The Ultimate Destruction of the US Dollar Will Not Happen

[Norman]

And at the end of this possible carnage we have another 'little' problem: The ones that own your debt end up owning you!

the article bables on about curency valuation , while convienitly leaving out the Chinese bond raters

yeah, the Chinese are into us for big $$$'s , and they're actively pursuing an Asian monetary consortium , even have the IMF convinced to knock the USD off as a global benchmark

the typical canard here is, they loose if they do, which is propaganda in it's usual guise of horesh*t rhetoric

valuation and debt can be inversely proportional konkon, so allow me to forward an anology in order for you to comprehend this in simplest terms

let's say you owe me $100 USD

but because you owe everybody & their uncle, i'm going to convince my fellow lenders that USD in your pocket is worth 80% of what you say it is

Now, you owe me $120 USD


get it yet?

Bring on a competing reserve currency and it will be played like a fiddle. It will appreciate to the point of killing-off several export markets in Asia, while the west, led by the US and Europe, will be making money off of this trade.

There is more to the USD than just a widely used currency. There is a lot of hidden force behind it. Some will stand to lose a lot if the USD gets crushed. So I'm not betting against it. Don't forget the US has historically low interest rates, and they will go up; meaning potential investments and a flood of other currencies to hit the US markets once again. I can then see opportunists out there getting on this band-wagon.

I do get what's going on, and at the end of the day the US doesn't have to pay these debts and it can just show the proverbial finger to whoever doesn't like this. It has in the past and it will again. I think that there are more at play here than just a simple explanation of what is going on at the simplest level.

Get it?

No not really.

The interest rates can raise, because the economy is doing so bad too. They can raise because people don't expect the US gov to pay back, or because they expect more inflation.

In "normal" scenario they would raise because people can get better rates because better offering, but they can also raise if NO ONE trusts the US government.

You are putting the cart before the horse, interest rates don't drive the investments into dollars this time, interest rates are required to get the funding. There is no demand for american, that is why they will raise. It will just crash the whole economy as all businesses addicted to them are done for.

It's all supply and demand, and the demand part is affected by the risk, which is growing. Not by supply that is getting better in this case.


Well that's my take on it.

 

[konkon]

No not really.

The interest rates can raise, because the economy is doing so bad too. They can raise because people don't expect the US gov to pay back, or because they expect more inflation.

In "normal" scenario they would raise because people can get better rates because better offering, but they can also raise if NO ONE trusts the US government.

You are putting the cart before the horse, interest rates don't drive the investments into dollars this time, interest rates are required to get the funding. There is no demand for american, that is why they will raise. It will just crash the whole economy as all businesses addicted to them are done for.

It's all supply and demand, and the demand part is affected by the risk, which is growing. Not by supply that is getting better in this case.


Well that's my take on it.

I think you make some valid points, but at the end of the day, isn't it better to buy something cheaper, that most likely, will survive and will become more expensive, like buying the US dollar with your own (most likely) expensive currency, if you're living outside of the US, for instance? Of course, it comes down to the USD surviving and appreciating in the future, which I believe it will. I rarely buy something expensive that ends up going on a roller-coaster ride anyway. Don't forget commodities, for example, were always thought of as going in one direction (up) throughout history, and they never do.

I remember speaking to someone around 10 years ago that had physical gold, left to him by his grandfather. It took well over twenty years, and before that, at least a further twenty years for gold to reach the value his grandfather had bought it; not adjusting for inflation etc though.

The US will restructure itself somehow and the inverse relationships will tilt the other way - again!

As for the cart leading the horse, I can give you tons of examples of this as being the norm in everyday life, like when unions want higher wages above productivity levels etc etc. The cart leading the horse is just normal every-day practice in our, sometimes, bizarre world.

 

[Norman]

I think you make some valid points, but at the end of the day, isn't it better to buy something cheaper, that most likely, will survive and will become more expensive, like buying the US dollar with your own (most likely) expensive currency, if you're living outside of the US, for instance? Of course, it comes down to the USD surviving and appreciating in the future, which I believe it will. I rarely buy something expensive that ends up going on a roller-coaster ride anyway. Don't forget commodities, for example, were always thought of as going in one direction (up) throughout history, and they never do.

I usually look more into reasons as to why they are acting that way. And as for now, the dollar is something I do never invest into (I don't live in USA BTW). In 80s the fed tightened, which lead to gold going down, it went down a lot as people expected inflation. But now USA has 1.6 trillion in deficit, so where will that come from if not the fed? From taxes? Don't think so. So it's either dollar crash or bond crash. When it comes to business, USA is very risky place to invest as it's hard to know who is dependent only on the interest rates. Albeit exporting sector might have unreal demand in the future.

The US will restructure itself somehow and the inverse relationships will tilt the other way - again!

I don't think this will happen this time around as debt of USA is just too high. The interest rates combined with the rate hikes that will make the debt much more expensive as the turnover is now a lot faster than in the 80s. If the fed does the right thing, the economy will crash, but after that USA will finally be able to go forward.

 

[damien275x]

Well this is how I see it -

The three largest holders of treasuries are Japan/China/Federal Reserve

** Japan don't want any more US treasuries - in fact, with their recent disaster, they'd be wanting to sell their US holdings, not print up more of their own money.

**China doesn't want anymore either - if you look closely at what's going on, they are diversifying out of US treasuries slowly into commodities and other "hard" assets.

With interest rates at near 0 - who else is left to buy up except the Federal Reserve?
They can do two things -

1 - Hike rates to attract private buyers, if they do this, the fragile economy will grind to a halt. Also, when these rates go sky high they will very quickly get to a point where the USA can't service the interest alone on their insane debt. If they even go up 3-4% it will make their billions of dollars of proposed cuts pointless.

2 - They can (and in my opinion) will continue to debase their currency to pay off all their bills. The problem with this is they are watering down their currency and this will eventually result in insane inflation or even hyperinflation. Game over again.

You've also got to remember that the USA isn't what it used to be. Yes - you've pulled yourselves out of shit before. Back then you had something to offer the world. These days, not so much. All your manufacturing/producing is done in China/Overseas in more favorable locations. People don't want to operate businesses in the USA, and why would they? The corporate tax rates for people who run companies there are as high as 40%! Sure the US collapse will shake up the markets and inflict a lot of pain on them too, but they'll bounce back - because they PRODUCE.They aren't as dependent on the USA as you would like to believe. All USA does today is consume and borrow! Take take take!

I hate to say it but these are the only two possible scenarios. So I'd be buying a hell of a lot of food and perhaps some other stuff for bartering like matches,candles, all that kind of thing. Maybe gold. Shit will hit the fan eventually.

How do you see things panning out in the future.

 

[Norman]

Above post is pretty much all I wanted to say.

Couple things though. US corporate rate is in fact the highest in the whole world once you account the state corporate tax rates (at least I believe this). Spending is not quite world highest but probably most wasteful. We of course don't know how much the true spending is as FED is now buying private stuff too, but it is more than 44% of gdp.

And as for 1. You too are putting the cart before the horse. The rates will raise if people don't want to buy them. However of course, the fed is major buyer so in that way it's right. If they don't want massive inflation. Also if the fed tightens it will have to SELL bonds instead of buying them. The interest rates will go through the roof, and I would say there is no hope of anything but a default. Other way there is going to be massive inflation or massive tax hikes (the fed can also control inflation via interest it pays - pretty much same scenario as selling the bonds as it will lose as much tax payer money).

Of course the interest rates will raise in any case if fed tried to buy bonds indefinitely - but if they buy it all I guess no one cares about the rates, what everyone will care about is inflation.

 

[konkon]

Well this is how I see it -

The three largest holders of treasuries are Japan/China/Federal Reserve

** Japan don't want any more US treasuries - in fact, with their recent disaster, they'd be wanting to sell their US holdings, not print up more of their own money.

**China doesn't want anymore either - if you look closely at what's going on, they are diversifying out of US treasuries slowly into commodities and other "hard" assets.

With interest rates at near 0 - who else is left to buy up except the Federal Reserve?
They can do two things -

1 - Hike rates to attract private buyers, if they do this, the fragile economy will grind to a halt. Also, when these rates go sky high they will very quickly get to a point where the USA can't service the interest alone on their insane debt. If they even go up 3-4% it will make their billions of dollars of proposed cuts pointless.

2 - They can (and in my opinion) will continue to debase their currency to pay off all their bills. The problem with this is they are watering down their currency and this will eventually result in insane inflation or even hyperinflation. Game over again.

You've also got to remember that the USA isn't what it used to be. Yes - you've pulled yourselves out of shit before. Back then you had something to offer the world. These days, not so much. All your manufacturing/producing is done in China/Overseas in more favorable locations. People don't want to operate businesses in the USA, and why would they? The corporate tax rates for people who run companies there are as high as 40%! Sure the US collapse will shake up the markets and inflict a lot of pain on them too, but they'll bounce back - because they PRODUCE.They aren't as dependent on the USA as you would like to believe. All USA does today is consume and borrow! Take take take!

I hate to say it but these are the only two possible scenarios. So I'd be buying a hell of a lot of food and perhaps some other stuff for bartering like matches,candles, all that kind of thing. Maybe gold. Shit will hit the fan eventually.

How do you see things panning out in the future.

This is a very good post. Thank you for these valuable comments.

I think we need to bring in all kinds of factors into the equation, even though the US would be scoring a very low score on its overall economy, if you were to isolate the economy from all other variables. But in real world, you can't.

The US along with Germany and the UK controls the future of trading: with sophisticated and intelligent computers that do around 70%+ of major trades. This is what ultimately will continue to give the United States the edge on the rest of the world. Do you really think the US will allow China etc to take charge here? No chance. It won't happen, no matter how wealthy the Chinese become. I'm not talking about GDP vs GDP here or some other economic dynamic. I'm talking about who will always be the ultimate economic gate-keeper, and yes, the US will still be in charge here even if its wealth is half that of China's in the foreseeable future.

As a last resort, if the US had to restructure its currency and/or default on outstanding debts it would do so, but not in the traditional sense, that would ultimately harm them the most. No, the United States will find ways to restructure its economy (and it might not and most likely won't be pretty!).

Initially, it would look like the United States is losing while some emerging countries have gained ground, overnight. But, most countries stand to lose more from a sophisticated restructuring event, than the US. Economists will tell you to look at the text books for reasons why the US will suffer the most. But these economists and text books can't see the overall picture and (not just economic) reasons why other countries will stand to lose the most. For example, when does the might and influence of the United States military factor into some macro economic (text book or economist's) reasoning? Hardly ever, because they don't see it as a major historical influence in United States' economic success. Text books will strip-out all of these necessary 'bits' and discuss economic dynamics in isolation, and even treat the United States as another potential eg. Yugoslavia without realizing that there's so much more to the United States economy than just its economy.

Well, for starters, non US countries might not get paid and their old US treasuries would be worth nothing. So what do these countries do to retaliate? Not use new US treasuries and not have the the new USD as a reserve currency or just trade amongst themselves and leave out the US? Really? What if they're given little choice but to (eventually) adopt this new currency and the new system, still run by the United States? Do you really believe that countries can just trade amongst themselves without being 'entrapped' into the economic matrix that the United States set up and would still control?

I think that people underestimate the sophisticated nature of the higher-end United States in general, and the influence it's had on the longevity of the United States economy. Sorry, and I don't mean to offend, but the US didn't just get to where it is (was) from just back-breaking hard work! Plenty of countries have and are doing this and this alone has got them nowhere. Once again, I don't mean to offend (after all, I'm just an average guy going to work too). I am talking about (historically) macro-focused higher-end groups that set to control different aspects of the world, directly or (mainly) indirectly, by establishing, maintaining and controlling the set of systems or matrix that underlies the very structure of perhaps all asset classes, worldwide. And they are still at it, even though they don't and can't advertise this.

Responding to "1 - Hike rates to attract private buyers...." - The US will eventually hike rates, even by default. Along with a clever restructuring program that's implemented gradually, they will stimulate their own domestic economy. But the US doesn't have to and won't pay its bills in full. Who really stands to lose here, if you take into account what I stated above and not respond to this in isolation.

In response to "2 - They can (and in my opinion) will continue to debase their currency to pay off all their bills." - I don't think the United States will do this or need to do this. I don't see the US as the big losers here if they slowly and cleverly restructure their economy and if it doesn't end up paying its bills in full; which it won't do.

So does the US have to 'play fair' (whatever that means!)? Why should it when countries have piggy-backed on all of the United States' risk taking over the last decade plus. Pegging your own currency to gain advantages in various markets is an example of this.

 

[sparky]

Do you really think the US will allow China etc to take charge here? No chance. It won't happen, no matter how wealthy the Chinese become. I'm not talking about GDP vs GDP here or some other economic dynamic. I'm talking about who will always be the ultimate economic gate-keeper, and yes, the US will still be in charge here even if its wealth is half that of China's in the foreseeable future.

you seem to have amazing faith in the USD Konkon

but people can't eat faith, and he who has the gold makes the rules....

 

[editec]

Well certainly in my lifetime the USD's purchasing power has declined.

What's even more troubling is that most people's salaries haven't remotely kept up with the rate of inflation, too.

But still, that does not mean that the USD is in danger of eminent collapse.

I can easily envision natureal events or complex affairs of finance that might cause that to happen, but really nobody can predict that such events will actually happen.

Folks, we had inflation even when the whole world was on the gold standard.

Sometimes inflation is a good thing.

Other times it is catastropic thing for most of us.

I'm just here to RECANT the above position.

REcent events unfolding in the markets PLUS various actions being taken by various government is leading me to the conclusion that the abandonment of the USD as the international specie is already happening but as yet not officially

And when that officially happens?

The US economy is toast.

 

[konkon]

you seem to have amazing faith in the USD Konkon

but people can't eat faith, and he who has the gold makes the rules....

I do have faith in all that supports the US dollar. The USD is not isolated, and this is a strong belief I have had for some time.

One of the things working against the US dollar is the ongoing political tug-of war between the right and the left. It gets worse than this. There seems to be unresolved disputes amongst the right and right, and even the left and left. The American currency along with the American economy is being punished as a result.

The chicken or the egg? My view is that the US dollar comes first and then does gold. The only reason the price of gold is going higher is because the US dollar is or has been weakening for quite some time. Gold's strength did NOT cause the USD's weakness. The US dollar's weakness has caused gold to go up in value.

 

[konkon]

I'm just here to RECANT the above position.

REcent events unfolding in the markets PLUS various actions being taken by various government is leading me to the conclusion that the abandonment of the USD as the international specie is already happening but as yet not officially

And when that officially happens?

The US economy is toast.

It won't happen for the reasons stated in one of the previously long posts above. Not to mention reasons that are not clear to us right at this moment.

 

[Zander]

I am bullish on the US$

 

[konkon]

The position of a market at a given time is to a large extent about net gains or losses between a multitude of opposing investment forces. There appears to be a largely one-sided effort to, for example, sell the USD and buy-up commodities, like gold, silver etc. Instead of allowing investors to keep making this largely one-sided trade, why don't those in charge of printing money, and pretty much anyone else (with power) that has a vested interest in saving the USD down the track, tilt the dynamics in their favor by any reasonable (or unreasonable) means necessary to make a fundamental paradigm shift in the pressures that ultimately decide which trade we stick to. So just turn the tables on those that want to keep bumping-up the price of commodities in a year or so, after inflation in those non US economies has played its part.

This has been achieved throughout history at various times and by various methods. Maybe this is a possible option down the track, and anyone long gold, silver etc in a year's time and beyond, might have to watch-out. We have been through this type of trade over and over before throughout history where investors ended up holding overinflated and overpriced commodities for decades even! The justifications were there like they are now.

Don't be surprised if the Federal Reserve and the US Government, and other senior interested parties end up turning the tables on this one-sided trade (in the future sometime), and, those that are betting against the USD's survival, are all left holding just some overpriced commodity certificates. It won't happen for a while so enjoy it while it lasts.

 

[Neubarth]

Simple fact of the matter is that it is impossible for the Dollar to collapse for reasons I have stated thousands of times on this board.

 

[konkon]

The US's ability to influence all markets has not disappeared. And when it's time for the US economy to strengthen the dollar will begin to appreciate. The price of commodities will decline as they are priced in US dollars.

The rest of the world stands to lose a fair bit over the next year or more, with high inflation, high interest rates and a lot more volatility when QE2 ceases. A key move will be over the next few months when QE2 begins to be fazed-out. This most probably will send markets on a roller-coaster ride and volatility will be high. QE3 will be needed, but this has become a real political and election issue now and it will have too much opposition.

Commodities have always gone up and down throughout history; silver in 1980 hit around US$49 (The Silver Institute - Historical Prices: UK) and then depreciated. Silver will have to find a ceiling in the distant future, but it could easily go back to under $20 in a few years time, even if it hits around +$60 this time round. In fact, it like other commodities has risen to such heights during Quantitative Easing. It may continue to go higher but it could easily depreciate. It just won't happen without speculation going the other way.

There will be a growing number of speculators bullish on the (to some extent, reinvented) US economy, USD etc in the future and their influence will dwarf interest in commodities and most variables, asset classes etc that are inversely related to the USD.

Bernanke can and just might increase interest rates in even a minute, if the circumstances granted such a move in a year or more. I can foresee a coordinated move by the Fed, US Government, US corporations and other powerful US and US-allied 'associates', to change the dynamics of market sentiment and back a revived US economy, in the future. What happened won't be reversed. A restructuring will occur, and the consequences of such a move will be aimed at favoring the US's economic regrowth, which most likely would mean a stronger USD. So commodity speculators better be prepared down the track, as they won't be able to withstand the onslaught of a resurgence in the United States economy. Just ask those that bought and held gold for decades to try and get their money back! Money just went into other asset classes, during gold's demise, and this will happen again.

Speculation in all kinds of markets could easily prop-up prices past 100% of values if there weren't the very influential 'sales-reps' behind such moves. People have to understand that collusion in markets and market prices is a very big thing and you can be assured that if there is a 'sure-thing' going on, like money being piled onto silver, for example, then you must understand those with hundreds of millions to invest might pile money onto those asset classes. Birds of a feather flock together; so you don't even have to go for silver. Pretty much any soft or hard commodity will do.

Unfortunately we live in a world where those that latently collude to price-fix end up to some extent (to a large extent in the last few years) sealing our economic fate. Sure it troubles people to hear this but it does go on. Just think of what you could do if you were 'networked' with half a billion to use, and there's hardly anyone to overhear you and your 'partners' colluding to corner markets. While this goes on, the proper authorities are too busy (through no fault of their own) looking the other way. And are our authorities and courts able to look-into, for example, complex derivative contracts and their validity or legality? When 'cloud exchanges' (merger of international exchanges) are up and running, what happens to jurisdiction on such and other complex matters?

 

[editec]

Add to the pressure on the USD the fact that the Scoial Security Administration is holding trillions in US bonds. (this is the social security reserve that the boomer generation built up over the last 40 years)

And as SSA starts spending down those reserves, the market for those bonds collapses.

 

[sparky]

well sure

so isn't the barometer for the USD our Debt /GDP ratio?

 

[editec]

Yeah the thing is that when the USD hits some tipping point the collapse is going to be very dramatic.

All it will take is a major policy decision from our trading partners and the whole house of cards collapses.

Perhaps something is happening in the back rooms to keep it all from coming ondone, but frankly, I think that the economy is poised for a collspse the likes of which we have never seen...EVER!

 

[konkon]

Yeah the thing is that when the USD hits some tipping point the collapse is going to be very dramatic.

All it will take is a major policy decision from our trading partners and the whole house of cards collapses.

Perhaps something is happening in the back rooms to keep it all from coming ondone, but frankly, I think that the economy is poised for a collspse the likes of which we have never seen...EVER!

But why isn't this reflected in the markets today (and even the futures markets)? I agree there is a whole lot of back-room negotiations going on.

Does the US stand to lose more from defaulting on its debts than the rest of the world (not necessarily collectively, but country to country)? Assuming that the US restructures to benefit the US (and not necessarily its trading partners) as best as it can given the (future) circumstances.

 

[konkon]

There are many issues the United States can tackle and the orchestration of a commodity (speculation) take-down in the future is just one of several options. Another option would be to adopt an increase in wages policy across the board, but fazed-in gradually. Food will not drop in price. So the US has to match this with higher salaries. Enough of this importation of cheap labor in eg. the hospitality industry. The minimum wage must increase and matched with small and reasonable periodic increments.

The US has to get more proactive, offensive and much less defensive. If you increase wages across the board then housing will become more affordable. Sure there will be opposition from large corporations and employers because of lower profit margins. But take the fight to them! No one will allow these sort of changes without a fight (not in the physical sense, of course). I think that a more proactive potential US President (or even Obama himself) with a higher wages policy, starting with addressing the minimum wage, will win the support of the people. This is the fight big corporations cannot compete with! The electorate most probably will vote this guy (or gal) in even with all the opposition from big-business. Big-business had a hand in the financial crisis and this is a compromise to compensate, and restrengthen the US economy. If you expect the US consumer to help 'fix' the economic problems, then pay us more!

If your printing record volumes of money, then make it worth while. Channel a large portion to growth and regrowth areas that will reinvest in the US economy. For example, if the minimum wage (especially in the private sector) increased an initial amount of 20% and then increments of 5% every year for three years to start off with, then you would enable those who never could buy into the housing market purchase a property, with all the strict regulatory requirements, of course.

Higher wages, will bring inflation, but you're going to get this anyway. Higher wages will mean more tax revenue to continue paying for all those important public service jobs. They're also going to be paying tax too. So you're addressing the domestic debt issue to some extent. Every bit helps. Never underestimate the growth potential from a confident US consumer that's back in his/her own house and is paying their bills and is investing in more ways than one for the future.

As for (a largely narrow-minded) big-business (large corporations etc) that will oppose such a move, can you imagine how much revenue you will eventually receive from a prosperous US consumer that can consistently pay its bills?

If the US doesn't increase salaries across the board, then they won't be able to keep up with higher national and state debts, higher costs for food, energy etc and higher inflation. All those nasties that have to be matched with higher wages.

Don't forget that higher US wages and higher interest rates in the US down the track means lower commodity prices in the US, as they are priced in US dollars. The best thing is it will take the speculators out of the market. So there may not be as much inflation as you think. Inflation with real and strong growth is better than inflation with negative growth (what the US is going through now).

 

[konkon]

The run-up in commodity prices this year is alarming. The pressure on other asset classes must be quite high. Last night's trade on Wall Street was a little alarming and a sign of things to come. At least two things surprised me. One being the heavy selling of USDs overnight with very little concern and another (serious) move was the buying of stocks around the world, as if the USD's move down is in some vacuum and it shouldn't impact other asset classes.

I think that in the months to come, and most likely next year, the heavy selling of USDs in a session will bring markets down with it.

What will happen if institutions really need to protect themselves from a falling USD? I do know the answer to this question, but am concerned.