OT: End of the dollar?

The below is my opinion only. The US has debt by the federal government, states, and private persons. We have seen a lending bust of 2008 that showed a collapse of confidence that private debts can be repaid. Hence the banking crisis.

What I think is that the amount of debt that we owe, including government debt, already exceeds our ability to service it.

If, hypothetically, inflation rose and interest rates rose to 8%, not a far fetched number, then the service on 12 trillion of federal debt alone would be 840 billion dollars. This is an amount that is difficult to raise, since we already have a large number of taxes beside the federal income tax. (state taxes, sales taxes, local taxes etc). So, realistically, taxes can and should be raised, but there is a limit on how much they will be raised due to the multitude of existing taxes.

Thus, the stimulus efforts and other money printing endeavours that we see, amount to repudiation of our national debt in slow motion. The dollar as the world's reserve currency will be the victim.

I am optimistic that our economy, but not necessarily reputation, will recover. I am considering refinancing out house from 15 year fixed to a 30 year fixed due to these considerations.

i

Iggy, Carry your thoughts further. If the $ loses its place as the worlds reserve currency, as you so correctly stated, all those dollars we have already exported through the IMF and petro banks along with other nations $ reserves and purchased debt (exported inflation) will be dumped right back into our economy. This will, without any doubt in my mind, cause a complete collapse of our economy and as our economy is the cornerstone of our national strength, put our country under severe military threat. Without the strength of our economy, our ability to wage war will be non-existent. Don't worry about your mortgage, it will be the least of your concerns. Our previous governments have severely compromised our nation's security, but Obama and the current congress have signed our death warrant. As a final thought, I really, really hope I'm wrong, but I don't think so. Steve

The wars we wage currently, are partly to blame for our present financial condition. Let's not forget that.

Secondly, dollar that is valued based on US economic fundamentals, and not on the basis of being the world's reserve currency, would be more suitable to the US economic conditions and to balance of imports vs. exports.

Thus, the fall of the dollar, in my personal opinion, would not cause economic collapse, though it would cause quite a bit of economic dislocation and wealth redistribution.

I agree with you that if we lose our ability to borrow money at artificially low rates, we will not be able to be involved in so many foreign entanglements simultaneously.

i

Spend some time with a textbook or Wikipedia and study how the Fed introduces money into the economy through securities sales and purchases which are gauged to achieve the targeted Federal Funds Rate, and how the money multiplier works. There is very little chance of what you are describing, particularly at this point, because banks want to reduce their leverage. Whether dollars are printed or electronically transferred is not really an issue, the difficulty of physically printing dollars has never been an impediment to hyperinflation in the past.

If you look back at posts that others have made in that regard over the past year, you'll see that by now we should all be eating out of trash cans and that we should be deeply engaged in WWIII, or WWIV, depending on how you count.

There is little chance the dollar will cease to be the world's reserve currency in the foreseeable future. The dollars we have "exported" through IMF etc. have all been spent and returned to our banks -- that's the reason we "export" them, so they can be spent. Many of them have been reinvested in the US. A dollar in a bank in Moscow has precisely the same economic effect on the US economy as a dollar in a bank in New York. There is no credible military threat to the United States, nor will there be under any conceivable scenario. Our "nation's security" is stronger than at any time in history.

I'm tempted to ask where you get these ideas, Steve, but something tells me I'm better off not asking. d8-)

-- Ed Huntress

At first glance one may assume you are correct, but you might want to read this:

for quite a different perspective.

They're actually a very, very small part of it. The collapsed assets of one investment bank over the past 12 months is greater than all the money we've spent in Iraq.

It already is. That's why it's the world's reserve currency.

As for the dollar falling, it gained against the euro over the last few days, AFTER it was announced that the Fed will be dumping money into the economy with open-market transactions.

Where do you get these ideas, Iggy? You, of all people, should know that this is not home finance we're talking about here. This is very obscure stuff.

-- Ed Huntress

Ed wrote: "There is little chance the dollar will cease to be the world's reserve currency in the foreseeable future. The dollars we have "exported" through IMF etc. have all been spent and returned to our banks -- that's the reason we "export" them, so they can be spent. Many of them have been reinvested in the US. A dollar in a bank in Moscow has precisely the same economic effect on the US economy as a dollar in a bank in New York. There is no credible military threat to the United States, nor will there be under any conceivable scenario. Our "nation's security" is stronger than at any time in history."

Many thanks Ed, for that breath of fresh air. The spiel of the doomsayers needs ventilation from time to time.

Bob Swinney

----------- The current economic situation appears to closely parallel the period after WW1 with the United States [Dollar] playing the role of the UK [Sterling].

The huge international debts, amplified and exacerbated by CDS and other derivatives, combined with the huge capital imbalances and flows, parallel the international credit situation in the run-up to the "great depression," i.e. a "house of cards" that the slightest puff of wind [or reality] can bring down at any time.

The private American financial sectors have continued to play at being the world's bankers, but by borrowing money from China at

2% to lend at 5 or 6% rather than investing the surplus value added by domestic American activities.

As the UK did after WW1, the US is attempting to maintain the Dollar at an artificially high level, promoting imports and restricting exports, with a continual effort to drive down domestic production costs, generally through wage/benefit reductions. The US is now screwed because the private sector banks lent long at high rates to bad credit risks, and their funding sources are short term, which are going up and up and up. The taxpayers, who never shared in the gains, are now expected to cover the losses. Countries using the US Dollar are about to take it in the shorts, just like the countries that used Sterling as a reserve rather than gold did when the UK went off the gold standard and devalued in 1931.

FWIW -- When the UK went of the gold standard and devalued in 31, while the international bankers, financiers, speculators, etc. had a cow, the average person was much better off. Deflation stopped, wages and commodity prices started to increase, and the real cost of credit dropped drastically. Exports increased, and the economy began to revive. One area that was hard hit was the international financial services sector, but this did not appear to have generated any "real" income.

Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

Wait, wait, wait. George, promoting imports and "restricting" exports (which we're not) is precisely what causes the value of a currency to *fall*, not to rise to artifically high levels. That is, according to Milton Friedman and neoclassical theory. But ours isn't falling. Nor is it rising, except against a few other currencies in countries that are in worse shape than we are. Contemporary trade theory, the one that Krugman just won the Nobel Prize for, says that balances of trade don't have any direct, fundamental effect on exchange rates -- and what he predicted is exactly what's happening now.

And if you've looked at the export and production numbers recently, you know that Europe is in worse shape than we are. Japan is in *much* worse shape. And China's leaders are downright scared, because they need over 8% growth to keep a lid on social unrest, due to their extraordinarily high (by western standards) rates of unemployment and underemployment.

The dollar remains the safe haven. The ultimate safe haven continues to be US Treasury bonds. That's why we're pumping money into the economy and money is still pouring in from foreign countries and private investors.

As for the parallels with the UK, no way. The whole world is in a different place, as are all of our economies.

-- Ed Huntress

The Chicken Littles are coming out of the woodwork. This is a perfect season for them.

-- Ed Huntress

While that is true, the government is not gifting money to banks (besides FDIC bailouts, which are bank financed). It makes investments that will be repaid, or buys toxic assets which have a reasonable chance of returning most of this money eventually.

Actually it fell by several percentage points. I believe that it was the sharpest fall against Euro ever.

Well, what can I do, I am the chief risk officer of my household and I do have to think about various ways how I can lose money. And then I try to not lose money.

I do have some minimal economics education (MBA from U of Chicago in finance) and, while this does not make me a foreign trade or budget guru, I do realize that I have to make choices and I cannot avoid making choices. Even doing nothing is a choice. I would totally hate to lose all my money.

It dropped on Wednesday, after the announcement, as should be expected with programmed trading. But the important point is that it started clawing back right away. Against the Yen, it regained almost all of the drop through Saturday. We'll see what happens when Asian markets close, after the Dow bounced by 500 points today.

That's not what you'd expect from the announcement that a trillion dollars is going to pumped into M1. That's not a sign that the dollar is falling. That's just a programmed response to money supply news.

Betting your own money is likely to be a risk-averse business. But that doesn't tell us what's likely happening to the economy. One investment versus another is a tactical decision that often has little to do with the fundamentals of an economy.

My concern now is that the overhang of bad debts is so great that nothing to going to get lending going again until the banks start facing the prospect of going under as a result of not making any money -- just watching it drain away is going to get to them eventually. Right now they're trying to hold on to what they have. Sooner or later they're going to have to start lending and making money again or they're going to tank, just sitting there with a pat hand. We hope it's sooner, because it's costing us enormously while they sit there with their thumbs up their butts, hoping that someone else will pick up the tab for their toxic junk before they run out of cash and bailouts.

-- Ed Huntress

Ed, you are the voice of reason today.

Wes

Ed, I am too lazy to review the graph, but I believe that euro rose from 1.26 or so, to $1.36 or so, and it stayed there ever since.

I do not consider myself to be any more risk averse than necessary. For example, I put more or less all our retirement money into stocks between late October and beginning of March. This was a very scary times when most "financial gurus" talked about "the end of buy and hold" and "reducing risk exposure". But the way I saw it is that risk is a function of how much you pay. The more you pay for something, the more risk. The risk of buying a 13x36 lathe for $425, is a lot less than the risk of buying same for $1,995. Same with stocks. With the stocks being 50-60% cheaper, the risk of owning them has been proportionally reduced.

I am right now working towards refinancing my mortgage, and I can see from calling various places, that banks are lending just fine. They have tightened their lending standards, which returns us to a more stringent foundation of how economic dealings are done.

Banks are also making a lot of profits on money spreads (spread between their cost of acquiring deposits and their loan rates), which have never been wider.

The Fed seems to be determined to give banks emough money to overcome the scenario outlined by you. I am pessimistic regarding US dollar, and optimistic about the economy.

You just think that because you agree with me today.

Wait till tomorrow. d8-)

-- Ed Huntress

Likely so. ;)

I, too, have been pondering this great crisis, but being a mere tradesman I can only think of greed and incompetence as the root causes - unfortunately, some people have based their whole belief system on this and are unable to accept that it was, in part, their own political philosophies that gave the Robber Barons freedom to degrade the worlds economy.

But I was sent a clear and cogent summary of the situation, and to me it resonates as "Yep. Thats what happened...."

Heidi is the proprietor of a bar in Berlin. In order to increase sales, she decides to allow her loyal customers, most of whom are unemployed alcoholics, to drink now but pay later. She keeps track of the drinks consumed on a ledger, thereby in effect granting the customers 'subprime loans.'

When word gets around, increasing numbers of customers flood into Heidi's bar. Business is booming.

Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her total sales value increases massively.

A young and dynamic customer service consultant at the local bank recognizes that these customer debts are valuable future assets and so he increases Heidi's borrowing limit.

He sees no reason for undue concern, since he has the debts of the alcoholics as collateral.

At the bank's corporate headquarters, expert bankers transform these customer assets into Drinkbonds, Alkbonds and Pukebonds. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean or how the securities are guaranteed.

Nevertheless, their prices continuously climb, and the securities become top-selling items.

One day, although the prices are still climbing, a risk manager at the bank (who is subsequently fired for his negativity) decides that the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar.

But they cannot pay back the debts.

Heidi cannot fulfill her loan obligations and claims bankruptcy.

Drinkbond and Alkbond drop in price by 95 %. Pukebond performs better, stabilizing in price after dropping by 80 %.

The suppliers of Heidi's bar, having granted her generous payment due dates, and having invested in the securities, are faced with a new and challenging situation.

Her wine supplier claims bankruptcy, and her beer supplier is taken over by a competitor.

However, the bank is saved by the Government after dramatic round-the-clock consultations by leaders from the governing political parties.

The funds required for this purpose are obtained by a tax levied on the non-drinkers.

...finally an explanation that can be understood by anyone !

Andrew VK3BFA.