Excellent Article

[Anonymous]

[quote=SD Realtor]You also make it sound like the dollar as the reserved currency for the future is going to happen just because it was in the past. Do you really think that cannot change?[/quote]

Of course anything can change, but it comes down to a basic question that needs to be asked in any analysis:

What are the alternatives?

Yeah, someday there may be another currency that has the characteristics to challenge the dollar as a reserve, but today there is nothing even close. The only alternative that ever seemed likely, the Euro, is on the verge of extinction.

I like Rich’s article and generally agree that the magnitude of the debt will overwhelm all other factors in the long run.

However it is very hard to predict timing, and IMO the “long run” may be very long – long enough to invoke Keynes:

In the long run, we are all dead.

[Rich Toscano]

[quote=DomoArigato]Rich’s article is retarded. If interest rates go up, the value of existing U.S. debt will go down and the Federal Reserve can actually buy that old debt back at a cheaper overall cost than if interest rates were to go down or stay the same. This is just a simple present value analysis.
[/quote]

“This is just a simple present value analysis” = Using big words to pretend what you wrote wasn’t nonsensical.

I mean, come on, the value of the debt going down IS the problem I am talking about! And you’re throwing it back like it’s some solution I haven’t thought of, as if that fixes anything. Bizarre.

As for Krugman, he is the equivalent of the 2006-era housing bull, whose entire argument basically comes back to saying just because something hasn’t been a problem yet, it will never be a problem.

[Rich Toscano]

[quote=pri_dk][quote=SD Realtor]You also make it sound like the dollar as the reserved currency for the future is going to happen just because it was in the past. Do you really think that cannot change?[/quote]

Of course anything can change, but it comes down to a basic question that needs to be asked in any analysis:

What are the alternatives?

Yeah, someday there may be another currency that has the characteristics to challenge the dollar as a reserve, but today there is nothing even close. The only alternative that ever seemed likely, the Euro, is on the verge of extinction.

I like Rich’s article and generally agree that the magnitude of the debt will overwhelm all other factors in the long run.

However it is very hard to predict timing, and IMO the “long run” may be very long – long enough to invoke Keynes:

In the long run, we are all dead.[/quote]

The alternative is to not use the dollar as the single reserve currency. A single reserve currency makes things easier, but it’s not required… many countries have already started to set up bilateral agreements to trade in their own currencies.

As for timing, I should clarify that I do have some idea — that it won’t be in the “we’re all dead timeframe.” I’m talking about in the coming years. I simply don’t see it limping along for much longer than, say, 5 years.

Now, will the whole thing start to come undone next month, or will it be 5 years out, or somewhere in between? That’s the part I have no idea about, and despite Domo’s pathetic attempt to make an insult of the fact that nobody can time such things, it’s completely legit to not know, because again: it has to do with psychology, and you can no more predict when the investment herd will change direction than you can time when a shoal of fish will change direction. But you can know when things are reaching the point of inevitability, and I think we are very close (within years).

Hope that clears it up my thinking a bit on the timing question.

[SD Realtor]

pr – I think the only problem with the argument of “what are the alternatives” are quite US centric. I would argue that a country like say China would say the alternative is the yuan or reminbi.

It is perfectly logical to assume (and in reality I believe it is happening) that China wants a bigger slice of the economic pie. I would say it is pretty much central to Beijings strategy. It doesn’t happen fast but over time, say 10-15 years…

Second and just as important, the US has a history and capacity of honoring its obligations. More then anything else this is why we are “safe haven” status. However there can (and I think) will be a tipping point. The spiraling debt service or a strategy of inflating our way out will be recognized and other currencies will be recognized as safe haven status. Agreed with you that is not the Euro but the yuan is looking pretty darn good.

I think that if there were tangible solutions on the horizon I would feel more confident but all I see on the horizon is 65T… I may be gone but my kids will not and that will suck for them.

[earlyretirement]

It will take several years…. The question really isn’t IF it will happen… it’s simply… WHEN.

All you can personally do is be prepared for such a scenario….

[briansd1]

[quote=Rich Toscano]
The alternative is to not use the dollar as the single reserve currency. A single reserve currency makes things easier, but it’s not required… many countries have already started to set up bilateral agreements to trade in their own currencies.

As for timing, I should clarify that I do have some idea — that it won’t be in the “we’re all dead timeframe.” I’m talking about in the coming years. I simply don’t see it limping along for much longer than, say, 5 years.
[/quote]

I believe that China and Japan recently agreed to such bilateral currency agreement.

5 years will be around the the corner really soon.

I personally don’t see a US Dollar currency crisis during that time. I’m bullish on China, in the long run, but I believe that China will experience a combination of a political and economic before we do. That will give us another reprieve.

We’ll see in 5 years.

Speak of George Soros, he has a new book out on financial turmoil.
http://www.nybooks.com/articles/archives/2012/feb/23/how-save-euro/
The solution is certainly not draconian budget cuts.

[briansd1]

[quote=SD Realtor]pr – I think the only problem with the argument of “what are the alternatives” are quite US centric. I would argue that a country like say China would say the alternative is the yuan or reminbi.
[/quote]

[quote=SD Realtor]
Agreed with you that is not the Euro but the yuan is looking pretty darn good.
[/quote]

Allan has accused me of being a “China lover.” I admire the achievements China has made since the 1970s, but I don’t think that are anywhere near reserve currency status.

First of all, the Yuan is not even a freely traded currency. It will take another decade for that to happen.

China also has political problems will be very difficult to solve. We will see if China can workout smooth transitions of power from the older strongmen to the younger generations. Today, the Chinese who are well-educated, well-to-do global citizens are all securing foreign passports as insurance against political upheaval.

I believe that, eventually (don’t know when) the world will evolve to a multi-currency system where the dollar loses its preeminence. Big economies will jointly share management of the world’s economy.

That will be better for the world because a one currency dominated system chronically misallocates resources away from the poorest regions of the world where development is most needed.

[Arraya]

[quote=Rich Toscano]I don’t put a timeframe on it because it’s impossible to put a timeframe on it. The reason it’s impossible to put a timeframe on it is that it comes down to psychology: when will the herd change direction and lose confidence? I just don’t think such things can be timed. They happen when they happen. i don’t agree with your premise (as I read it) that if you can’t put a timeframe on something it’s not worth talking about. It’s worth knowing something is likely to happen so that you can prepare for it, even if you don’t know exactly when it might happen.[/quote]

No doubt, psychology plays a HUGE role. But, really it’s just psychology catching up to the rotten underlying real fundamentals that dictate that sufficient growth is not going to materialize to wipe the debt problems away. I suppose it could go for more than a decade but I doubt it. I think peak oil dynamics will push it along in less than a decade.

[sreeb]

[quote=DomoArigato]Rich’s article is retarded. If interest rates go up, the value of existing U.S. debt will go down and the Federal Reserve can actually buy that old debt back at a cheaper overall cost than if interest rates were to go down or stay the same. This is just a simple present value analysis.
[/quote]

Absent, hyper-inflation, the debt won’t go down that much because it is very short term. Average maturity is ~4 years.

The government is currently borrowing 40 cents of every dollar it spends. We have to borrow or print a lot just to stay in business. We won’t be able to just print enough to just buy back the debt without massive inflation.

[briansd1]

[quote=Arraya] I suppose it could go for more than a decade but I doubt it. I think peak oil dynamics will push it along in less than a decade.[/quote]

So 5 to 10 years is what I have to look forward to to see it all unfold.

Yes, psychology plays a huge part. But if capital is going to flee America en masse, where is it going to go that is safer?

[SD Realtor]

Yes, psychology plays a huge part. But if capital is going to flee America en masse, where is it going to go that is safer?

Brian you make it sound like there is some fixed amount of capital that is needed to keep us afloat when in reality we keep falling further and further behind. It is like a pyramid where there is not any tangible product but you need to keep roping more and more friends in just to keep the churn going. Sooner or later it falls apart. Trying to minimize the problem using justification of what alternatives are there for investment is ridiculous. Money is made by moving it from place to place and constantly seeking better and more solid returns. Those will be found and just because you or I cannot identify them now doesn’t mean they don’t exist or will not exist tomorrow. Also China is working very hard to internationalize the yuan, and you know that.

It doesn’t matter where it goes. Go study the history of the reserve currency. All for the reasons for the dollar as a reserve (including giving the US the ability to penetrate foreign markets) are so far gone it is ridiculous.

The world is waking up.

Raising taxes, cutting spending (draconian or not draconian) will help a little bit but when we have to face dealing with the unfunded entitlements those measures will be nominal at best.

There simply will not be enough to go around.

[Fearful]

I have not read the Q&A following Bernanke’s speech, but I understand via Calculated Risk that Bernanke said the Fed would only slowly reduce the inflation rate as long as unemployment remained up.

Them’s fightin’ words.

[Rich Toscano]

[quote=SD Realtor]Yes, psychology plays a huge part. But if capital is going to flee America en masse, where is it going to go that is safer?

Brian you make it sound like there is some fixed amount of capital that is needed to keep us afloat when in reality we keep falling further and further behind. It is like a pyramid where there is not any tangible product but you need to keep roping more and more friends in just to keep the churn going. Sooner or later it falls apart. Trying to minimize the problem using justification of what alternatives are there for investment is ridiculous. Money is made by moving it from place to place and constantly seeking better and more solid returns. Those will be found and just because you or I cannot identify them now doesn’t mean they don’t exist or will not exist tomorrow. Also China is working very hard to internationalize the yuan, and you know that.

It doesn’t matter where it goes. Go study the history of the reserve currency. All for the reasons for the dollar as a reserve (including giving the US the ability to penetrate foreign markets) are so far gone it is ridiculous.

The world is waking up.

Raising taxes, cutting spending (draconian or not draconian) will help a little bit but when we have to face dealing with the unfunded entitlements those measures will be nominal at best.

There simply will not be enough to go around.[/quote]

Another great post on this topic, SDR… I am in complete agreement with your views on this issue.

I would just add a couple points in your response to Brian that I quoted above:

– Where will capital go? To where it is treated best. For instance, to somewhere where the Central Bank hasn’t just announced it will keep real (inflation adjusted) interest rates steeply negative through 2014, and quite possibly beyond. To a place that isn’t so indebted that a move into positive interest rates would crush the economy. Etc.

– Arguments like “where else will capital go” or “there’s no other option but the dollar” are similar to the housing bubble argument, “people need somewhere to live.” Yes, people do need somewhere to live, but that doesn’t mean it can remain prohibitively expensive to buy real estate — people will find a way around it (in this case renting). And yes, a single reserve currency makes things more efficient, and the US has the history of being a target for capital, but that doesn’t mean it can stay prohibitively expensive to do these things. Again, people will find another option.

[Anonymous]

[quote=Rich Toscano]Again, people will find another option.[/quote]

Not if there are no other options.

And there really are no alternatives to the dollar.

There aren’t any now, and there aren’t any on the horizon.

We can talk about alternatives in the abstract. But at the end of the day, investors must make a choice. And the actual, real world, choices are very limited.

The housing-bubble analogy doesn’t hold: There were plenty of prudent investment alternatives during the bubble. One can eliminate real-estate exposure from a portfolio. It’s much harder to eliminate all currency risk from a portfolio (it can be done, but not without other significant risks…)

Since the world cannot avoid currency altogether, investors will stay with least risky currency (by a long-shot): The US Dollar

[SD Realtor]

pr in general for the very short term I would agree (but alter) your above statement to read:

“Since the world cannot avoid currency altogether, investors will stay with least risky (internationalized) currency (by a long-shot): The US Dollar”

Once the yuan reaches a certain threshold with regards to internationalization I think the game will change in a big way.

I also think that your argument hinges much more on the present then the future. Yes in the real world AT PRESENT, choices are very limited.

I am not arguing about the present but the future. I would argue that if trends of both the US and China continue at current rates, (which is not going to be the case because our debt servicing burden is non linear) that in the real world the choices will not be limited as they are now.

To me the argument that the investment choices are crappy now and will be crappy in the future doesn’t hold at the rates of change we are encountering.

[Author]

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