Hyperinflation? Not in America.

[Toro]

OK, it is time to put an end to this silliness. Certain people who believe every conspiracy that comes down the pike believe that America's future is Zimbabwe, where hyperinflation hit 79.6 billion percent. In fact, by one estimate, inflation in Zimbabwe hit an annualized return of 430,000,000,000,000,000,000,000,000,000,000,000,000%. I don't even know how to pronounce that number.

Now, it should be apparent why comparing America to Zimbabwe is pretty silly. Unfortunately, alarmists pray on the gullible, and sometimes the gullible can be persuasive to the less gullible. Normally I don't go to all the time and effort to do this, but since I've been called out, I thought it would be appropriate to do so.

The reason why people believe hyperinflation is coming is because of the rapid expansion of the balance sheet of the Federal Reserve, particularly graphs that look like this.

This is a graph of the monetary base. The monetary base is also known as "high-powered money." It is the total amount of currency in circulation, bank reserves and central bank reserves. Reserves are the base upon which loans are made in the economy. In a fractional banking system such as ours, if reserves rise, then there is more money to lend. This, all else being equal, is inflationary. Here is a graph of excess reserves in the banking system.

These are the non-borrowed reserves of the banks, that is not borrowed from the Fed and other banks.

This is why some believe high inflation is coming. A massive increase in reserves should equal a massive increase in the money supply and thus a massive increase in inflation.

Looks pretty scary, doesn't it? And it is, all else being equal. But as we will see, all else is not equal.

Now, notice in the graph immediately above. See how it dips to more than -$300 billion? We will return to this in a bit.

But first, let us look at what has actually happened to the money supply. With the massive increase in reserves, has there been a corresponding increase in money?

This is a graph of M1. M1 is all the currency, checking accounts and travelers checks. As you can see, M1 has risen but not much more than it did in 1987 or 2002.

A broader definition of money is M2. M2 is M1 plus deposit accounts, overnight repurchase agreements, overnight Eurodollar deposits, small time deposits and retail money market funds. This is a graph of M2.

Now, M2 has risen, but it has not risen as much as it did in 1983 or 2003.

M3 is the broadest definition of money. M3 is M2 plus large time deposits, institutional money market funds, large long-term repurchase agreements and large Eurodollar deposits. Unfortunately, the Fed stopped publishing this data a few years back. The conspiracy theorists say they did this to hide the inflation in the system. The conspiracy theorists may be right. However, M3 has tracked the directional change of M1 and M2 plus a some percentage change more. It is not rising at an astronomical rate that would have to occur to think hyperinflation is coming. Here is a graph of institutional money market funds, which is a component of M3.

Institutional money funds are rising at a faster rate than M2, about 25% per year. However, that is not much faster than M1. And as we see in the M1 and M2 graphs, the money supply often increases around a recession, which is typical monetary policy by the Fed to fight a recession.

So, has inflation come?

The Consumer Price Index for All Urban Consumers (CPI-U) increased
0.3 percent in May before seasonal adjustment, the Bureau of Labor
Statistics of the U.S. Department of Labor reported today. Over the last
12 months the index has fallen 1.3 percent.

Consumer Price Index Summary

Inflation has fallen 1.3%. We have deflation, not inflation.

Why is that? Because a collapse in asset prices, whether that is in stocks, bonds, housing, or whatever, is deflationary because a fall in asset prices destroys the credit used to finance the rise in asset prices. In a fiat monetary system, the supply of money is a function of the amount of credit in the economy. When credit collapses, as it has over the past two years, prices fall. That is how it always works.

"But the actions of the Fed are planting the seeds of future hyperinflation" is what they will say. Yes, that is true, all else being equal. But things are not equal, and this is why.

First, what is known as "monetary velocity" or the money multiplier has collapsed.

Monetary velocity measures the rate at which money circulates in the economy. Think about an extreme example. Let's say the money multiplier fell to zero. That would mean that all transactions stopped. What would happen? The economy would collapse and prices would implode. When the money multiplier falls, it has a deflationary effect.

So why is it falling? Remember those graphs of the banking reserves above? It is because banks are hoarding money. And why are banks hoarding money? Because they believe there are more losses to come and they will need the reserves to cover the losses.

US banks and brokerage firms have written-off
approximately $572 billion in loan losses since the onset of
the credit crisis. But at least another $500 billion will be
written-off over the next two years, as housing prices
plummet and unemployment rises, according to a report
issued by Nouriel Roubini and Elisa Parisi-Capone,
colleagues at the RGE Monitor.

http://www.advisorperspectives.com/...-Bank_Write-offs_are_at_the_Halfway_Point.pdf

So all those reserves are being held to pay future costs. This isn't inflationary because that money will disappear. In fact, the $1 trillion in estimated losses approximates the expansion of the Fed's balance sheet.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--June 11, 2009

The Fed has increased its reserves to inject reserves into the banking system to cover the losses. The Fed is merely replacing credit in the economy that has been destroyed.

Bank credit has fallen

But more importantly, the shadow banking system has collapsed. What is the shadow banking system?

System of non-financial institutions that borrow money in the short term and take that money to invest in long-term assets. Shadow banking systems are able to avoid standard banking regulations through the use of credit derivatives.

shadow banking system Definition

The shadow banking system is enormous.

"In early 2007, asset-backed commercial paper conduits, in structured investment vehicles, in auction-rate preferred securities, tender option bonds and variable rate demand notes, had a combined asset size of roughly $2.2 trillion. Assets financed overnight in triparty repo grew to $2.5 trillion. Assets held in hedge funds grew to roughly $1.8 trillion. The combined balance sheets of the then five major investment banks totaled $4 trillion. In comparison, the total assets of the top five bank holding companies in the United States at that point were just over $6 trillion, and total assets of the entire banking system were about $10 trillion."

Reducing Systemic Risk in a Dynamic Financial System - Federal Reserve Bank of New York

I tried to find some data on losses in the shadow banking system. A couple of bond investors whom I spoke with thought it ran in the trillions.

So we have $1 trillion in losses in the banking system and "trillions" in the shadow financial system. Yet, the Fed has expanded its balance sheet by $1 trillion, trillions less than what has been lost. The expansion of the Fed's balance sheet has not been enough to replace the credit destroyed in the private economy. Thus, the expansion of the Fed's balance sheet is not inflationary. It cannot become inflationary until the credit that has been destroyed is replaced by new credit.

And when will credit start expanding in the private economy? Only when the economy starts improving. For the economy to start improving, for credit to expand, and for inflation to start rising, the following must happen.

1. Output must stabilize.

2. Output must start growing.

3. Output must grow faster than trend productivity.

4. Firms must slow layoffs to the normal rate.

5. Firms must remobilize slack full-time employees (workers who are still on the full-time payroll but aren’t being asked to produce much, because businesses have been trying to reduce inventories).

6. Firms must bring part-time employees back to full time. (This recession in particular has been characterized by the tendency to reduce hours rather than laying off employees.)

7. Hiring (which has been falling rapidly) must stabilize.

8. Hiring must rise to the point where it equals the normal rate of layoffs, to get total employment to start rising.

9. Hiring must become rapid enough that employment starts to grow faster than the population.

10. Hiring must become rapid enough that employment growth is faster than the sum of the population growth & labor force re-entry. In other words, net hiring has to be fast enough to absorb all the workers who will start looking for jobs again once there are more jobs around to look for.

11. The unemployment rate must start declining.

12. The unemployment rate must decline by 4 or more percentage points, which, by historical experience, will take a matter of years.

13. Firms must start competing for labor.

14. Firms must start raising wages.

15. Firms must raise wages faster than trend productivity growth.

Employment, Interest, and Money: A Long Way to Inflation


Capacity utilization is sitting at an all-time low.

As long as there is excess capacity, i.e. capacity utilization is low, there will not be any inflation, as you can see in this graph.

The savings rate is rising.

If inflation were coming, then the yields for Treasury Inflation-Protected Securities (TIPS) would be off the charts. They are not. This is the yield for a 30-year TIPS bond.

Corporate bond rates would be going through the roof if hyperinflation was imminent. They are not.

So there is no evidence, nor is there any reason to think that hyperinflation is coming. It is shrill hysteria to think so.

Is inflation coming? Probably. There will be no inflation if the government starts withdrawing liquidity, i.e. reserves, from the financial system. Historically, however, there has usually been a lag between when monetary policy should and does work. Thus, it is likely that the Fed will wait too long to start tightening the money supply, which would lead to inflation down the road.

5% inflation, or maybe 10% inflation. But not 79,600,000,000% inflation.

Now, if you have read this entire post, congratulations. You are probably the only one.

 

[Oddball]

Where's the chart that contrasts demographics with unfunded promises to pay??

 

[Toro]

Where's the chart that contrasts demographics with unfunded promises to pay??

Feel free to post it.

 

[Paulie]

I know I've personally learned a lot about monetary policy in the past year especially. I was once a doomsdayer who called for hyperinflation. At this point, I expect there to be inflation down the road. Probably bad, but also probably nothing we haven't already seen in this country.

I do wonder though, how the government plans on covering their massive liabilities, namely the three big entitlements. Most likely, it will have to be printed. We're talking tens of TRILLIONS in liabilities. You can't tax that much money out of us, we don't HAVE it.

 

[Toro]

I know I've personally learned a lot about monetary policy in the past year especially. I was once a doomsdayer who called for hyperinflation. At this point, I expect there to be inflation down the road. Probably bad, but also probably nothing we haven't already seen in this country.

I do wonder though, how the government plans on covering their massive liabilities, namely the three big entitlements. Most likely, it will have to be printed. We're talking tens of TRILLIONS in liabilities. You can't tax that much money out of us, we don't HAVE it.

The liabilities will be met primarily by changing the liabilities.

And probably some inflation.

 

[Paulie]

I know I've personally learned a lot about monetary policy in the past year especially. I was once a doomsdayer who called for hyperinflation. At this point, I expect there to be inflation down the road. Probably bad, but also probably nothing we haven't already seen in this country.

I do wonder though, how the government plans on covering their massive liabilities, namely the three big entitlements. Most likely, it will have to be printed. We're talking tens of TRILLIONS in liabilities. You can't tax that much money out of us, we don't HAVE it.

The liabilities will be met primarily by changing the liabilities.

And probably some inflation.

Changing? They haven't changed YET. I've seen zero indication that leads me to believe they ever will, either. It makes for great campaign rhetoric, but of course nothing ever comes of it.

The REAL change has to come from the voters. We need to wise up and throw the mainstream politicians out on their asses and try something we've never tried before. It can't possibly end up any worse than what we already have.


I won't hold my breath.

 

[Toro]

You can wipe out most of the liabilities by raising the retirement age to 72. There is no reason not to do this. When Social Security was changed in the 60s, the average expectancy was 65. The amount actually paid out wasn't that large. Today, the average life expectancy is 77. So we will change it to 72.

The reason why we will do this is because the other option is inflation, which will erode the value of Social Security anyways. Seniors live on fixed incomes. Inflation is bad for them. So they will have the option of inflation or changing social security.

But that is a different issue. It will not cause hyperinflation even if we have all these liabilities.

 

[jreeves]

I know I've personally learned a lot about monetary policy in the past year especially. I was once a doomsdayer who called for hyperinflation. At this point, I expect there to be inflation down the road. Probably bad, but also probably nothing we haven't already seen in this country.

I do wonder though, how the government plans on covering their massive liabilities, namely the three big entitlements. Most likely, it will have to be printed. We're talking tens of TRILLIONS in liabilities. You can't tax that much money out of us, we don't HAVE it.

The liabilities will be met primarily by changing the liabilities.

And probably some inflation.

What will this do to confidence in the US dollar? How will China feel about us changing our liabilities? Do you really predict that a politician will tinker with the entitlements, when it would be their political suicide?

 

[Toro]

What will this do to confidence in the US dollar? How will China feel about us changing our liabilities? Do you really predict that a politician will tinker with the entitlements, when it would be their political suicide?

Not the bonds. The liabilities for social security and Medicare. The US will not default on their bonds.

I believe that eventually the politicians will have no choice but to address social security. I come from the cradle of socialism in North America, and the people there gored sacred cows to save their political future. I see no reason why America will not.

 

[jreeves]

What will this do to confidence in the US dollar? How will China feel about us changing our liabilities? Do you really predict that a politician will tinker with the entitlements, when it would be their political suicide?

Not the bonds. The liabilities for social security and Medicare. The US will not default on their bonds.

I believe that eventually the politicians will have no choice but to address social security. I come from the cradle of socialism in North America, and the people there gored sacred cows to save their political future. I see no reason why America will not.

I guess we will see, but I don't see anyone in Washington DC having the courage to take on the problem seriously. Especially considering over the next 10 years will add another nearly 9 trillion dollars on the national debt....

 

[jreeves]

Where's the chart that contrasts demographics with unfunded promises to pay??

Where is the CBO projections of an additional 9 trillion dollars of additional governmental spending?

I don't think we will hit 700000000000....etc.....% inflation but 15 to 20% inflation wouldn't surprise me in the least. That type of inflation rate would send this economy in a tail spin.

 

[Oddball]

Where's the chart that contrasts demographics with unfunded promises to pay??

Feel free to post it.

You're the one with all the charts and graphs.....I figgered you might have that one in your repertoire.

 

[dec8ur]

the reason why so many "alarmist" believe in hyper-inflation is two reasons, one is that 2/3 of American dollars are held by foreign governments and entities and two we are one of the few nations who get to pay off their debts in their own currency. now look into those charts and tell me what would happen if those other countries decided that we could never exchange back all those pieces of paper for actual durable goods (seein as how we have gutted and sold off alot of our manufacturing base). all it would take is for china to try and dump the dollars that they hold (and they are already indicating that they are nervous about our ability to honor our debts), setting off a fire sale of u.s. dollars, for us to have hyper-inflation. and the fed cant do a damn thing about that

 

[Toro]

First, most of our debt is not held by foreigners. Most of our publicly traded debt is held by foreigners. But if you include debt owed by the US to other US government entities, such as social security, the ratio is far less.

Second, if China were to dump all US debt - and they continue to buy at record levels - that would not lead to hyperinflation. Exports are less than 15% of the US economy. The decline in the dollar would not bring about any great inflation. It would increase interest rates, but it would not greatly increase inflation. This, of course, assumes that China is incredibly stupid and would vaporize hundreds of billions of dollars of their own wealth by dumping all their debt, an unlikely scenario.

 

[Oddball]

First, most of our debt is not held by foreigners. Most of our publicly traded debt is held by foreigners. But if you include debt owed by the US to other US government entities, such as social security, the ratio is far less.

So, then the money will just be printed up, as there will be an ever shrinking domestic pool of buyers for new T-bills.

Second, if China were to dump all US debt - and they continue to buy at record levels - that would not lead to hyperinflation. Exports are less than 15% of the US economy. The decline in the dollar would not bring about any great inflation. It would increase interest rates, but it would not greatly increase inflation. This, of course, assumes that China is incredibly stupid and would vaporize hundreds of billions of dollars of their own wealth by dumping all their debt, an unlikely scenario.

That presumes that they would continue trading with the USD as their reserve currency. If they dump their treasuries -admittedly at the peril of massively devaluing them- the signal will be sent and the lettuce to redeem them is going to have to come from somewhere.

 

[dec8ur]

First, most of our debt is not held by foreigners. Most of our publicly traded debt is held by foreigners. But if you include debt owed by the US to other US government entities, such as social security, the ratio is far less.

Second, if China were to dump all US debt - and they continue to buy at record levels - that would not lead to hyperinflation. Exports are less than 15% of the US economy. The decline in the dollar would not bring about any great inflation. It would increase interest rates, but it would not greatly increase inflation. This, of course, assumes that China is incredibly stupid and would vaporize hundreds of billions of dollars of their own wealth by dumping all their debt, an unlikely scenario.

you identified the main problem which i was talking about, which is the fact we aint got shit to redeem our dollars for.and i did not say debt, i said dollars. china has a reserve capitol of two trillion, half of which is dollars and treasury notes. already at this time not many countries want much more of our dollars or t-bills, so if they dumped their dollars the u.s. would have no choice but to take them, and if the rest of the world sees any country try to dump their dollars, it would start a vicious cycle eventually leading to hyper-inflation at home(because u.s.citizens would become very skeptical of thier own dollar if aint nobody else in the world taking it) the only reason china is buying our debt at record levels is because there are very few other buyers out there, and it would hurt their own balance sheet because they need to keep the purchasing power of the dollar at a certain level or it would destroy the worth oftheir own reserves. and it is not stupidity to dump something that is becoming increasingly worthless, they just don't want to be the first to do it because it would bring about the very scenario i'm talking about , but they damn sure aint gonna be the last.. when i get to 15 post i will start linking the url's to back my assertions but for now you will have to do your own research.

but let's try this to put it simply. lets say you were a drug dealer, competing amongst a few other drug dealers. now all of you have this one costumer who was rich and who consumes a massive amount of drugs. now in the beginning this costumer paid you with money, but after awhile he started paying you with i.o.u's. now because he was rich, and everybody else is taking his i.o.u's, even using his i.o.u's to pay of thier own drug debts and/or exchanging it for real money, you keep giving him drugs because . now at some point in time he is going to have so many i.o.u's floating out there that eventually you have to realize that he ain't gonna be able to pay back all of these i.o.u's. now answer me this, would you keep selling him drugs? and for how long would you hold onto those i.o.u's?

you seem to be under the impression that the dollar has an intrinsic value, but it don't. see any fiat currency is a confidence game, and as long as the holder of the note, whether it be in the form of an i.o.u. or a dollar bill, the holder of that note has to be confident that it will not lose it's value over the long term. and all the charts and graphics in the world ain't gonna change the fact that it's hard to contract the money supply when you ain't holding most of the money.

 

[wimpy77]

im trying to figure out who de8cur's real screename is. seem like he's an alt.

 

[dec8ur]

im trying to figure out who de8cur's real screename is. seem like he's an alt.

no this is my screen name and you can say that im peddling pure junk but you havent disproved what i have said

 

[editec]

First of all, I think we ought to kiss TORO's ass for taking the time to put so much effort into schooling us on this issue.

Kudos are definitely in order.

Now, as to inflation and deflation?

Our economy is in the crapper because American losts the PERCEIVED WEALTH we thought we had when the market pricing was inappropriately inflated and the prices of real estate was wildly out of align with how much money most of us make, too.

Hence the "monetary velocity" has crapped out (people aren't spending)

And note that savings (which was down to 0%!!!) is now up to about 5%!! (historically what American saved)

So a people who IMAGINED they had a lots more money in stocks and real estate, upon finding that they didn't really have all that much money, stopped spending and started saving.

And what happens in a CONSUMER-DRIVEN ECONOMY, when consumers stop buying stuff?

duh!

Folks, we NEED some inflation. What we need is MORE MONEY CIRCULATING IN THE SYSTEM, not less!

And that is WHY the government is borrowing money.

Basically, to prevent our economy from going into a economic anaphylatic shock.

Of course, in my opinion, the BLEEDING ARTERIAL WOUND that is FREE TRADE is going to continue to plague us.

American didn't just lose the industrial jobs it once had, America has created a system of trade policies and tax laws which insure that we will also NOT CREATE JOBS in future's industries, either.

This faith based belief in FREE TRADE is the major problem facing this nation.

We invent industries here, and then the moment they become viable, they go offshore to make the stuff we'll need.

But unemployed pAmerican do not make great consumers, folks.

We are screwing our working class to the benefit of the investor class, and as the investor class is (hopefully) now beginning to realize, they cannot SELL to people who don't have JOBS!

duh!

We have slowly been putting ourselves into this bind by opening one market after the other to foreigh imports.

And we cannot just close the borders now, because we do EXPORT and the trade war that would ensuew would screw the entire world, us included.

But we can slowly and surely start initiating a FAIR TRADE policy to insure that Americans can work too.

And, if China doesn't want to end up holding a trillion dollars in worthless bonds, they're going to WANT to work WITH US to see to it that the trade imbalance that they have enjoyed tilts back toward the USA somewhat.

There is NO FREE LLUNCH in economics.

There is no SIMPLE SOLUTION to these problems.

There are difficult things to balance to insure that we do not DISRUPT our economy and the economies of our trade partners, too.

But the time when AMERICAN THE WEALTHY NATION can just give away the farm to other nations is past.

America is NOT a wealthy nation, right now.

We are the world's largest DEBTOR nation.

If we do not invest in AMERICAN INDUSTRY, then inflation is only a small part of the problem we're going to be facing.

Because a recently empoverished well armed people who think they are not peasants and slaves are easily driven into very unpleasant modes of thinking.

The economic destruction of Germany gave us Hitler.

Now imagine what wierdness the AMERICANS can come up with if ENOUGH OF US FIND THAT WE HAVE NOTHING TO LOSE!

 

[Toro]

you identified the main problem which i was talking about, which is the fact we aint got shit to redeem our dollars for.and i did not say debt, i said dollars. china has a reserve capitol of two trillion, half of which is dollars and treasury notes. already at this time not many countries want much more of our dollars or t-bills, so if they dumped their dollars the u.s. would have no choice but to take them, and if the rest of the world sees any country try to dump their dollars, it would start a vicious cycle eventually leading to hyper-inflation at home(because u.s.citizens would become very skeptical of thier own dollar if aint nobody else in the world taking it) the only reason china is buying our debt at record levels is because there are very few other buyers out there, and it would hurt their own balance sheet because they need to keep the purchasing power of the dollar at a certain level or it would destroy the worth oftheir own reserves. and it is not stupidity to dump something that is becoming increasingly worthless, they just don't want to be the first to do it because it would bring about the very scenario i'm talking about , but they damn sure aint gonna be the last.. when i get to 15 post i will start linking the url's to back my assertions but for now you will have to do your own research.

First, about two-thirds of China's $2 trillion in foreign reserves are in dollars. The rest are in euros, yen and various other currencies. A very, very small proportion is in gold.

BBC NEWS | Business | China quietly builds gold reserve

Here is the Fed's balance sheet.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--June 11, 2009

As you can see in the Fed's balance sheet, total currency in circulation is $907 billion. In fact, in total there are "only" $1 trillion in reserve notes outstanding. So China does not hold $1 trillion worth of dollar bills because if they did, there would not be a single dollar bill in the United States. They would all be in China.

Most of China's dollar assets are in Treasury bonds and US agency - Fannie Mae and Freddie Mac - debt, though they have been decreasing their holdings of agencies. You can see in the line item on the Fed's balance sheet that the Fed holds $2.7 trillion of securities held by the Fed for foreign institutions (primarily central banks).

China currently holds $768 billion in Treasuries, up from $508 billion a year ago.

http://www.ustreas.gov/tic/mfh.txt

And you can see China has been buying US Treasury debt and selling agency debt here.

http://www.ustreas.gov/tic/snetus.txt

So most of China's dollar holdings are in US debt and are held at the Fed. If China wanted to started dumping dollars, it would primarily do so by selling US debt.

And that makes sense. Why would China hold $1 trillion in currency? Even if it invests in low-yielding Treasuries that earns 2%, that is $20 billion foregone. China only needs enough dollars to facilitate trade and transactions in its financial system.

But your point should be considered because it is a valid one.

It is possible that China would start dumping our dollars, and it should not be dismissed. However, you have to understand why China holds that much currency in the first place, and there are two reasons.

The first reason is because the Chinese modeled their economic development on the Asian countries that preceded it, which was primarily through exports. And those exports are primarily to the American market. China has a large trade surplus, but only with America. With the rest of the world, its net trade balance was in balance or a slight deficit (or at least it was before the recession). The country developed primarily to serve the US market.

Fixed investment in China is 42% of the economy, roughly equating that of its domestic consumption. That is an enormous amount.

National Economy: Positive Changes Emerged in the First Quarter of 2009

The Chinese consumer is not large enough to keep China out of recession if the US collapses. It simply isn't large enough, at least not now. When the US economy went into recession, China's economy fell sharply, not as far as America but to a rate of growth below that which the Chinese authorities is necessary to maintain social order. So why would they dump dollars?

Also important is the fragility of the Chinese financial system. Some estimate that the Chinese financial system is insolvent, and has been for many years. I do not know if that is true or not, having never looked closely at the Chinese banking system. However, it is difficult to see how a dollar crisis would not imperil the banking system, since a collapse would wipe out many of the banks' assets.

You also have to ask yourself, if China is going to dump the dollar, what are they going to replace it with? The euro? Well, maybe, but countries have not been shifting to the euro.

The use of the euro in foreign exchange reserves held by third countries, i.e. countries outside the euro area, increased moderately by around 1½ percentage points during the review period owing to positive valuation effects. When measured at constant exchange rates, the share of the euro in global foreign reserves decreased slightly by almost 1 percentage point, mainly as a result of a decline in developing countries. ...

[The euro's] role gradually increased during the first few years of European Monetary Union but has been broadly stable for around five years.

http://www.ecb.int/pub/pdf/other/euro-international-role200807en.pdf

The euro has a host of problems on its own. There is a good chance that weaker countries such as Greece and Italy may have to leave the euro zone. Plus, Europe's banks are in as bad if not worse shape than America's and Europe does not have a common financial authority to deal with the problems.

The yen? Given that Japan brutally invaded China 80 years ago - a blink in time for a country that measures its existence in millenia - I don't think so.

The pound? Are you kidding? The UK is in worse shape than the US.

The Swiss franc? Too small. And did you know the Swiss National Bank has sold most of its gold? Plus, its banks have a lot of exposure to eastern Europe and some have postulated that the Swiss banks are insolvent also.

Switzerland threatened with bankruptcy

Swiss banks have given billions of credit to Eastern Europe - now the customers cannot pay back the money. Switzerland is threatened with the fate of Iceland, says economist Arthur P. Schmidt.

In countries such as Poland, Hungary and Croatia, the Swiss franc has become an important currency. Thousands of households and small firms took out loans in Swiss francs, and not in the national currency zloty, forint, or kuna because of lower interest rates. In Hungary, 31 percent of all loans are in Swiss currency. Amongst household loans, they are almost 60 percent.

Switzerland threatened with bankruptcy - Credit Writedowns

Gold? There is not enough gold in the world. There are only 150,000 tons of gold on the entire planet. If China started buying gold in size, the price would skyrocket.

So what are the alternatives? People who make the "dollar is going to collapse" argument seem not to have considered the other side of the trade. If the dollar did collapse against the rest of the world, the rest of the world see its manufacturing base gutted as factories in the Rhine, Szechuan and Chihuahua would relocate to the Ohio Valley and Alabama. It would utterly devastate the world economy.

The second reason why it is unlikely the Chinese will precipitate a currency crisis is because the leadership remembers what happened in the 1998 Asian Contagion. China has built an impenetrable strategic currency reserve so it will never, ever be at the mercy of foreign currency traders.

Now, does this mean the current imbalances can continue indefinitely? No. There has to be a restructuring of the global economy. That may be occurring now as the savings rate in the United States is rising and the government of China seems to be attempting to spur domestic consumption.

Over time, the yuan is going to strengthen against the dollar regardless, and the Chinese authorities know this simply because China's economy is growing faster than America's.

There may be a currency crisis but it is unlikely to happen. There is no reason for China to dump dollars. More likely is the development of a moderate amount of inflation globally as fiat currency holders debase against each other. It probably means that the value of real assets will rise over time.