Katchum's  Instablog

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HOBO POTHEAD Comments (36)
 
Sir:

I'm a big fan of yours. Could you please explain why long term treasuries are safer? I'm not a financial guy, I'm a retired computer programmer and it seems to me that if the USD loses (in part or fully) its status as the world's reserve currency the promice (for example) of $10,000 10 years from the current date would fall to worthless.

Also, if you would, could you please opine on the following. I've always though that if the USD loses its reserve status then all the USD held abroad would come flooding back to the USA where it is legal tender thus causing a mega tsunami of inflation here.

Thanks
Hobo
22 Jun 2012, 05:41 PM Reply Like

Katchum Comments (428)
 
Look at Greece, when defaults start to happen, the short term interest rates always go higher than the long term interest rates. Because defaults will happen on short term bonds first. You can look at it like this, for the long term bonds, you will have more time to get your budget right and then pay it off later on. For the short term bonds though, you don't have enough time to get your economy in place to pay off your short term debt. Also, you should listen to Peter Schiff's radio show where he explains this clearly on 8 June's radio show. I have it on mp3. Short term interest rates will go up first.
I know what you mean by worthless in 10 years, inflation will eat up your bond value, but you forget that you don't have to wait 10 years to sell those bonds to some greater fool.

This video is interesting to watch too:
http://bit.ly/KqN0ZO

More info on debt maturities is found in this article:
http://bit.ly/O28YZf

Then about the USD as reserve currency. If USA loses reserve currency status it means that global investors around the world have sold their dollars for other currencies. Selling dollars always means that the dollar goes down. It is just the law of physics in the economy. When the dollar goes down, inflation will be present in USA as Americans use dollars to transact for goods. Of the allocated forex reserves 60% is held in US dollars, the amount is 3.5 trillion today. China basically holds 1.5 trillion in US dollar reserves. So if USA would be losing reserve status it would mean that China has sold their bond holdings and US dollars in the amount of 1.5 trillion. If that were to happen, the US would lose reserve status because the US dollar goes below 40% of global currency holdings. That would also mean that the bond market would collapse and that means inflation will come, just like in Greece and likely a default after that.

But that's for the long term future, today, the USA is still the leader in reserve currency status as China keeps supporting the USA.
22 Jun 2012, 06:14 PM Reply Like

HOBO POTHEAD Comments (36)
 
Sir

Thanks a million for your informative responce ... wait, better make that a trillion or better still a quadrillion.

OK, so following your logic wont the Chinese view Bernanke's Operation Twist as a scam? Duh, I guess you already explained that.

Thanks again
Hobo
22 Jun 2012, 06:34 PM Reply Like

Katchum Comments (428)
 
Yes, it's the ultimate scam. But the scam can't go on infinitely. Because once the short term bonds are all sold by the fed into long term bonds, it won't be able to sell the short terms anymore, because there is none.

Then the fed needs to print money to buy long term bonds instead of swapping short term for long term.

This is also explained in one of Peter Schiff's recent radio shows, I think it's from this Thursday.

This article explains how many short term bonds the fed still has:
http://bit.ly/KqUYCu

It's around 100 billion US dollars less than 1 year. That's almost nothing. This is also why operation twist II was only around 200 billion, because they didn't have more than that to swap.

After that, who knows what will happen.
22 Jun 2012, 07:35 PM Reply Like