the situation with their banks is over, wait and see. China? India? They still both have currency controls making it very hard to get your capital out. Russia? Well, if you trust those guys with your money, I've got a co-op in Manhattan i'd like to sell you. Canda, Austrailia, New Zeland? Sure, commodity currencies are appealing. But how deep are those markets?

We are both the lender AND borrower of last resort. Will it last forever? Probably not. Long enough for the followers of Lord Keynes perhaps.

Jul 08 09:27 AM

[Mono:]

i am not a goldbug and agree on a few idea of yours, but it can be inflationary instead without money velocity. people focus on demand-pull inflation instead of cost-push, with the latter being brought about by a failure of currency to hold its value due to a loss of confidence stemming from trade/fiscal imbalances. that is what we're about to go through. every instance of cost-push inflation in history has arisen amidst low capacity utilization, high unemployment, and generally terrible business conditions. the end result is usually some form of hyperinflation.

again- not a goldbug...just look at history of inflation


On Jul 08 09:13 AM jeandit75 wrote:

> Now all of the gold bugs are gonna jump on this post to promote the
> coming crash in the dollar and the gold price lift-off. The sad truth
> is the dollar has to crash against some more valuable currency. Unless
> there is some kind of non-human currency, I don't see against what
> the dollar could lose its value.
>
> Look gold bugs, there is no money velocity, we are in a declining
> price environment, the recent drop in the dollar value was driven
> by an inventory rebuilt in China and a speculative increase in risk
> appetite. Once speculators' appetite for risk is fulfilled (just
> about now), the dollar will rebound, the commodities will come back
> to their downtrend, so as the equities generally speaking. That's
> it. There is absolutely no strong case on gold and won't be until
> the demand for gold increase (which is not for soon).

Jul 08 09:32 AM

[doubleguns:]

Capital injections all over the world, ECB, Japan, China, USA are what will lead to an entire collapse of the fiat monetary system. All of the smaller countries who have reserves in these currencies will get crushed too.

We are on the edge and the question is do we go over. I think it is inevitable I just don't know when. 1 year--100 years I have no clue since it will depend upon an "event" or sheer stupidity by our govt or other govts.

Presently we seem to have the lead in the stupidity department.

Jul 08 10:02 AM

[DONE_SONZ:]

What would a bankrupt currency be worth?What valuable currencies are you talking about?They are all in the same boat.If the market does recover it will be inflation led.A better scenario,but will also lower currencies."absolutely no strong case on gold"?I beg to differ.


On Jul 08 09:13 AM jeandit75 wrote:

> Now all of the gold bugs are gonna jump on this post to promote the
> coming crash in the dollar and the gold price lift-off. The sad truth
> is the dollar has to crash against some more valuable currency. Unless
> there is some kind of non-human currency, I don't see against what
> the dollar could lose its value.
>
> Look gold bugs, there is no money velocity, we are in a declining
> price environment, the recent drop in the dollar value was driven
> by an inventory rebuilt in China and a speculative increase in risk
> appetite. Once speculators' appetite for risk is fulfilled (just
> about now), the dollar will rebound, the commodities will come back
> to their downtrend, so as the equities generally speaking. That's
> it. There is absolutely no strong case on gold and won't be until
> the demand for gold increase (which is not for soon).

Jul 08 10:08 AM

[Vuke:]

When the entire fleet is sinking survivors will head for the driest boat. In a sea of sinking currencies, the lifeboat is gold. That is its value, its grace and its historical role. And, it has always come through.

Jul 08 10:31 AM

[huangjin:]

The U.S. central bankers are like alcoholics amongst heroin and crystal meth addicts.

Jul 08 11:00 AM

[Douglas T:]

The state of California (eighth largest economy in the world) is broke and handing out IOU's this week, and the US government is presently having discussions regarding yet another monetary stimulous package. I suggest that any global monetary ramifications as discussed in this article could come to fruition in the not too distant future. Investors should be prepared to seek relatively safe haven investments short term for their personal portfolios.

On the positive side of all this doom and gloom, there are always sectors of the global market place that do well no matter what economic conditions exist. The key to this of course is to be informed and invested in these areas as they arise.

www.mutualfundwealth.com/

Jul 08 12:20 PM

[conceptwizard:]

Very good article!

How America's Payment Deficit Became a Source of Strength, not Weakness

It let America achieve what no earlier empires did - "a flexible form of global exploitation that controlled debtor countries by imposing Washington Consensus (diktats)." It's used the IMF, World Bank and other international lending agencies for its purposes, while the Treasury-bill standard "obliged the payments-surplus nations of Europe and East Asia to extend forced loans to the US Government." If they don't, world economies face monetary crisis.

Other nations are tired of being held hostage.

Jul 08 12:50 PM

[Mad Hedge F...:]

How long will the stock market go down? The stage is now set for the dollar. With the US 20 months into arecession, it’s just a matter of time before the Feds pull us back fromzero interest rates. With the ECB late to the funeral, European CentralBank president, Jean-Claude Trichet, last week reaffirmed hiscommitment to keep their benchmark rate at 1% to restore the economy.There’s your trade. The next move in the euro/dollar spread will be infavor of the greenback, as the US will be the first out of recession.On top of that, you can pile a fading US stock market and a back off incommodity prices, which are also dollar positive. You can expect theeuro to trade down to the low $1.30s. Mind you, this is still a countertrend trade, which I generally try to avoid. It’s a one night stand,not a marriage. Anyone reading the National Enquirer knows the dollaris sick, and even my cleaning lady has a major position in the futures.Thus, the street is overdue for a spanking, the inevitable outcome whenthere are too many bets on one side of the table. I still think it will cost TWO BUCKS to buy a EURO sometime in the foreseeable future. Forthose hardy souls willing to scoop up some pennies in front of a steamroller, look at the 200% short euro ETF (DRR), which has backed off 34%from $63 to $42 since November.

Jul 08 02:28 PM

[Dissenter:]

Great article. If the Japanese and Chinese found out tommorrow that their US securities holdings were worthless what effect would such a loss in asset value have on the Japanese and Chinese economies and their currencies? Would all that worthless US security holdings cripple their economies?

Jul 08 09:42 PM

[Gold Barron:]

What cost $1,000,000 in 1970 would cost $5,485,861 in 2008.

Also, if you were to buy exactly the same products in 2008 and 1970,
they would cost you $1,000,000 and $178,672 respectively.

Get the picture?

Jul 09 01:05 AM

[Tony Daltorio:]

If anyone wants to see why the US is going downhill fast, just read this load of Wall Street-type BS. What arrogance! What hubris! I've run out out of words.

There are plenty of areas that other nations can put their monies - into their own country - to help their own people, not indebted Americans. To help their own people, they can and are currently buying commodities and commodity production. That way their people are assured of food & energy supllies,etc.


On Jul 08 09:27 AM DWStein wrote:

> 1) during the most acute phase of the crisis, the strongest asset
> in the world was the 3 month US treasury bill. The yields were pushed
> negative as panicked investors knew the only safe harbor was the
> US and it's massive capital base (natural resources, human capital,
> rule of law). When the chips were down, the world knew where to look.
> Can we screw this up? Yes. But the most recent evidence suggests
> the US is still safest place in the world to keep your capital.<br/>
>
> 2) The new version of MAD (mutual assured destruction) is between
> the US and it's creditors. There is an adage in real estate that,
> if you borrow $1 million from a bank and can't pay it back, you are
> in trouble. If you borrow $100 million from a bank and can't pay
> it back, the bank is in trouble. Well, the US is the borrower and
> the world is the bank (plus a few zeros). As you pointed out, if
> China doesn't feed the beast and the USD truly collapses, they will
> hoist themselves by their own petard. Probably the chief benefit
> of being able to borrow in your own currency.
>
> 3) Money, in the economic sense, is much more that the currency,
> deposits...etc. The creation or destruction of money is a very dynamic,
> organic phenomenon; over which, the Fed only has a Rube-Goldberg
> like control. Can they drop cash from helicopters? I guess. But within
> reason, it may prove very hard to manufacture an increase in asset
> prices.
>
> 4) where else are players going to put their capital? Europe? A land
> where some banks have balance sheets larger than the GDP of their
> home country? And if you think the situation with their banks is
> over, wait and see. China? India? They still both have currency controls
> making it very hard to get your capital out. Russia? Well, if you
> trust those guys with your money, I've got a co-op in Manhattan i'd
> like to sell you. Canda, Austrailia, New Zeland? Sure, commodity
> currencies are appealing. But how deep are those markets?
>
> We are both the lender AND borrower of last resort. Will it last
> forever? Probably not. Long enough for the followers of Lord Keynes
> perhaps.

Jul 09 10:15 AM

[sarge 907:]

"Promise them anything: Give them nothing."

Isn't that the creed of any good politician?

Well, America is going to see that creed come true when our fiat money is worthless.

Jul 09 12:37 PM

[whidbey:]

Doubtlessly a probability we all live with - useless dollar, but few have suggested what we do about the problem. The Administration is not about to solve the recession because it is a powerful cover of political change.

We should think about post Obama living and policy. I suggest some radical things. Cut spending on social programs, Lower taxes on operating businesses, and consider a hard currency. The shock would wreck the global scam and it might fix us after a term of years, not over night, but eventually.

Jul 09 02:49 PM

[Steven Hansen:]

i would like to point out that if bernanke is not capable of eating treasuries - i am sure obama will find someone who will.

Jul 09 07:43 PM

[Aki Izayoi:]

"Tokyo has laid out plans to sell a record 44 trillion yen ($460 billion) of new debt in the fiscal year thru March 2010, to finance regular and stimulus spending to ease the pain of recession. Yet despite the record issuance, Japanese 10 year bond yields still remain depressed near historic lows. The Tokyo bond market is the world’s second largest, with $8.5 trillion outstanding, yet 10 year JGB yields have been locked in a super tight range between 1.15% and 2.00% for the past eight years. "

Little bit of history... if I remember correctly, 10 year JGBs yielded 46 basis at one point in 2003.

Jul 11 05:13 PM