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Thread: US Dollar Crisis in the making ???

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    Default US Dollar Crisis in the making ???

    ... this is supposedly the first of three parts ...



    (snip)"DOLLAR CRISIS IN THE MAKING
    Before the stampede
    By W Joseph Stroupe

    Increasingly ominous clouds are gathering in what could soon be the perfect storm against the United States dollar and against the present dollar-centric global financial order.

    This is not shaping up to be a storm that anyone is trying to initiate, not even those who are actively driving for a new global financial order that is no longer centered on the dollar. Instead, it will result from a correlation of forces arising out of the deepening global financial and economic crises, coupled with recurring and conspicuous miscalculation on the part of some of the world's political, financial and economic leaders.

    The storm has the potential to cause upheaval on a grand scale, opening the door to swift, and largely uncontrolled, fundamental transformation.

    As is widely recognized, the present financial order that is inordinately reliant on the US dollar must some day give way to a new order that is more balanced, stable, resilient and reliable, one that is based on multiple currencies and that therefore won't be plagued by the extremely dangerous structural drawback of an increasingly worrisome elemental single point of failure (the dollar).

    But if the current dollar-centric financial order should become more seriously shaken than it already has been, perhaps even suffering a collapse, as a casualty of the present deepening global crisis, then the transition to any new global financial order is most likely to be disorderly, disruptive and unmanageable rather than gradual and orderly.

    We can hope - but cannot be at all confident - that world leaders and global investors will act coherently, cohesively and intelligently enough in this crisis so as to ensure that the policies and actions being undertaken will not put at further serious risk the fundamental structure of the current dollar-centric financial order, and that they will instead be effective in bolstering deteriorating global confidence in the present order and in the safety of the dollar, at least until we get through this crisis.

    Unfortunately, we cannot be confident that world leaders know what they are doing in seeking to resolve the crisis. Are their measures attacking the heart of the problem, or only its periphery? Are they exacerbating the crisis, either by enacting certain misdirected measures, or by failing to enact certain required measures? Are they setting up conditions that make a dollar crisis and radically increased financial upheaval virtually inevitable, by blindly pushing ahead with a simplistic agenda of trying to spend their way out of the present crisis?

    If the dollar is being put at significant short- and medium-term risk by such measures, then we're seriously risking plunging the global financial order into a depth and breadth of transition that we cannot adequately control. "(snip)

    (snip)"The stampede in the making
    Investors will begin to stampede out of financial assets such as Treasuries and into hard assets like precious metals and certain commodities whose price has been severely beaten down. These will offer comparatively much safer stores of wealth, ones with a real profit potential. China, via its resource buys, is already blazing the trail, going energetically into hard assets, rather than sustaining its 2008 rate of purchases of Treasuries and other financial assets.

    Replay the recent histories of the chaotic housing and the commodities bubble bursts. Global investors, at the behest of enthusiastic governments, largely ignored the inevitable risks and piled into these assets on a grand scale, with the hottest interest coming just before the burst occurred. The environment of very low global interest rates and a massive global credit excess set the stage for enormous investor profits on these gigantic and mushrooming asset bubbles.

    But when mounting inflation obliged the Fed to begin to steadily hike interest rates, the housing bubble began to burst in late 2006. As the dollar weakened under mounting inflation and loss of its appeal as a safe store of wealth, global investors piled ever faster into commodities for safety and for profit, inflating that bubble to gigantic proportions by the summer of 2008, when oil nearly reached $150 per barrel.

    Then, when the global recession emerged later that summer, investors realized global demand and prices for commodities would plunge, so they stampeded out of commodities and into Treasuries, and the commodities bubble burst. Both bubble bursts left a great deal of wreckage in their wakes, with asset values collapsing, pulling businesses, banks and even governments into the abyss.

    Though the present Treasuries bubble is more about safety than it is about profit, the fundamental risks associated with bubbles still apply to it. The bigger it gets, and the more reliant upon it as a safe store global investors become, the more unstable it turns out to be because it becomes more sensitive to various factors, both internal and external, both real and psychological.

    The bigger and hotter any bubble gets, the more prepared its devotees become to speedily abandon it in favor of the next one. That explains why investors have mostly piled into very short term Treasuries - they know they may well have to sell out even faster than they bought in.

    So, no one should assume that the present crisis will moderate or move toward resolution just because global demand for Treasuries might remain high in coming months. That would only signal that the Treasuries bubble is growing more massive, and that the distortions in the global financial order are only becoming more profound and dangerous, threatening to bring in a second wave of destruction, and that the bubble is therefore much nearer to bursting. This constitutes a potential perfect storm against the dollar and against the present global financial order that no one wants, but no one is seeking to prevent either. "(snip)

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    Banned Melonie's Avatar
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    Default Re: US Dollar Crisis in the making ???

    and here's part 2 ...

    (snip)Like it or not, the US dollar still constitutes the de facto central framework of the present global financial order - the dollar is its fundamental support structure, much like the steel framework that supported the Twin Towers in New York. The global crisis is sending shockwaves of ever increasing intensity throughout the present order. Few thought the shaking would reach its present intensity and scope, and no one really knows how powerful and destructive the shaking might get before the crisis is over.

    The initial, knee-jerk reaction in this situation has been to reach out and grab tightly onto the framework with both hands (that is, in an exceptionally risk-averse reflex, flee into the dollar for relative safety) and hold on for dear life. This reaction of global investors is motivated partly by logic but also in large part by the strong psychological components of uncertainty, fear and even panic.

    As China Banking Regulatory Commission deputy head Luo Ping stated on February 12, in his own reactive-style retort to the unfolding crisis, Treasuries are just about the only safe-haven option in perilous times. However, his clarification on the next day appeared a bit less knee-jerk and more rational, stating that gold and selected government bonds (but not those of the US) look more attractive to China from a risk assessment standpoint, because China rightly fears its dollar-denominated holdings will almost certainly be inflated away over time by the US policy of issuing huge new sums of dollar-denominated debt in the form of Treasuries.

    This brings us to the crux of the matter of escalating risks for the dollar. In the current fiscal year alone, the US is expected to issue somewhere between US$2 trillion and $2.5 trillion in new debt. It could conceivably exceed that amount if the crisis worsens and more money than anticipated is required to rescue the financial and economic sectors from ruin, or if virtually the entire financial sector has to be nationalized to prevent a total collapse. That is a prospect that is swiftly becoming more and more likely. A running estimate by Bloomberg News recently put the total so far of all the new sums of dollars the US government has spent, lent and/or committed to spend due to this crisis at about $9.7 trillion and counting! (snip)

    (snip)But such a bubble burst for Treasuries could come about even if risk aversion persists, or perhaps intensifies, in this deepening global crisis. What if investors become more worried about the safety of Treasuries, fearing, as China's central bank increasingly does, that the flooding of the market with huge new sums of US debt will inevitably inflate away the value of their Treasury holdings? Or what if the costly new US stimulus package and bank rescue fail, and the US descends into a much deeper recession or a full-blown depression and is forced to nationalize virtually the entire financial sector, stoking fears that the US government may have no choice but to default on at least a portion of its gargantuan debt?

    In that case there is a real threat that investors will begin to transfer their risk aversion strategy from focusing on Treasuries and the dollar to focusing on something else that is deemed much safer - perhaps including hard assets like gold and other precious metals and commodities. If US gross domestic product (GDP) deteriorates significantly further than it has already, the dollar will become much more vulnerable and will likely fall as investors begin to value the safe haven currency more in line with the fundamentals of the US economy. Then, the same self-reinforcing downward spiral described above would likely come into play, and the Treasuries bubble would burst in chaotic fashion in an investor stampede to havens safer than the shaky dollar.

    One can begin to see how very tentative is the dollar's recent appeal as a safe haven in the mounting storm. In verification of that fact, investors have been piling into short-dated Treasuries for the most part, for two reasons. First, these assets are less vulnerable to the ravages of higher yields, which tend to hit the long-dated Treasuries earliest and hardest. Second, the short-dated assets facilitate a quick exit in the event that it is deemed justified. When taken together, these two factors are not a very solid vote of confidence in Treasuries and the dollar. (snip)

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    Default Re: US Dollar Crisis in the making ???

    followed by part 3 ...



    (snip)"However, it should be noted that almost no matter what currencies these resource buys are being transacted in, there does exist a potential negative impact for the dollar itself further down this path. How so?

    Obviously, with China's uncomfortably large present exposure to the dollar, it is in its interests to concentrate on converting much of the dollar-denominated portion of its secret reserves into resources reserves. In other words, China will undoubtedly spend dollars, whether directly or indirectly, to fund its resource buys. But it must do so in a largely opaque manner that leaves little, if any trace in official data such as the US Treasury's TIC report. It will also be likely to be a net buyer of Treasuries, though nowhere near its 2008 pace, or else refrain from selling significant amounts of Treasuries, while it clandestinely reduces its exposure to the dollar. Otherwise, its actions could spark a dollar panic.

    Increased buying of Treasuries by US citizens and investors, and by various foreign investors other than China, as the global crisis rapidly deepens and increases risk aversion, may likely take significant pressure off of China to soak up the huge issuance of new sovereign US debt now getting underway. That will help to provide breathing room for China to address its problem of reducing exposure to the dollar.

    Whether China will approach the problem with a scheme of swaps amongst its various state-controlled entities and wealthy private Chinese investors, or by some other nearly opaque means, probably cannot be determined with any certainty at present. But it has undoubtedly worked out the problem of clandestinely converting significant sums of its dollar-denominated financial assets into hard assets without dumping Treasuries and triggering a dollar panic.

    It is most unlikely, therefore, that its actions in this regard will be sufficiently proved before it has already succeeded in accomplishing its goals. Furthermore, since resource prices are now very attractive, China will certainly expand and accelerate its resource buys while prices remain attractive, converting ever-larger sums of its dollar-denominated reserves into resource reserves.

    If China averaged a conversion of only $35 billion per month from dollars into resources, it could convert the entire $450 billion in little more than 12 months' time. Hence, I predict that the next eight to 15 months will provide China with sufficient time to bring its total exposure to the dollar much more in line with its strategic goals. "(snip)

    (snip)"Obviously, if the US reaches the point where it fails to find sufficient buyers for its new flood of Treasuries, that will also become a perilous situation for the dollar and for the huge Treasuries bubble, which will almost certainly burst as global investors seek better stores of wealth in hard assets, following the lead of China's central bank.

    Either way, the US is engaged in the implementation of extremely risky and potent inflationary, dollar-debasing policies, making a loss of global confidence in the dollar in the short to medium term a virtual certainty. Even if the massive spending does restore economic growth, the US economy is likely to remain very weak for some time. That will make it extremely difficult for the US Federal Reserve to tighten monetary policy to fight off the inevitable and potent inflation that will result from today's shortsighted policies.

    When the Fed attempts to tighten, the US economy will likely be plunged into a second-round recession or depression, with obviously awful effects upon the dollar. But if the Fed fails to tighten sufficiently and quickly, runaway inflation will ravage the currency anyway.

    Prudent, forward-looking Chinese officials have clearly assessed the entire situation as one demanding careful but swift action to ensure that its huge reserves are not imperiled by what has obviously become an untenable global rush into an unstable and perilous dollar bubble.

    Hence, China's central bank is enacting with a sense of urgency prudent measures, both explicit and clandestine, to significantly decrease exposure to the dollar. If the details of such measures should become sufficiently public and should attract undue global attention before China accomplishes its goals, a dollar panic might be triggered. "(snip)

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    Default Re: US Dollar Crisis in the making ???

    http://www.treas.gov/press/releases/tg57.htm

    "FROM THE OFFICE OF PUBLIC AFFAIRS
    March 16, 2009
    TG-57

    Treasury International Capital (TIC) Data for January

    Washington —The U.S. Department of the Treasury today released Treasury International Capital (TIC) data for January 2009. The next release, which will report on data for February 2009, is scheduled for April 15, 2009.

    Net foreign purchases of long-term securities were negative $43.0 billion.

    Net foreign purchases of long-term U.S. securities were negative $18.8 billion. Of this, net purchases by private foreign investors were negative $10.2 billion, and net purchases by foreign official institutions were negative $8.5 billion.
    U.S. residents purchased a net $24.2 billion of long-term foreign securities.
    Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been negative $60.9 billion.

    Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities increased $30.9 billion. Foreign holdings of Treasury bills decreased $15.4 billion.

    Banks’ own net dollar-denominated liabilities to foreign residents decreased $118.9 billion.

    Monthly net TIC flows were negative $148.9 billion. Of this, net foreign private flows were negative $158.1 billion, and net foreign official flows were $9.2 billion. "

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    Default Re: US Dollar Crisis in the making ???

    now Russia is expressing the same concerns


    and a whole lot of Americans are starting to get nervous ... even Americans who would ordinarily be supportive
    Last edited by Melonie; 03-18-2009 at 03:49 AM.

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    Default Re: US Dollar Crisis in the making ???

    Fed is buying Treasuries! Foreigners don't want them any more? Look at the gold chart!:

    http://www.kitco.com/charts/livegold.html

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    Default Re: US Dollar Crisis in the making ???

    Wheee... Aussie dollar rocketed up
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
    - Dr John Zoidberg

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    Default Re: US Dollar Crisis in the making ???

    Quote Originally Posted by Adelina View Post
    Fed is buying Treasuries! Foreigners don't want them any more? Look at the gold chart!:

    http://www.kitco.com/charts/livegold.html
    That is not the reason the Fed is buying treasuries. They want to force investors out of treasuries and into the corporate bond market in an effort to get lending going again. I am not convinced that this plan will have the desired effect. It may very well cause a sell off of existing treasuries held by whomever. However, the Fed is only buying new issues, and not existing treasuries. Thus, they are attempting to give the market the signal to buy corporate bonds. As I said, I am not convinced this will work, it may just cause further panic among investors who really want only the safest investments out there, US Treasuries. In that case, we could see a real dearth of capital in the markets as hoarding starts in earnest. The other possibility is this round of T-bill buying will cause a heavy dose of inflation and a collapse of the USD.

    I view this much the way Woody Hays viewed the forward pass. Three things can happen and two of them are bad. Yet, OSU threw the forward pass, sparingly. And anyone who has watched college or pro football in the last ten years knows everyone, even OSU is pass happy.

    HTH
    Z

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    Default Re: US Dollar Crisis in the making ???

    re the Aussie dollar / Euro etc, in reality the US dollar fell considerably while these other currencies did not. Attempting to use the US dollar as a financial 'yardstick' is becoming an increasingly problematic concept - because it leads to technically false assumptions such as the value of the Aussie or value of US stock markets being 'up' when in fact the Aussie and US stock markets values are basically unchanged in terms of purchasing power but the US dollar's value has fallen. By the same concept the 'value' of one ounce of gold or one barrel of oil is essentially unchanged as well even though the US dollar denominated price of gold went 'up' by $50 per ounce in a single day and the US dollar denominated price of oil went up 15% in the past week !

    Because of past US dollar dominance as the world's reserve currency, Americans are famous for being US dollar centric. But as the US dollar steadily drifts to the real world status of being just one more paper currency whose exchange rate can be manipulated by gov't money printing, it also becomes more and more important to use some other 'value model' when trying to understand US dollar denominated price movements in stocks, commodities etc. It always amazes me that US 'smart money' investors have routinely applied world market valuation models to movements in other currencies / stock markets (prime examples the Ruble / the BOLSA ) while not doing the same for their home currency / stock market. Hint hint they are now definitely doing so !

    PS Zofia your forward pass analogy is brilliant !!! In keeping with this analogy, China has already 'read the play' that the US 'quarterback' has called, and the defense is already arranged to mount a 'blitz' ! And China is running this defensive play for the same reason as an opposing football team ... due to China's huge US Treasury holdings, any gain in yardage for US capital markets is a loss in yardage for Chinese reserve funds.



    (snip)LUXEMBOURG (Reuters) - A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

    Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

    Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.

    "It is a good moment to move to a shared reserve currency," he said.

    Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.

    Some analysts said news of the U.N. panel's recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.(snip)

    this is of potentially earth-shaking importance for anybody using US dollars as their 'home' currency !



    !
    Last edited by Melonie; 03-19-2009 at 10:53 PM.

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