In previous posts I have touched upon my concerns over the US Treasuries ever bulging balance sheet. Its ludicrous to blame Wall Street for over leverage and balance sheet risk when Daddy is sniffing the glue more then the kids down the hall.
Our current overstretched Government Monetary Policy, even in the face of it trying to maintain its independence and its ability, or willingness, to dry the U.S. Economy of the current excess liquidity, is very fragile. Furthermore, we heard last week the Fed Chairman’s congressional testimony on the perils of excessive fiscal deficits and the effects these deficits are having on interest rates at a time when the Federal Reserve is intervening in the economy to try to keep interest rates low...Basically Bernanke was warning of excess liquidity and how that can back fire on what ever stabilization that they have achieved for the Financial/Credit System.
But...how does this play out "Taleb/Black Swan Style"? What is the "Unthinkable"?
What I call “Unthinkable” is basically the following:
What if, because of all these issues, individuals/entities across the world start dumping U.S. Dollar denominated assets/notes, like the U.S. Dollar bills? We have heard that “Rogue/Unfriendly” states, like Iran, Venezuela, Nicaragua, Bolivia, as well as "friendly" states like China, Brazil, Argentina, Russia, etc., have been discussing a way to go from a dollar pattern/platform for multilateral trade to another country’s or a combination/basket of country's currencies in order to achieve independence from U.S. monetary/foreign/fiscal policy decisions. While these attempts, or at least the noise they produce in the media, have increased during the last year or so, my biggest concern is not with what these countries may do, but what individuals across the world may do if they believe the U.S. Dollar is in actual trouble.
Why? Because one of the advantages the U.S. Federal Reserve has over almost all of the rest of the world’s central banks is that there seems to be an almost infinite demand for U.S. dollars in the world, which has made the Federal Reserve’s job a lot easier than that of other central banks, even those from developed countries. Furthermore, approximately three-fourths of U.S. dollar bills are in foreign hands or foreign safe deposit boxes, and an about-face by individuals across the world regarding these holdings of U.S. currency could be a huge blow to the value of the U.S. Dollar, U.S. Debt and the Federal Reserve’s monetary policy.
Why? Because all those holdings of U.S. Dollar bills are basically a free loan from foreigners to the U.S. government, and if there is a massive run against the U.S. dollar across the world then the Federal Reserve will have to sell U.S. Treasuries to exchange for those U.S. dollars being returned to the country, which means that the U.S. Federal Debt and interest payments on that debt will increase further. This means that we will go from paying nothing on our “currency” loans to having to pay interest on those U.S. Treasuries that will be used to sterilize the massive influx of U.S. Dollar bills into the U.S. economy, putting further pressure on interest rates.
Also if we add the nervousness from Chinese officials regarding U.S. Debt issues, then we understand the reason why we had Treasury Secretary/Traitor Timothy Geithner in China last week “calming” Chinese officials concerned with the massive U.S. fiscal deficits. I remember similar trips from the Bush administration’s Treasury officials pleading with Chinese officials for them to continue to buy GSEs (Freddie Mac and Freddie Mae) paper just before the financial markets imploded. But the situation today is even more delicate because of the absurd amounts of U.S. Treasuries s we will have to issue during the next several years in order to pay for all the programs we have put together to minimize the fallout from this crisis.
Furthermore, if China and other countries do not keep buying U.S. Treasuries, then interest rates are going to skyrocket exponentially. This is one of the reasons why Bernanke was so adamant against fiscal deficits in his latest congressional appearance. Of course, the U.S. Government knows that the Chinese are in a very difficult position: If they don’t buy U.S. Treasuries, then the Chinese currency is going to appreciate against the U.S. dollar and thus Chinese exports to the U.S., and consequently, Chinese economic growth will falter. This is something that will probably keep Chinese demand for Treasuries elevated during the next several years. However, this is not a guarantee, especially if the Chinese recovery is temporary and they have to keep on spending resources on more fiscal stimulus rather than on buying U.S. Treasuries
All of these issues will have an important, weakening effect on the U.S. dollar, Most people are still bullish on the Dollar, partly because many other countries in the world, especially the European Countries, appear to be in even worse shape than the U.S. Economy. This means that these countries will also have to keep interest rates down while continuing to spend their way out of recession, pressuring their own currencies in the process.
However if plays out, the 30/50 Year Credit Cycle had its day of reckoning, thus my assessment of the U.S. Dollar is not great, no matter what ever does become the reserve currency, the socialization of Bank Losses on the backs of Tax Payers, while Tax Payers are being foreclosed on by the banks is BAD KARMA. I don't envision within the next 10-15 Years, the US Dollar losing its dominant status, no matter what Marc Faber or Jim Rodgers have to say. WHY? Who is going to trust the following?
Hugo Chavez’s Venezuelan Peso?
Putin’s Russian Rubble?
The Iranian Rial?
The Chinese Renminbi?
Kirchner’s Argentine Peso?
Lula da Silva’s Brazilian Real?
Congress Party and the Rupee?
I don't think so -
But we have seen painful dislocations happen, now that we have gotten to a point where these type of events are a daily occurrence, it might be prudent to consider all the alternatives.
Nice Post!
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