Day of reckoning looms for the U.S. dollar

[Arraya]

http://www.atimes.com/atimes/China_Business/JG30Cb01.html

The vast expansion of US-led globalized trade since the Cold War ended in 1991 had been fueled by unsustainable serial debt bubbles built on dollar hegemony, which came into existence on a global scale with the emergence of deregulated global financial markets that made cross-border flow of funds routine since the 1990s.

Dollar hegemony is a geopolitically constructed peculiarity through which critical commodities, the most notable being oil, are denominated in fiat dollars, not backed by gold or other species since then president Richard Nixon took the US dollar off gold in 1971. The recycling of petro-dollars into other dollar assets is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973. After that, everyone accepts dollars because dollars can buy oil, and every

economy needs oil. Dollar hegemony separates the trade value of every currency from direct connection to the productivity of the issuing economy to link it directly to the size of dollar reserves held by the issuing central bank. Dollar hegemony enables the US to own indirectly but essentially the entire global economy by requiring its wealth to be denominated in fiat dollars that the US can print at will with little in the way of monetary penalties.

[partypup]

[quote=patientrenter]partypup, a default occurs when the person who is supposed to pay does not pay, not when the person who is owed refuses to accept the payments.[/quote]

I understand your point about a default technically not occurring as long as a debtor is making payments. But a debtor can’t make a creditor accept her payments, and we’re not talking about paying a credit card bill from JP Morgan Chase. If Chase didn’t accept my payment, I would undoubtedly file a claim and bring the matter to court to compel payment and have my debt cleared.

However, there is no such authority that can compel one nation to accept another nation’s intentionally-devalued crap currency as payment for a loan made in good faith. I am just speaking in practical terms. If China (or Russia) decides that a dollar that is worth 50% of what it was when the loan was made no longer constitutes sufficient payment for our debts, then they can and will default us, and there’s nothing I can see that would prevent them from doing so. Who would we appeal to? And if there were an appropriate tribunal, what legal grounds would we have to argue against default? “Yeah, we knew we owed a LOT of money, so we basically just decided to run the printing presses all night and give our creditors something worthless. That’s okay, right?” This is no about a debtor who attempts in good faith attempt to repay a debt and is prevented from doing so. This is about a debtor who has decided to pull the ultimate scam on his creditors. So legally and practically speaking, I don’t think the U.S. has the power or the grounds to resist a default.

[quote=patientrenter]Eventually, the dollar will reach a value that satisfies our foreign trade parties. It’s not going to be zero. I just don’t see why a large devaluation has to go all the way to zero. This is not how these things work historically. The US has problems, but it does have good infrastructure, food and water supply, open space, and other basics of a good modern life. At some point that puts a floor under the value of US assets and even the dollar.
[/quote]

I agree, I can’t imagine the dollar going to zero. But I think a 50-70% devaluation is not unlikely. And I don’t think the dollar would have to go to zero before (a) foreign investment did a U-turn and starting flowing elsewhere (which is already happening now) and (b) the dollar loses its sole reserve currency status. A U.S. without the sole reserve currency and a strong military simply is not a very attractive place for investment and not the ideal safe haven. As one of my friends observed this weekend, it’s now becoming very clear that the U.S. had a phony, illusory economy for the last 3 decades, built on paper and hype. And the only reason it has lasted this long is because we carried the biggest stick and had the only currency in town. When that changes, the U.S. won’t be in a better position than any other “developed” nation, and in fact we actually be in a worse position (at least in the short-to-mid term) because (a) our open space with 300 million (some heavily-armed) will make it difficult to keep order when the machine breaks down, (b) our unprecedented debt will make it harder for us to recover than nations with much less debt and (c) our uniquely heterogeneous population presents significant challenges in allocating limited resources because of competing social interests and cultures.

But hey, I am not predicting the end of the U.S. Far from it. But there’s no way that we will come out of this debacle as a superpower that controls all the chess pieces on the board. This country will simply go dormant for a generation or two while we rebuild, re-orient and re-discover our core values. This will present tremendous opportunities for those born today. Unfortunately, my time horizon is much shorter, and I doubt your or I will live to see this resurgence. So we have to deal with the reality of the coming years and prepare accordingly.

[partypup]

[quote=patientrenter]partypup, a default occurs when the person who is supposed to pay does not pay, not when the person who is owed refuses to accept the payments.[/quote]

I understand your point about a default technically not occurring as long as a debtor is making payments. But a debtor can’t make a creditor accept her payments, and we’re not talking about paying a credit card bill from JP Morgan Chase. If Chase didn’t accept my payment, I would undoubtedly file a claim and bring the matter to court to compel payment and have my debt cleared.

However, there is no such authority that can compel one nation to accept another nation’s intentionally-devalued crap currency as payment for a loan made in good faith. I am just speaking in practical terms. If China (or Russia) decides that a dollar that is worth 50% of what it was when the loan was made no longer constitutes sufficient payment for our debts, then they can and will default us, and there’s nothing I can see that would prevent them from doing so. Who would we appeal to? And if there were an appropriate tribunal, what legal grounds would we have to argue against default? “Yeah, we knew we owed a LOT of money, so we basically just decided to run the printing presses all night and give our creditors something worthless. That’s okay, right?” This is no about a debtor who attempts in good faith attempt to repay a debt and is prevented from doing so. This is about a debtor who has decided to pull the ultimate scam on his creditors. So legally and practically speaking, I don’t think the U.S. has the power or the grounds to resist a default.

[quote=patientrenter]Eventually, the dollar will reach a value that satisfies our foreign trade parties. It’s not going to be zero. I just don’t see why a large devaluation has to go all the way to zero. This is not how these things work historically. The US has problems, but it does have good infrastructure, food and water supply, open space, and other basics of a good modern life. At some point that puts a floor under the value of US assets and even the dollar.
[/quote]

I agree, I can’t imagine the dollar going to zero. But I think a 50-70% devaluation is not unlikely. And I don’t think the dollar would have to go to zero before (a) foreign investment did a U-turn and starting flowing elsewhere (which is already happening now) and (b) the dollar loses its sole reserve currency status. A U.S. without the sole reserve currency and a strong military simply is not a very attractive place for investment and not the ideal safe haven. As one of my friends observed this weekend, it’s now becoming very clear that the U.S. had a phony, illusory economy for the last 3 decades, built on paper and hype. And the only reason it has lasted this long is because we carried the biggest stick and had the only currency in town. When that changes, the U.S. won’t be in a better position than any other “developed” nation, and in fact we actually be in a worse position (at least in the short-to-mid term) because (a) our open space with 300 million (some heavily-armed) will make it difficult to keep order when the machine breaks down, (b) our unprecedented debt will make it harder for us to recover than nations with much less debt and (c) our uniquely heterogeneous population presents significant challenges in allocating limited resources because of competing social interests and cultures.

But hey, I am not predicting the end of the U.S. Far from it. But there’s no way that we will come out of this debacle as a superpower that controls all the chess pieces on the board. This country will simply go dormant for a generation or two while we rebuild, re-orient and re-discover our core values. This will present tremendous opportunities for those born today. Unfortunately, my time horizon is much shorter, and I doubt your or I will live to see this resurgence. So we have to deal with the reality of the coming years and prepare accordingly.

[partypup]

[quote=patientrenter]partypup, a default occurs when the person who is supposed to pay does not pay, not when the person who is owed refuses to accept the payments.[/quote]

I understand your point about a default technically not occurring as long as a debtor is making payments. But a debtor can’t make a creditor accept her payments, and we’re not talking about paying a credit card bill from JP Morgan Chase. If Chase didn’t accept my payment, I would undoubtedly file a claim and bring the matter to court to compel payment and have my debt cleared.

However, there is no such authority that can compel one nation to accept another nation’s intentionally-devalued crap currency as payment for a loan made in good faith. I am just speaking in practical terms. If China (or Russia) decides that a dollar that is worth 50% of what it was when the loan was made no longer constitutes sufficient payment for our debts, then they can and will default us, and there’s nothing I can see that would prevent them from doing so. Who would we appeal to? And if there were an appropriate tribunal, what legal grounds would we have to argue against default? “Yeah, we knew we owed a LOT of money, so we basically just decided to run the printing presses all night and give our creditors something worthless. That’s okay, right?” This is no about a debtor who attempts in good faith attempt to repay a debt and is prevented from doing so. This is about a debtor who has decided to pull the ultimate scam on his creditors. So legally and practically speaking, I don’t think the U.S. has the power or the grounds to resist a default.

[quote=patientrenter]Eventually, the dollar will reach a value that satisfies our foreign trade parties. It’s not going to be zero. I just don’t see why a large devaluation has to go all the way to zero. This is not how these things work historically. The US has problems, but it does have good infrastructure, food and water supply, open space, and other basics of a good modern life. At some point that puts a floor under the value of US assets and even the dollar.
[/quote]

I agree, I can’t imagine the dollar going to zero. But I think a 50-70% devaluation is not unlikely. And I don’t think the dollar would have to go to zero before (a) foreign investment did a U-turn and starting flowing elsewhere (which is already happening now) and (b) the dollar loses its sole reserve currency status. A U.S. without the sole reserve currency and a strong military simply is not a very attractive place for investment and not the ideal safe haven. As one of my friends observed this weekend, it’s now becoming very clear that the U.S. had a phony, illusory economy for the last 3 decades, built on paper and hype. And the only reason it has lasted this long is because we carried the biggest stick and had the only currency in town. When that changes, the U.S. won’t be in a better position than any other “developed” nation, and in fact we actually be in a worse position (at least in the short-to-mid term) because (a) our open space with 300 million (some heavily-armed) will make it difficult to keep order when the machine breaks down, (b) our unprecedented debt will make it harder for us to recover than nations with much less debt and (c) our uniquely heterogeneous population presents significant challenges in allocating limited resources because of competing social interests and cultures.

But hey, I am not predicting the end of the U.S. Far from it. But there’s no way that we will come out of this debacle as a superpower that controls all the chess pieces on the board. This country will simply go dormant for a generation or two while we rebuild, re-orient and re-discover our core values. This will present tremendous opportunities for those born today. Unfortunately, my time horizon is much shorter, and I doubt your or I will live to see this resurgence. So we have to deal with the reality of the coming years and prepare accordingly.

[partypup]

[quote=patientrenter]partypup, a default occurs when the person who is supposed to pay does not pay, not when the person who is owed refuses to accept the payments.[/quote]

I understand your point about a default technically not occurring as long as a debtor is making payments. But a debtor can’t make a creditor accept her payments, and we’re not talking about paying a credit card bill from JP Morgan Chase. If Chase didn’t accept my payment, I would undoubtedly file a claim and bring the matter to court to compel payment and have my debt cleared.

However, there is no such authority that can compel one nation to accept another nation’s intentionally-devalued crap currency as payment for a loan made in good faith. I am just speaking in practical terms. If China (or Russia) decides that a dollar that is worth 50% of what it was when the loan was made no longer constitutes sufficient payment for our debts, then they can and will default us, and there’s nothing I can see that would prevent them from doing so. Who would we appeal to? And if there were an appropriate tribunal, what legal grounds would we have to argue against default? “Yeah, we knew we owed a LOT of money, so we basically just decided to run the printing presses all night and give our creditors something worthless. That’s okay, right?” This is no about a debtor who attempts in good faith attempt to repay a debt and is prevented from doing so. This is about a debtor who has decided to pull the ultimate scam on his creditors. So legally and practically speaking, I don’t think the U.S. has the power or the grounds to resist a default.

[quote=patientrenter]Eventually, the dollar will reach a value that satisfies our foreign trade parties. It’s not going to be zero. I just don’t see why a large devaluation has to go all the way to zero. This is not how these things work historically. The US has problems, but it does have good infrastructure, food and water supply, open space, and other basics of a good modern life. At some point that puts a floor under the value of US assets and even the dollar.
[/quote]

I agree, I can’t imagine the dollar going to zero. But I think a 50-70% devaluation is not unlikely. And I don’t think the dollar would have to go to zero before (a) foreign investment did a U-turn and starting flowing elsewhere (which is already happening now) and (b) the dollar loses its sole reserve currency status. A U.S. without the sole reserve currency and a strong military simply is not a very attractive place for investment and not the ideal safe haven. As one of my friends observed this weekend, it’s now becoming very clear that the U.S. had a phony, illusory economy for the last 3 decades, built on paper and hype. And the only reason it has lasted this long is because we carried the biggest stick and had the only currency in town. When that changes, the U.S. won’t be in a better position than any other “developed” nation, and in fact we actually be in a worse position (at least in the short-to-mid term) because (a) our open space with 300 million (some heavily-armed) will make it difficult to keep order when the machine breaks down, (b) our unprecedented debt will make it harder for us to recover than nations with much less debt and (c) our uniquely heterogeneous population presents significant challenges in allocating limited resources because of competing social interests and cultures.

But hey, I am not predicting the end of the U.S. Far from it. But there’s no way that we will come out of this debacle as a superpower that controls all the chess pieces on the board. This country will simply go dormant for a generation or two while we rebuild, re-orient and re-discover our core values. This will present tremendous opportunities for those born today. Unfortunately, my time horizon is much shorter, and I doubt your or I will live to see this resurgence. So we have to deal with the reality of the coming years and prepare accordingly.

[partypup]

[quote=patientrenter]partypup, a default occurs when the person who is supposed to pay does not pay, not when the person who is owed refuses to accept the payments.[/quote]

I understand your point about a default technically not occurring as long as a debtor is making payments. But a debtor can’t make a creditor accept her payments, and we’re not talking about paying a credit card bill from JP Morgan Chase. If Chase didn’t accept my payment, I would undoubtedly file a claim and bring the matter to court to compel payment and have my debt cleared.

However, there is no such authority that can compel one nation to accept another nation’s intentionally-devalued crap currency as payment for a loan made in good faith. I am just speaking in practical terms. If China (or Russia) decides that a dollar that is worth 50% of what it was when the loan was made no longer constitutes sufficient payment for our debts, then they can and will default us, and there’s nothing I can see that would prevent them from doing so. Who would we appeal to? And if there were an appropriate tribunal, what legal grounds would we have to argue against default? “Yeah, we knew we owed a LOT of money, so we basically just decided to run the printing presses all night and give our creditors something worthless. That’s okay, right?” This is no about a debtor who attempts in good faith attempt to repay a debt and is prevented from doing so. This is about a debtor who has decided to pull the ultimate scam on his creditors. So legally and practically speaking, I don’t think the U.S. has the power or the grounds to resist a default.

[quote=patientrenter]Eventually, the dollar will reach a value that satisfies our foreign trade parties. It’s not going to be zero. I just don’t see why a large devaluation has to go all the way to zero. This is not how these things work historically. The US has problems, but it does have good infrastructure, food and water supply, open space, and other basics of a good modern life. At some point that puts a floor under the value of US assets and even the dollar.
[/quote]

I agree, I can’t imagine the dollar going to zero. But I think a 50-70% devaluation is not unlikely. And I don’t think the dollar would have to go to zero before (a) foreign investment did a U-turn and starting flowing elsewhere (which is already happening now) and (b) the dollar loses its sole reserve currency status. A U.S. without the sole reserve currency and a strong military simply is not a very attractive place for investment and not the ideal safe haven. As one of my friends observed this weekend, it’s now becoming very clear that the U.S. had a phony, illusory economy for the last 3 decades, built on paper and hype. And the only reason it has lasted this long is because we carried the biggest stick and had the only currency in town. When that changes, the U.S. won’t be in a better position than any other “developed” nation, and in fact we actually be in a worse position (at least in the short-to-mid term) because (a) our open space with 300 million (some heavily-armed) will make it difficult to keep order when the machine breaks down, (b) our unprecedented debt will make it harder for us to recover than nations with much less debt and (c) our uniquely heterogeneous population presents significant challenges in allocating limited resources because of competing social interests and cultures.

But hey, I am not predicting the end of the U.S. Far from it. But there’s no way that we will come out of this debacle as a superpower that controls all the chess pieces on the board. This country will simply go dormant for a generation or two while we rebuild, re-orient and re-discover our core values. This will present tremendous opportunities for those born today. Unfortunately, my time horizon is much shorter, and I doubt your or I will live to see this resurgence. So we have to deal with the reality of the coming years and prepare accordingly.

[partypup]

[quote=barnaby33]patientrenter, you should know by now not to stop partypup when he gets wound up. Is entertaining.[/quote]

LOL. I will admit to getting wound up on occasions, Josh, but for the record I’m a woman. But I am glad that I at least provide cheap entertainment for you 😉

[partypup]

[quote=barnaby33]patientrenter, you should know by now not to stop partypup when he gets wound up. Is entertaining.[/quote]

LOL. I will admit to getting wound up on occasions, Josh, but for the record I’m a woman. But I am glad that I at least provide cheap entertainment for you 😉

[partypup]

[quote=barnaby33]patientrenter, you should know by now not to stop partypup when he gets wound up. Is entertaining.[/quote]

LOL. I will admit to getting wound up on occasions, Josh, but for the record I’m a woman. But I am glad that I at least provide cheap entertainment for you 😉

[partypup]

[quote=barnaby33]patientrenter, you should know by now not to stop partypup when he gets wound up. Is entertaining.[/quote]

LOL. I will admit to getting wound up on occasions, Josh, but for the record I’m a woman. But I am glad that I at least provide cheap entertainment for you 😉

[partypup]

[quote=barnaby33]patientrenter, you should know by now not to stop partypup when he gets wound up. Is entertaining.[/quote]

LOL. I will admit to getting wound up on occasions, Josh, but for the record I’m a woman. But I am glad that I at least provide cheap entertainment for you 😉

[patientrenter]

partypup, you are a lawyer, so although you are not an economist, you do know how to take apart transactions.

The basic transaction in international trade that we are discussing here (I think) is the purchase by US consumers of goods made by people in other countries. In return, those people currently accept dollars. Yes, I know they may decide they want more dollars, but they still accept the dollars.

Since these people in other countries don’t consume as much as us, they don’t need to spend all the dollars at once. So they send the dollars back to the US, and buy promises from us to give them more dollars in the future (e.g. through US Treasury bonds).

With China and OPEC and Russia etc holding a few trillion of our US Treasury bonds, and bonds from GSEs like FNMA, they have NO CHOICE about accepting future dollars. They have already made the deal to accept future dollars. All the bonds issued by the US govt and the GSEs are denominated in dollars, so China etc have no options – they must accept dollar interest and principal repayments on the bonds they’ve already purchased from us. That covers everything that’s happened in the past.

Turning to the future, will these foreign exporters continue to accept promises from us of future dollars in return for sending us real goods? If they veer away from that, it will show up first as higher yields on US bonds (but Mr Bernanke will put a stop to that) or a lower foreign exchange value for the US dollar. That will continue for a while (a few years at least.) Only in extremis will it proceed to the next step, where these exporters feel the future value of the dollar is so unreliable that they will not accept ANY AMOUNT of future dollars in exchange for a real good today. Then we will have to issue Yuan-denominated US govt bonds. But that’s years away, if ever.

[patientrenter]

partypup, you are a lawyer, so although you are not an economist, you do know how to take apart transactions.

The basic transaction in international trade that we are discussing here (I think) is the purchase by US consumers of goods made by people in other countries. In return, those people currently accept dollars. Yes, I know they may decide they want more dollars, but they still accept the dollars.

Since these people in other countries don’t consume as much as us, they don’t need to spend all the dollars at once. So they send the dollars back to the US, and buy promises from us to give them more dollars in the future (e.g. through US Treasury bonds).

With China and OPEC and Russia etc holding a few trillion of our US Treasury bonds, and bonds from GSEs like FNMA, they have NO CHOICE about accepting future dollars. They have already made the deal to accept future dollars. All the bonds issued by the US govt and the GSEs are denominated in dollars, so China etc have no options – they must accept dollar interest and principal repayments on the bonds they’ve already purchased from us. That covers everything that’s happened in the past.

Turning to the future, will these foreign exporters continue to accept promises from us of future dollars in return for sending us real goods? If they veer away from that, it will show up first as higher yields on US bonds (but Mr Bernanke will put a stop to that) or a lower foreign exchange value for the US dollar. That will continue for a while (a few years at least.) Only in extremis will it proceed to the next step, where these exporters feel the future value of the dollar is so unreliable that they will not accept ANY AMOUNT of future dollars in exchange for a real good today. Then we will have to issue Yuan-denominated US govt bonds. But that’s years away, if ever.

[patientrenter]

partypup, you are a lawyer, so although you are not an economist, you do know how to take apart transactions.

The basic transaction in international trade that we are discussing here (I think) is the purchase by US consumers of goods made by people in other countries. In return, those people currently accept dollars. Yes, I know they may decide they want more dollars, but they still accept the dollars.

Since these people in other countries don’t consume as much as us, they don’t need to spend all the dollars at once. So they send the dollars back to the US, and buy promises from us to give them more dollars in the future (e.g. through US Treasury bonds).

With China and OPEC and Russia etc holding a few trillion of our US Treasury bonds, and bonds from GSEs like FNMA, they have NO CHOICE about accepting future dollars. They have already made the deal to accept future dollars. All the bonds issued by the US govt and the GSEs are denominated in dollars, so China etc have no options – they must accept dollar interest and principal repayments on the bonds they’ve already purchased from us. That covers everything that’s happened in the past.

Turning to the future, will these foreign exporters continue to accept promises from us of future dollars in return for sending us real goods? If they veer away from that, it will show up first as higher yields on US bonds (but Mr Bernanke will put a stop to that) or a lower foreign exchange value for the US dollar. That will continue for a while (a few years at least.) Only in extremis will it proceed to the next step, where these exporters feel the future value of the dollar is so unreliable that they will not accept ANY AMOUNT of future dollars in exchange for a real good today. Then we will have to issue Yuan-denominated US govt bonds. But that’s years away, if ever.

[patientrenter]

partypup, you are a lawyer, so although you are not an economist, you do know how to take apart transactions.

The basic transaction in international trade that we are discussing here (I think) is the purchase by US consumers of goods made by people in other countries. In return, those people currently accept dollars. Yes, I know they may decide they want more dollars, but they still accept the dollars.

Since these people in other countries don’t consume as much as us, they don’t need to spend all the dollars at once. So they send the dollars back to the US, and buy promises from us to give them more dollars in the future (e.g. through US Treasury bonds).

With China and OPEC and Russia etc holding a few trillion of our US Treasury bonds, and bonds from GSEs like FNMA, they have NO CHOICE about accepting future dollars. They have already made the deal to accept future dollars. All the bonds issued by the US govt and the GSEs are denominated in dollars, so China etc have no options – they must accept dollar interest and principal repayments on the bonds they’ve already purchased from us. That covers everything that’s happened in the past.

Turning to the future, will these foreign exporters continue to accept promises from us of future dollars in return for sending us real goods? If they veer away from that, it will show up first as higher yields on US bonds (but Mr Bernanke will put a stop to that) or a lower foreign exchange value for the US dollar. That will continue for a while (a few years at least.) Only in extremis will it proceed to the next step, where these exporters feel the future value of the dollar is so unreliable that they will not accept ANY AMOUNT of future dollars in exchange for a real good today. Then we will have to issue Yuan-denominated US govt bonds. But that’s years away, if ever.

[Author]

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