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What will the US Dollar do?
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by PIM of SPAIN | October 29, 2009 at 08:56 am
747 views | 28 Recommendations | 21 comments
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“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology called a printing press (or, today, its electronic equivalent) that allows it to produce as many U.S. dollars as it wishes at essentially no cost... We conclude that under a paper money system, a determined government can always generate higher spending and, hence, positive inflation.”
In other words, if you want to grease an economy, turn on the printing presses and make it easy to solve the problem by borrowing money at a low rate of interest. Bernanke and his colleagues at the Fed still think that doesn’t cause a single problem. They believe that they can handle it, just so long as short-term interest rates are close to zero and don’t go in the opposite direction. “Flooding the market with easy money is more like burning your furniture to keep warm.” It cannot last as a temporary solution. It's inviting a catastrophe.
Mankind will eventually bury the greenback in the ground, alongside every fiat currency that ever went before it. The question left, is not if but when this will happen.
Once upon a time, the mighty greenback was the best show on Earth, the "must have" ticket for the rocking Asian economies. “China, Korea and Japan all amassed huge stockpiles. The three together hold about US$4 trillion in foreign reserves, much of it in US Treasuries.” Even “Taiwan has stashed away the equivalent of US$332 billion in foreign reserves.”
But that was then. This is now. And meanwhile many know what all those dollars are worth, with the kind of authorities behind it, that made these paper dollars with a promise on it.
Right now, the media is betting against the dollar. The dollar is bearish in money jargon.
The economist, Ludwig von Mises*, was right, when he said:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Thanks to the Fed-driven loose credit policy, “consumer debt has soared. It's never been higher. In 1987, when Alan Greenspan first took his job in Washington, consumers were in the hole by about $10 trillion.” Where are they now? A mind boggling $37.3 trillion in the red or about 350% of GDP.
Think about that. As a whole, Americans owe three and a half times more than the size of their entire economy, which is the largest quantity of debt in history.
Meanwhile, the feds don't seem to worry. They spend money even faster. It borrows even more. Even the Bush administration, with full knowledge of the implications of an eventual credit disaster, borrowed more money from 2000–2008 than any White House administration did in history.
Magazines as Time and Barron's say, “2009 could bring the U.S. first $1 trillion deficit. After that, it will jump to $2 trillion.” That's not how much is owed it is how much is added to what is owed, every year on.
One may ask himself where and when is the turning point of all this?
* Ludwig Heinrich von Mises (September 29, 1881 – October 10, 1973) was of Austrian Nobility, economist, philosopher, lectured at the Austrian School of Economics.
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PIM of SPAIN
San Pedro de A, Malaga, Spain
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Most RecentMost Recommended Comments (21)
at 09:36 on October 29th, 2009
".....it will jump to $2 trillion.” That's not how much is owed it is how much is added to what is owed, every year on."
Let us eat, drink, and be merry, for tomorrow we die."
That seems to be the attitude of the federal gummit.
"....the Bush administration, with full knowledge of the implications of an eventual credit disaster, borrowed more money from 2000–2008 than any White House administration did in history."
Now, Obama, not to be outdone, tops even that.
Get out that wheelbarrow, folks.
at 11:04 on October 29th, 2009
The major mistake in my opinion was made by Greenspan after the dot.com bubble burst. He was the initiator after he took over from Paul Volcker who acted contrarily - keeping money supply tight - to create the easy credit with the argument he could avoid a recession. But Greenspan didn't realize he was postponing D-Day of reckoning and making it worse than it should have been if he allowed the economy to go into recession in 2001. Ben Bernake was at his side and continued this policy. We certainly will witness the end of this saga provided we may be still alive in the coming years.
at 12:41 on October 29th, 2009
PIM,
Your assertion that consumers are in the hole to the tune of 350% of GDP is misleading and a dangerous assumption to be telling people that don't know better. See this article for a more realistic assumption. I'm sure it wasn't intentional on your part.
http://www.businessinsider.com/2009/2/us-debt-levels-are-fine-debt-to-gdp-chart-is-wrong-and-meaningless
With utmost respect. nanute
at 16:58 on October 29th, 2009
The dollar will remain pegged. That is China is in control of the US dollar at the moment. They do not want to lose from the massive amount of T.Bills they bought. The plan is that China will improve its domestic development and consumption... They will slowly increase the value of the rmb....which will encourage US products to be consumed in China...And to use US investment in China..thereby generating & guaranteeing America resources to make good on China's T-bills. US presently is investing heavily in the energy sector in China.. There will be a slight lowering, of the dollar..to edge up the rmb...and then the dollar will go up again....to begin a process to make good on the IOU's to China.... No major shifting will take place.....
The Rev.
at 00:48 on October 30th, 2009
nanute thanks for yr comment however the link doesn't provide the intended info. Please check and provide me the good one.
djermano an interesting view you present, I'm aware about, but there still is a lot of skepticism about by analyst I learned. The question still is whether China is able to buy enough foreign resources with their US Dollars just to get rid of those, or finally has to accept the lost. Their patience with the US authorities are limited, they know very well that they are cheated by them. As you in a previous comment wrote, 'it all is matter of trust'. And so it is.
at 02:06 on October 30th, 2009
PIM,
I can't seem to get the link right. What I wanted to know is the 350% GDO figure a combined rate of public and private (household) debt ? If it is, it would seem somewhat misleading.
On the China issue and your contention that we (US) are somehow cheating them: Do you think it is acceptable for China to peg the yuan to the dollar, and then not allow it to float in an open currency market? That is what might be considered cheating. In fact, if China allowed the currency to truly float, indications are that the value would rise, and help exporting countries such as Japan and Germany, and by extension the US.
at 03:15 on October 30th, 2009
The link address worked for me yesterday - have to do a copy>paste to the URL bar.
i can't get i to work as a link either, else i would accuse nanute of being technically incompetent owing to his radical political and musical tastes.
nanite, can you serve up the ratio of government spending vs. "income" - meaning revenues from taxes, etc.
How 'bout the same for private spending vs. income, over the last 70-80 years.
My guess is it will give a better clue of what is really happening.
at 04:58 on October 30th, 2009
PIM the US borrowed money from China in rmbs....to equal the US dollar amount they needed. This is the T-bill arrangement. China will not lose out on anything. They don't care how long it takes...but they will get their money...whether the US lied or not. The Chinese like low cost on goods.....and there is no connection to thinking low cost is cheap or low quality goods, vs. High prices refer to high quality. China has good standard quality...that reflects their market costs, which are better than the so called free market....which I contend is corrupt.....and as we see that corruption has America in deep shit at the moment. China will not lose...and I trust China economics without hesitation in comparison to the US system of scandal. In fact it will be China rules that America will follow to get it out of the mess....this thereby assures China will not lose... China does have a floating rmb at the moment to a basket average to world currency... It is no longer pegged to the dollar.
The Rev.
at 04:53 on October 30th, 2009
Not the same link as yesterday but if this one works it will give a clearer picture of where the debt is and what the percentages are:
http://www.businessinsider.com/henry-blodget-our-de-2009-4
at 07:20 on October 30th, 2009
nanute thanks for the fresh link: To put the matter in simple perspective:
"At the end of 2008 total financial sector debt was $17.2 trillion, or 121% of GDP. At the end of 2007 it was $16 trillion, or only 115% of GDP.
To put this in perspective, in 1958, financial sector debt was $21 billion, only 6% of GDP."
I wrote: “consumer debt has soared. It's never been higher. In 1987, when Alan Greenspan first took his job in Washington, consumers were in the hole by about $10 trillion.” Where are they now? A mind boggling $37.3 trillion in the red or about 350% of GDP.
Above stat - from the link -looks at 2007/8, before the crisis started or the effects of it became visible. I looked at today. If it is indeed $37,5 trillion with a T and this is about 350% increase compared with 1987. Which translates into about 3,5 times higher. All figures related to GDP which can increase or diminish depending the economic climate.
Moreover in Active Monetary Intervention I wrote: Total debt as a measure of the size of the bubble in the credit markets rose from only about 150% of GDP in the 70s and 80s, to 370% during 2000 -2008.
I agree that statistics are sometimes confusing and contradicting, those always should be handled with care. But the point that the volume of debt has sored tremendously is clear and that is the message.
at 10:26 on October 30th, 2009
I appreciate your response, but I think you left part of the link out of the quote above. From Henry Blodget at The Business Insider:
Government debt has remained at a relatively consistent percentage of GDP for the past 50 years, but the debt of companies, consumers, and financial businesses has soared. The problem now is that the value of the assets that serve as collateral for that debt (houses, stocks, cars, etc.) is plummeting. Thus, the percentage of debt to equity is increasing, and in many areas, the equity is being wiped out.
In 1958, 75 percent of financial sector debt was on the books of traditional financial institutions — banks, savings and loans and finance companies. Now the proportion is 18 percent.
The rest was securitized. And the securitization markets have collapsed. Which is why folks like Bill Gross say that fixing the banks will only fix a small portion of our overall credit system.
And this is also only part of the story. It is my contention that the financial sector debt is much more at risk and significant than actual household debt. The point I'm trying to make here PIM is a lot of your readers hear the term consumer debt and confuse it with personal individual debt Again, thanks for the response.
at 07:34 on October 30th, 2009
djermano to be correct China didn't lent the bulk that the US borrowed in rmbs. I don't know from where that piece of info comes? The truth is that China bought for their through export earned US Dollars T-Bills in US Dollars and not in their own currency. By law the currency in which Bonds are issued cannot be changed. Those Bonds are tradeable on the open market, however the moment China starts to sell those Bonds the value falls beyond parity. Another part of the export earned money is kept in cash in US Dollars. Rumors are that cash is about 3/4 trillion and the rest in Bonds. But no one knows for sure.
at 07:41 on October 30th, 2009
According to the exchange rate values...The US borrowed according to the exchange rate the value of Rmb in US dollars. It was still China's value according to RMB standards..but they did the trading and buying in US bills... We are talking the same language..you just don't understand what I mean.
The Rev
at 07:56 on October 30th, 2009
Indeed djermano as Roy C explains that's the case, there is no risk for the US and its Dollars, the more the US Dollar still is the only one reserve currency on Earth, which China wants to change!
at 10:56 on October 30th, 2009
Nanute whatever the exchange rate there is no influence of that in the US Dollars received by China and lent back to the US Government. As Roy correctly stated above.
Indeed nanute I left that part out, because debt is debt wherever it came from if you want to compare total debt against GDP.
Hope this complicated issue is better clarified for you?
at 11:15 on October 30th, 2009
PIM,
I didn't need any clarification. I'm just trying to make it clear to your readers what the components of the debt are. It isn't just one piece.
That isn't the point PIM. The fact that China manipulates their currency has a direct impact on the value of other currencies the dollar included.
at 11:31 on October 30th, 2009
Again nanute the value of a currency is established through supply and demand. If the printing presses in the US are printing more dollars than the demand, the value of that currency is inflated, - less valuable. The value of the Chinese currency will go down too if it is pegged to the US dollar, but that only influences other currencies than the US dollar.
at 01:30 on October 31st, 2009
Yes, I understand the concept quite clearly. My point is that the Chinese are manipulating the renminbi/yuan or whatever you want to call their currency, You can't possibly be arguing that they are not. Are you? What would happen if tomorrow China decided to sell a large portion of their dollar holdings? More dollars without demand would devalue the dollar, would it not?
at 07:12 on October 31st, 2009
You're right the Chinese are manipulating their currency in the sense if it was free to float on the market the value would be much higher than the present pegged value. In other words their currency is probably cheaper than it would be floating. Indeed China is married to the US Dollar but not with love. It is like the banker when you have a loan of $10.000 you won't sleep to get it pais back. But if you had a loan of $ 1 million the banker wouldn't sleep because he wouldn't know whether he is able to recuperate it.
If China starts selling US Dollars it will be the end for everyone holding US Dollars, these will fall through the bottom in a matter of days, and total world chaos will be the result. That's why China cleverly tries to buy every resource available to get rid of their dollars. They also buy gold quietly.
at 07:45 on October 31st, 2009
Now we're getting somewhere! lol. I don't think it would serve China's interest to flood the market with dollars. They've got too many. As Krugman argues, and I agree, if they did sell some of their dollars it would benefit other exporting countries such as Japan, Germany and the US. As you well know, the US is not going to be the consumer engine for the rest of the world, and particularly China for a long time to come, if ever again. The US is in a forced savings mode right now, and will most likely remain there until unemployment declines, and business demand picks up.
On a side note: did you notice the market reaction to yesterdays GDP "growth" of 3%? Equities and commodities retreated and there was some flight to the dollar. I still maintain that a large portion of the commodities market is "speculative" rather than demand side driven, especially oil. Russia is no longer supporting production limitations with OPEC and is selling large amounts of product to China. OPEC won't be able to maintain the limits much longer, and I believe we'll see oil retreat even further in the next 3-6 months, barring a major geopolitical incident.
at 09:04 on October 31st, 2009
You are spot on right nanute. My next story is dealing with these aspects. Oil may come down to $50 /barrel. :)