Is the economy teetering on the edge of collapse?

[Ben Archer]

Well since that went over like a lead balloon, I think the next question you could ask is: What would happen if/when the world starts noticing how we're printing dollars at a pace of $85 billion a month? China already has, and their FX reserves are now well over 3 trillion. So what happens when the same thing that happened to British sterling happens to us? Their currency ruled the world for 200 years, and we saw the winter of discontent, starting in the 70's. If the dollar becomes devalued, the same scenario (detailed above) will happen...slowly, then all at once. And nothing will be able to stop it. Printing money stopped the 2008 crises. In a currency crises, you're screwed. 

[CrowEpistemologist]

Well since that went over like a lead balloon, I think the next question you could ask is: What would happen if/when the world starts noticing how we're printing dollars at a pace of $85 billion a month? China already has, and their FX reserves are now well over 3 trillion. So what happens when the same thing that happened to British sterling happens to us? Their currency ruled the world for 200 years, and we saw the winter of discontent, starting in the 70's. If the dollar becomes devalued, the same scenario (detailed above) will happen...slowly, then all at once. And nothing will be able to stop it. Printing money stopped the 2008 crises. In a currency crises, you're screwed. 

 

Gosh, I don't know. Good think it's a closely guarded secret that nobody in the whole world knows (present company excepted).

 

If the dollar becomes devalued... so what. It would hurt nobody. Nobody would be "screwed" except a few numbskulls who stash their entire life savings in paper money under their mattress. Everybody else would see US dollars as just another investment instrument and act accordingly in a matter of (literally in some cases) milliseconds.

 

So with that, another theory is that "The World" already knows very well what the Fed is doing (since they repeat it 45 times a day on Fox News for instance) and the "The World" doesn't care since inflation in the USA isn't going to happen anytime in the next 5 years at least, and there's no sign that it's ever going to happen, and further, there are many signs of deflation in our economy which is probably the biggest risk right now (although to be clear I'm not too worried about that either--I see relative stability in the US dollar for a very long time).

[Ben Archer]

If the dollar becomes devalued... so what. It would hurt nobody. Nobody would be "screwed" except a few numbskulls who stash their entire life savings in paper money under their mattress. Everybody else would see US dollars as just another investment instrument and act accordingly in a matter of (literally in some cases) milliseconds.

What I see is, like most Americans, you don't believe the US dollar could ever lose its spot as the world's reserve currency, or understand what it would mean if we did.

I agree that "The World" is aware. In fact steps are already being taken to phase out the dollar. With rising levels of US debt, many countries are questioning the US dollar's position as the reserve currency.

Consider the agreement between China and S. Korea recently, that allows firms to settle deals in either the yuan or the won instead of the US dollar.

"The agreement is part of a push amount emerging countries to internationalize local currencies after the global financial crises" --Bloomberg

 

"Fed up with what it sees as Washington's malign neglect of the dollar, China is busily promoting the cross-border use of its own currency, the yuan. Displacing the dollar, Beijing says, will reduce volatility in oil and commodity prices and belatedly erode the ‘exorbitant privilege' the United States enjoys as the issuer of the reserve currency at the heart of a post-war international financial architecture it now sees as hopelessly outmoded." --Alan Wheatley, Reuters

 

In the past few years China has signed currency agreements with Germany, Russia, India Brazil, Australia, Japan, Chile, Arabs, & South Africa. 

 

Japan and India just made a similar deal, lessening dependence on the dollar. 

 

Started a few years ago when the big players got together for a secret meeting the US wasn't privy to. 

 

Of course the US denied this. But if history tells us anything, it's that the best way to know when a currency is being devalued, is to wait for the head of the central bank goes on TV and says that any such transaction would never occur. 

 

Now we have the IMF talking about replacing the US currency with SDRs, and US bonds with SDR bonds. The could also be used to buy commodities like gold and oil. 

 

Edited November 26, 2013 by Ben Archer

[softwareNerd]

In fact steps are already being taken to phase out the dollar.

Just because these two countries are trading in US$ does not mean they have to keep huge dollar balances. One can hold Yuan or Rial and convert to dollars just-in-time to perform a transaction. Not to deny the transactional/frictional costs, but "medium of exchange" is not the primary reason most dollars are held abroad. Rather, it is held as "store of value". [Even when it comes to currency, rich foreigners want a little stack of US$ bills]

 

Most important is that the holdings are one side of a two-sided coin: the other side is China's balance of payments. Let's assume the Chinese decide to reduce these balances. What do you think they will do with the dollars? If they buy non-U.S. goods, or invest it outside the U.S., some other foreign entity holds the U.S. So, what are the other ways in which they can reduce these balances?

[Ben Archer]

I was saying that countries like China and S. Korea, and China and Russia, as well as the other countries above, are making efforts to exchange without using dollars at all. 

 

As far as what they'll do...China simply accumulates the dollars. It's FX reserve is over 3.6 trillion (way, way more than anyone else). We know they're manipulating their currency ...they disguise a lot of their bond purchases with the help of SOEs.

Edited November 26, 2013 by Ben Archer

[softwareNerd]

I was saying that countries like China and S. Korea, and China and Russia, as well as the other countries above, are making efforts to exchange without using dollars at all.

Yes, I understand. My point is: even if they stop trading in US$ with all but the US (unlikely, but let's assume), this is not the biggest factor at work. They hold dollars primarily as a store of value, not as a medium of exchange.

So, as long as they see the dollar as the store of value, the impact of switching to Yuan for trade is not a huge factor in their holdings of US$. The primary reason they accumulate dollars is as a net result of their other policies. Do you think they will reduce their US$ balances significantly?

[Ben Archer]

China holds dollars in part to manage the value of their currency to the dollar, there is little doubt of that. But China and the rest of the BRICs have been fighting the US dollar regime for a number of years, because holding the reserve currency brings a certain power which the US has not been shy in using (printing money to fuel our economy). If the US loses that power (from China failing to buy enough of our bonds), it spells disaster. It's the same as a default, and printing more money won't help.

 

In fact they're very worried about the $ 1.3 trillion exposure to US debt they have. As for what they're doing with the dollars, besides buying up all our assets (and famous NYC buildings), they've been mostly storing them up. I know they're trying to diversify, buying real estate in Europe. They're mostly storing the dollars to strengthen the yuan. I've no idea what the exact policy is, but their spoken intention is to "de-americanize the world."

 

And that's what I've been more worried about: the signs that they have every intention of phasing out the dollar as the Reserve currency. They're buying massive amounts of gold, and some think this would be to even replace the dollar with the yuan (backed in gold). 

 

The Chinese are quite aware of the track record for fiat currencies. They all fail. Every single fiat currency that ever existed has eventually devolved into extinction. 100% batting average. Why we believe it won't happen to the dollar, is beyond me. Actually, many of the Chinese public may not know what the deal is, but the Chinese government knows for sure that the dollar is doomed...which is why they are buying all the phyzz they can so that they can be the next reserve currency. They do not need war to become the strongest economic power in the world. They need gold...and they are getting it.(they just bought another 5k tons)

 

Regardless of Chinese policy, the dollar is doomed, and our economy is only able to survive because we are the world's reserve currency. 

Edited November 26, 2013 by Ben Archer

[Ben Archer]

So I guess that's the answer then. They've already bought securities, and now they're stuck. Then China also tried the US stock market and failed miserably. Now their intention seems to be: buy gold, lots of it. They're the largest importer and producer at the moment. Their intention is clear, they did this before with silver. Back then they were abused by the US, Russia, Britain, Japan. But now it's a different story; they're a much different country. And there's a lot of evidence that they're cornering the gold market. 

Edited November 26, 2013 by Ben Archer

[CrowEpistemologist]

What I see is, like most Americans, you don't believe the US dollar could ever lose its spot as the world's reserve currency, or understand what it would mean if we did.

 

Try again.

 

Like most numbskulls who believe everything they watch in Fox News, you swear that run-away inflation is "just around the corner"--just like it's been just around the corner for the last six years (and will be for the next sixty).

 

Anyhow, I don't care if the dollar is "doomed" because unlike idiots who stuff 100 dollar bills in their mattress and call that their "diversified portfolio" (figure about 47,000 redneck Fox News devotees) with a combined $4,700,000 in assets, I make use of fancy things like a "bank" to hold my money and an actual diversified portfolio which wouldn't care of the US dollar suddenly died. Me and people like me, on the other hand (including every large company and every sovereign stash) hold the other 99.99999% of the world's assets. We'll be fine.

 

Save the inflation scare mongering for the "BUY GOLD BUY GOLD" commercials on Fox News...

[Ben Archer]

Your numbers on the world's wealth distribution are suspect at best. 

 

Even if I did watch Fox News, and even if people have been warning of runaway inflation for exactly "six years", what bearing does that have on the arguments I made about the failure of the dollar as the reserve currency, and China's role in it?

 

I'm very interested in how exactly you diversify your portfolio, if you think a "bank" is any safer than a mattress. A foreign bank, maybe. 

 

Nevermind the uselessness of grouping yourself with "every large company", for there are many "large companies" in the US and abroad that could be very vulnerable to a run on the dollar. 

 

I think that there will be a near–complete shutdown of the American economy. Federal and state governments will shut down. Banks will not open. Business will at least temporarily shutter their doors. There will most likely be military enforced martial law.

 

What do you think would happen? 

Edited November 27, 2013 by Ben Archer

[CrowEpistemologist]

I think that there will be a near–complete shutdown of the American economy. Federal and state governments will shut down. Banks will not open. Business will at least temporarily shutter their doors. There will most likely be military enforced martial law.

 

 

Also, Jesus will return and sinners will burn in Hell. Sounds like real a bummer.

 

I hope this doesn't happen before the Superbowl this year as I got my tickets already...

[Ben Archer]

Also, Jesus will return and sinners will burn in Hell. Sounds like real a bummer.

 

I hope this doesn't happen before the Superbowl this year as I got my tickets already...

A quick note: Rand's lexicon covers the topic of evasion and blanking out. 

 

As with the first page of this thread, with the topic of credit expansion/consumption, you again seem intent on reducing the discussion to trolling (usually trolling a straw man argument). This reminds me of the same guy who recently got nasty with Mark K, and that other guy who brazenly cited ACLU. 

Edited November 27, 2013 by Ben Archer

[CrowEpistemologist]

A quick note: Rand's lexicon covers the topic of evasion and blanking out. 

 

As with the first page of this thread, with the topic of credit expansion/consumption, you again seem intent on reducing the discussion to trolling (usually trolling a straw man argument). This reminds me of the same guy who recently got nasty with Mark K, and that other guy who brazenly cited ACLU. 

 

Yeah, you, Nicky, and Mark K. certainly belong to the same club, that's for sure...

[Ben Archer]

Yeah, you, Nicky, and Mark K. certainly belong to the same club, that's for sure...

I'm not sure. I try to avoid the bickering, sarcasm and personal attacks. I come here to learn. 

 

By the way, if there is a failure to expand credit/consumption there could be several years of deflation. I'm not sure if you've given any thought to how horrible that is , as well. 

 

I see that your original assertion was based on a post you made in August on your views with inflation. You admitted the possibility to "holes" in your theory, so I'll reply on that, since I don't think we agree on the impact of deflation or hyperinflation. 

[CrowEpistemologist]

 

I see that your original assertion was based on a post you made in August on your views with inflation. You admitted the possibility to "holes" in your theory, so I'll reply on that, since I don't think we agree on the impact of deflation or hyperinflation. 

 

Yes, that's far preferable than dismissing my comments out of hand as completely ignorant. Have at it--I'd love to be proven wrong on that thread.

[Ben Archer]

So I did give your theory a look. I don't understand how a fast transaction time exempts a currency or goods from inflation, since whatever this undefined technological method you're using to establish nominal values will define a currency. Looking at this now I don't see how you could link it honestly thinking it's a good argument against the chance of hyperinflation in the US, simply because you have a porous theory on how it might not happen, if it was implemented "en masse." 
 
 

Most laymen think of the US Dollar as "money", and plan, keep score, and save based on this notion.
 
Any sophisticated investor, however, sees US dollars as just another instrument they may move their money into, along side of stocks, commodities, real estate, other currencies, etc.

Also, the supply of money (M0, MB, M1, etc) is irrelevant. What is the difference now between a dollar bill and a ten-year treasury bond? They are essentially both credit instruments.A dollar bill is just a bond that you get no interest on (with a bond today, you get next to no interest). So credit is money, as of 1971. I think 2008 should have made that obvious. The point is, what saved us in 2008, printing more money, will not help when this next bubble pops (or if we lose the Dollar as the reserve before then). 

 

You say that hyperinflation couldn't happen in the US. Nevermind the 12 times across the globe it's happened this century, and more recently with British sterling. There are many parallels between the crises. One common them is massive credit expansion and big government. Almost every industry in the US gets government subsidizes; the Fed is driving the economy. 

 

One thing to consider is that globalization is suppressing much of the inflation by putting a lot of (downward) pressure on wages. This is one of the reasons we've able to get away with all this Quantitative Easing ("printing $85 billion a month"). This is one of the main reasons inflation hasn't risen so sharply recently. Deflationary wage wars with China may never let up. While it may be deflationary in general,  it is growth deflation, not credit deflation, and does nothing to prevent credit expansion. 

 

Another thing is that even if these market forces prevent inflation, there is nothing to stop credit collapse, aka deflation. In a deflation, you have a domino effect of debts wiping out leverage leaving things like gold, silver as stores of value ("sophisticated investors" obviously know of other hedges, but they will still have to weather the same storm). Now since money = credit/debt, and debt default destroys money, you have money decreasing, which tends to drop prices. So now the real value of remaining debts goes up, which few can repay, causing even more defaults. (Banks would close). Panic would lead to runs on the bank. 

 

Now here it'd be nice to believe that the Fed could step in and save the day. And there are really only two ways to get rid of bad debt: default or inflation. Historically hyperinflation is usually what happens. Regardless, deflation, which can come prior, is devastating enough. 

 

The Fed can only save the day as long as the world is willing to buy our debt. 

 

As money depreciates, people will exchange out of it for anything. Other countries will obviously need to buy up dollars to save themselves from an exchange crises as people get out of the dollar. This is already happening to an extent, and it's helped keep prices down in the US. However if all central banks start inflating there'd be hyperinflation all over the world. The fact that the US dollar is the reserve currency makes this worse. What foreign investor would consider dollars safe if the Fed stars having to drop bills out of helicopters? Would countries try to exchange it for Euros? I highly doubt it. Maybe the yuan, but with China exposed to 1.3 trillion of US bonds, and 3+ trillion in FX reserves, it is likely that gold, silver and platinum will be used. (And this is why they're buying so damn much). 

 

There are a number of scenarios, besides the "currency wars" that could overwhelm this Fed policy of low interest rates and QE4ever. There could be protectionist trade wars, similar to the 1930's. Another asset bubble. The $200+ trillion in derivatives could melt down. A simple policy blunder. Or too low interest rates. Nothing would be able to push aggregate demand, so the only question is hyperinflation or deflation, a lose/lose. 

Edited November 28, 2013 by Ben Archer

[CrowEpistemologist]

So I did give your theory a look.

 

I've responded to your remarks about that thread... in that thread. Anything else, I think, will be really confusing.

[Ben Archer]

Since that distraction has trailed of into the realm of the theoretical, I think the threat of a run on the dollar reserve still stands. 

 

As for the threat being neutralized by other countries relying on the dollar as a store of value ...given many trade agreements (listed above) that exclude US dollars, and the massive amounts of gold now China has now, show they don't intend to rely on the dollar anymore.  (not to mention the many spoken intentions, especially during this last plenum, to "de-americanize the world"). 

 

I suppose it does seem a bit doom and gloom, but I'm a firm believer in the "normalcy bias."

Edited November 30, 2013 by Ben Archer