Blog

A Dollar Crisis in the Making

Tuesday, September 1, 2009, 2:09 PM

In this post, I respond to the recent flurry of activity in print and in blogs about the dollar, US indebtedness, and the risks associated with both.

Mish recently posted a mixed grab-bag entitled Countdown To Dollar Implosion Madness, in which he (very rightly, in my view) took to task various bloggers and other Internet sources that have been peddling rumors of bank holidays and setting specific dates for a dollar implosion.

I don't like trading in unsourced rumors, either by the mainstream media or by bloggers (as they are very nearly always proven wrong), and I am especially leery of setting dates for future market events.  So kudos to Mish for his efforts to hold bloggers to a higher standard.

However, I took exception to a snippet from a WSJ article by Andrew Batson, entitled Households Start to Rival the Chinese in Treasury Market (originally blogged about by Michael Pettis here), that offered the comforting impression that domestic savings are growing and are possibly sufficient to fund the US government deficit.

Where this article attempted to make its claims on the basis of comparing the Treasury purchases of China to those of US households, I saw arguments that were either inconsistent with the data with which I am familiar or were otherwise somewhat misleading. 

For example, we have this:

China is center stage when it comes to fears that buyers will one day spurn U.S. Treasurys. The bond market has been the source of much political theater between the U.S. and China in recent months, with Chinese officials passing up few chances to lecture the U.S. on its profligacy.

But that has obscured an important change: The market for Treasury bonds is now more reliant on U.S. buyers -- including the Federal Reserve after its recent buying spree -- than the Chinese.

This is technically accurate but leaves out the important fact that, according to the Treasury Department, China was not the most important purchaser of Treasuries over the first six months of the current year (2009), but was a distant third place behind the UK and Japan.

(Source - Data is through June, the latest data available)

While I don't want to minimize the fact that China has been an important client, currently holding 23% of all foreign-held Treasuries, its recent purchases have certainly not amounted to much, which makes a comparison to them something of a straw-man argument.  Instead, we might want to analyze the total behavior of the Treasury market before drawing conclusions or impressions about how one sub-group of purchasers is faring relative to another.

As an aside, one reason that I suspect the Federal Reserve is reticent to be audited concerns the UK purchases of Treasury bonds. One might wonder how an island nation that is mired in a deep and profound fiscal crisis finds itself in a position to buy so many Treasury bonds.  Where did the money come from?

While part of the answer lies with the fact that the UK banking center often operates as a pass-through for other entities (like Saudi Arabia, for example), it could also be operating on the behalf of other official parties. Like the Federal Reserve, perhaps?  While that is rank speculation, it would certainly be nice to have a simple audit put such nagging worries completely to rest.

Back to the matter at hand.  According to the Federal Reserve, by the end of Q1, US households amassed $450 billion in Treasury issues, increasing by an incredible $377 billion between the 4th quarter of 2008 and the 1st quarter of 2009.  We might note that this is a volatile data series.

This massive $377 billion increase is so far out of line with any other quarterly data in the series that it strikes me as rather odd.

We might also suspiciously note that $377 billion represents over 93% of total annualized domestic savings for the period in question (so the actual amount of savings for the quarter was only about $100 billion).

(Source)

Why suspiciously?

Because it strains one's imagination to envision that nearly the entire proportion of domestic savings went into Treasury securities, even after allowing that people might have pulled money out of the stock market and tucked it into Treasuries during a nasty spring equity sell-off.

But if all that money went into Treasuries, where did the money come from to pay down so much credit card debt and to buy so many houses with cash, as we saw in that same quarter?

I think I will wait for the next release of the data to see if this massive increase was a statistical fluke or the start of a trend.  Given the decrease in household deposits, credit card debt, increasing retail cash flows to mutual funds, and other measures, I strongly suspect that this incredible increase is not the start of a trend.   We'll see.

But the worst part of the WSJ article was this claim:

The rising budget deficit, which has led to record issuance in recent months, doesn’t necessarily mean the government is becoming more indebted to foreigners.

Well, in fact, it does. A philosophy student might argue that it does not "necessarily" have to be so, but the data we have available is unequivocal on the subject.

Again from the Treasury website, we can analyze the major foreign holders of US Treasuries and develop this chart:

(Source)

What we see here is that foreign holdings of US Treasuries were dead flat for about a year at the start of the decade, but over the past 18 months they have accumulated into foreign hands at the fastest rate on record.  You might also recall that this is the precise period of time associated with the massive budget deficits that won't "necessarily mean the government is becoming more indebted to foreigners" - a bizarrely counterintuitive claim.

If the fastest pace of Treasury purchases by foreign holders on record is not a mark of increasing government indebtedness to foreigners, I certainly don't know what is.

To put this into context, we might also note that where the US government has gone $1 trillion dollars into hock to foreigners over the past 18 months, it took over 350 years to amass the first trillion.

If matching over 350 years of increasing foreign indebtedness over just the past 18 months does not indicate that "the government is becoming more indebted to foreigners," then I don't know what does.

Again, this seems very straightforward and not really subject to sort of confusion that was on display in the WSJ article.  While I understand the temptation to engage in the wishful belief that the US can borrow record-shattering amounts of money while not somehow also mortgaging the entire farm, piece by piece, to foreigners, such thinking flies in the face of both common sense and the data.

My conclusion from all this is that the US has a date with a funding crisis and probably an associated dollar crisis, and increasing foreign indebtedness is an absolutely vital component of that pair of risks.  I assume that the record-breaking pace of foreign Treasury accumulation is not sustainable and that it will therefore stop.  Since it does not seem to want to stop for natural or fundamental reasons, I assume it will stop for some other reason(s), possibly abruptly.

As always, trust yourself. 

P.S. Where is Japan getting all that money from to buy US Treasuries?  Not from thin air, one hopes!

Endorsed Financial Adviser Endorsed Financial Adviser

Looking for a financial adviser who sees the world through a similar lens as we do? Free consultation available.

Learn More »
Read Our New Book "Prosper!"Read Our New Book

Prosper! is a "how to" guide for living well no matter what the future brings.

Learn More »

 

Related content

58 Comments

TimesAwasting's picture
TimesAwasting
Status: Silver Member (Offline)
Joined: Oct 13 2008
Posts: 100
Re: Dollars, Treasuries, and Indebtedness

Chris,

Great read... it appears the world's Central Banks are "Thin Air-ing" money to each other... buying each others debt to keep this ponzi game afloat. One feels that they can't keep this pace up for much longer... without disasterous results!

Seems like we're gonna do a Thelma & Louise pretty soon...

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: A Dollar Crisis in the Making

Dr. M,

I was hoping you would offer a rebuttal to these articles, and you sure didn't let me down. Thank you.

Can you offer any insight to why gold has not responded to all this massive printing by the central banks? 

Thanks in advanced.

joemanc's picture
joemanc
Status: Martenson Brigade Member (Offline)
Joined: Aug 16 2008
Posts: 834
Re: A Dollar Crisis in the Making
cmartenson wrote:

P.S. Where is Japan getting all that money from to buy US Treasuries?  Not from thin air, one hopes!

I'll be darned if I can find it, but I thought I had read the other day in one of the U.K. papers that the new government in Japan wanted to reduce it's investments in the U.S. I wonder if the story has been "misplaced".

Jeff Borsuk's picture
Jeff Borsuk
Status: Silver Member (Offline)
Joined: Jul 25 2008
Posts: 150
Re: A Dollar Crisis in the Making

It seems the Fed has multiple sources for buying Treasury bonds and is using them all. I suspect history writings will not be kind to the shenanigans our country is trying to pull off.  

Jeff

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: A Dollar Crisis in the Making
Jeff Borsuk wrote:

It seems the Fed has multiple sources for buying Treasury bonds and is using them all. I suspect history writings will not be kind to the shenanigans our country is trying to pull off.  

Jeff

+1

Hope they are written by historians and not 1984 NewsSpeak or the mainstream media for that matter.

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: A Dollar Crisis in the Making

Dr. Martenson:

Can you comment on the graph below with regards to the difference that appear to be on display between this graph and the one you have provided showing Treasury accumulations by foreigners?  You graph is unambiguous - foreign purchases are increasing.  On this graph, it seems they are dropping (blue line - it looks hidden behind the red, but it is there and dropping)), though not by much.  The source for this graph (according to the legend) is also the US Treasury.  Thank you.  Link: http://socioecohistory.files.wordpress.com/2009/08/tic.jpg

dander2194's picture
dander2194
Status: Member (Offline)
Joined: Apr 20 2009
Posts: 20
Re: A Dollar Crisis in the Making

History is written by the victors'. In the case of America it is fair to speculate the Chinese will write the history and make those living in the "American Bubble" look as foolish as the a period in the Dutch Golden Age during which contract prices for toulip bulbs reached extraordinarily high levels and then suddenly collapsed.

On a side note, I wanted to know just how many countries in the world are living with high inflation. I found a list from Wikipedia of all the countries in the world ranked by their inflation rate. What I find interesting is that a very high percentage (about 40%) of countries lived with inflation rates of 10% or higher in 2008. Inflation rates are likely much lower around the world in 2009.

Rank  ↓ Country  ↓ Inflation rate
(consumer prices)
(%)  ↓
Date of
information  ↓
1  San Marino -3.50 2008
 Northern Mariana Islands -0.80 2000
2  Niger 0.10 2007 est.
3  Kiribati 0.20 2007 est.
4  Brunei 0.30 2007 est.
5  Central African Republic 0.90 2007 est.
6  Canada 1.00 January 2009 est.
7  Liechtenstein 1.00 2001
 Greenland 1.00 2005 est.
8  France 1.00 2008 est.
 French Polynesia 1.10 2007
 New Caledonia 1.40 2000 est.
9  Spain 1.40 2008 est.
10  Antigua and Barbuda 1.50 2007 est.
11  Netherlands 1.50 2008 est.
12  Sweden 1.60 November 2008 est.
 Mayotte 1.70 2005
 Faroe Islands 1.80 2005
13  Japan 1.80 2008 est.
14  Monaco 1.90 2000
15  Saint Lucia 1.90 2007 est.
 British Virgin Islands 2.00 2005
 Cook Islands 2.10 2005 est.
 Hong Kong 2.10 2008 est.
 Netherlands Antilles 2.10 2003 est.
16  Federated States of Micronesia 2.20 2005
 U.S. Virgin Islands 2.20 2003
17  Bahamas 2.40 2007 est.
18  Switzerland 2.40 2008 est.
 Guam 2.50 2005 est.
19  Mali 2.50 2007 est.
 Montserrat 2.60 2002 est.
20  Dominica 2.70 2007 est.
21  Palau 2.70 2005 est.
 Bermuda 2.80 November 2005
 Wallis and Futuna 2.80 2005
22  Germany 2.80 2008 est.
 Gibraltar 2.90 2005
23  Portugal 2.90 2008 est.
24  Comoros 3.00 2007 est.
 European Union 3.00 2008 est.
 Isle of Man 3.10 December 2006 est.
 Aruba 3.40 2005
25  Montenegro 3.40 2007
 Guernsey 3.40 June 2006
26  Denmark 3.50 2008 est.
27  Algeria 3.60 2008 est.
28  Czech Republic 3.60 2008
 Falkland Islands 3.60 1998
29  Italy 3.60 2008 est.
30  Norway 3.60 2008 est.
31  Austria 3.70 2008 est.
 Jersey 3.70 December 2006
32  Grenada 3.70 2007 est.
 Taiwan 3.70 2008 est.
33  Guinea-Bissau 3.80 2007 est.
34  Tuvalu 3.80 2006 est.
35  United Kingdom 3.80 2008 est.
36  Andorra 3.90 2007
37  Vanuatu 3.90 2007 est.
38  Albania 4.00 2008 est.
39  Ireland 4.00 2008 est.
40  Luxembourg 4.00 2008 est.
 Niue 4.00 2005
41  Finland 4.10 2008 est.
42  Cuba 4.20 2008 est.
43  United States 4.20 2008 est.
44  New Zealand 4.30 2008 est.
45  Singapore 4.30 2008 est.
46  Poland 4.30 2008 est.
 Cayman Islands 4.40 2004
47  Malta 4.40 2008 est.
48  Cameroon 4.40 2008 est.
49  Greece 4.40 2008 est.
50  Belgium 4.50 2008
51  Saint Kitts and Nevis 4.50 2007 est.
52  Belize 4.50 2008 est.
53  Slovakia 4.60 2008
54  Morocco 4.60 2008 est.
55  Australia 4.70 2008 est.
56  South Korea 4.70 2008 est.
57  Israel 4.70 2008 est.
58  El Salvador 4.70 2008 est.
59  Fiji 4.80 2007
60  Bhutan 4.90 2007 est.
61  Republic of the Congo 5.00 2008 est.
62  Djibouti 5.00 2007 est.
63  Tunisia 5.00 2008 est.
64  Gabon 5.00 2008 est.
65  Cape Verde 5.00 2008 est.
66  Cyprus 5.10 2008 est.
67  Benin 5.20 2008 est.
 Anguilla 5.30 2006 est.
 Kosovo 5.30 2007 est.
68  Barbados 5.50 2007 est.
69  Thailand 5.50 2008 est.
70  Brazil 5.80 2008 est.
71  Malaysia 5.80 2008 est.
72  Tonga 5.90 2007 est.
73  China 6.00 2008 est.
74  Samoa 6.00 2007 est.
75  Slovenia 6.00 2008 est.
76  Gambia 6.00 2008 est.
77  Hungary 6.10 2008 est.
78  Saint Vincent and the Grenadines 6.10 2007 est.
79  Cote d'Ivoire 6.10 2008 est.
 Macau 6.20 December 2008
80  Mexico 6.20 2008 est.
81  Solomon Islands 6.30 2007 est.
82  Croatia 6.30 2008 est.
83  Suriname 6.40 2007 est.
 Puerto Rico 6.50 2003 est.
84  Senegal 6.60 2008 est.
85  Peru 6.70 2008 est.
86  Iraq 6.80 2008 est.
87  Serbia 6.80 2007
88  Bahrain 7.00 2008 est.
89  Argentina 7.20 2008 est.
90  Mauritania 7.30 2007 est.
91  Burkina Faso 7.30 2008 est.
92  Equatorial Guinea 7.50 2008 est.
93  Moldova 7.50 2008
94  Colombia 7.70 2008 est.
95  Nepal 7.70 2008 est.
96  Bulgaria 7.80 2008
97  Timor-Leste 7.80 2007 est.
98  India 7.80 2008 est.
99  Romania 7.80 2008 est.
100  Guyana 7.80 2008 est.
101  Bosnia and Herzegovina 8.00 2008 est.
 Saint Pierre and Miquelon 8.10 2005
102  Macedonia 8.40 2008 est.
103  Laos 8.50 2008 est.
104  Ecuador 8.60 2008 est.
105  Chile 8.80 2008 est.
106  Papua New Guinea 8.80 2008 est.
107  Malawi 9.00 2008 est.
108  Madagascar 9.20 2008 est.
109  Uruguay 9.20 2008
110  Philippines 9.30 2008 est.
111  Tanzania 9.30 2008 est.
112  Bangladesh 9.40 2008 est.
113  Rwanda 9.50 2008 est.
114  Togo 9.80 2008 est.
115  Chad 10.00 2008 est.
116  Lebanon 10.00 2008 est.
117  Lesotho 10.00 2008 est.
118  Mauritius 10.10 2008 est.
119  Armenia 10.20 2008 est.
120  Turkey 10.20 2008 est.
121  Saudi Arabia 10.30 2008 est.
122  Namibia 10.30 2008 est.
123  Estonia 10.40 2008 est.
124  Latvia 10.50 2008 est.
125  Uganda 10.50 2008 est.
126  Libya 10.50 2008 est.
127  Nigeria 10.60 2008 est.
128  Panama 10.60 2008 est.
129  Lithuania 11.00 2008 est.
130  Paraguay 11.00 2008 est.
131  Indonesia 11.10 2008 est.
132  Liberia 11.20 2007 est.
133  Mozambique 11.20 2008 est.
134  Georgia 11.30 2008 est.
135  South Africa 11.30 2008 est.
136  Bolivia 11.50 2008 est.
 West Bank 11.50 2008
 Gaza Strip 11.50 2008
137  Kuwait 11.70 2008 est.
138  Sierra Leone 11.70 2007 est.
139  Tajikistan 11.80 2008
140  Zambia 11.80 2008 est.
141  Honduras 11.90 2008 est.
142  Burundi 12.00 2008 est.
143  Dominican Republic 12.20 2008 est.
144  Guatemala 12.20 2008 est.
145  Angola 12.50 2008 est.
146  Oman 12.50 2008 est.
147  Botswana 12.50 2008 est.
148  Swaziland 12.70 2008 est.
149  Maldives 12.80 October 2008 est.
150  Marshall Islands 12.90 2008 est.
151  Afghanistan 13.00 2007 est.
152  Iceland 13.40 2008 est.
153  Uzbekistan 13.50 2008 est.
154  Costa Rica 13.90 2008 est.
155  Russia 13.90 2008 est.
156  United Arab Emirates 14.40 2008 est.
157  Sri Lanka 14.40 2008 est.
158  Trinidad and Tobago 14.50 2008 est.
159  Jordan 14.90 2008 est.
160  Syria 14.90 2008 est.
161  Qatar 15.20 2008 est.
162  Belarus 15.50 2008 est.
163  Haiti 15.80 2008 est.
164  Ghana 16.40 2008 est.
165  Sudan 16.50 2008 est.
166  Democratic Republic of the Congo 16.70 2007 est.
167  Egypt 18.00 2008 est.
168  Eritrea 18.00 2008 est.
169  Yemen 18.00 2008 est.
170  Turkmenistan 18.00 2008 est.
171  Kazakhstan 18.60 2008 est.
172  Cambodia 20.20 2008 est.
173  Nicaragua 20.60 2008 est.
174  Pakistan 20.80 2008 est.
175  Azerbaijan 21.60 2008 est.
176  Jamaica 22.50 2008 est.
177  Kyrgyzstan 22.50 2008 est.
178  Vietnam 24.50 2008 est.
179  Ukraine 25.00 2008 est.
180  Kenya 25.50 2008 est.
181  Seychelles 25.80 2008 est.
182  Sao Tome and Principe 27.00 2008 est.
183  Burma 27.30 2008 est.
184  Saudi Arabia 28.00 2008 est.
185  Mongolia 28.00 2008 est.
186  Iran 28.00 2008 est.
187  Guinea 30.00 2008 est.
188  Venezuela 31.00 2008 est.
189  Ethiopia 41.00 2008 est.
190  Zimbabwe 11,200,000.00 2008 est.
strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: A Dollar Crisis in the Making
joe wrote:

I'll be darned if I can find it, but I thought I had read the other day in one of the U.K. papers that the new government in Japan wanted to reduce it's investments in the U.S. I wonder if the story has been "misplaced".

Much like in the US and the UK, the Japanese government has little say on what the BOJ does.  Just like the Fed tells both of our parties what to do, if the new Japanese officials actually had new ideas, no doubt they've received their lecture from BOJ representatives behind closed doors.  

We gotta remember the banks run the governments, especially given their hyperleveraged positions now, which of course means they run the people too.  Remembering this, rather than thinking the central banks are making decisions in the interest of their people, will help us decipher what they're doing.  They're setting up a BIG trade that a few power people are going to profit massively from while the rest of the world loses, and in the meantime they get the side benefit of bringing the US down to size and trying a regional/global monetary system when the $ needs to be replaced.  If you can figure out the trade they're setting up, you'll do well with them.  Anybody have ideas, having seen the details on the shell games CM is reporting, what the longer-term trade might be?  It's not a simple $ short...if the $ disappears, shorts don't get paid.  

strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: A Dollar Crisis in the Making
jeff wrote:

It seems the Fed has multiple sources for buying Treasury bonds and is using them all. I suspect history writings will not be kind to the shenanigans our country is trying to pull off.  

Just to be precise...it's not "our country"...it's "the powers behind the central banks" (just look at CM's data...this stuff is being done by banks or their stooges like Geithner, not governments)...though when history is written, the country and some politicians will be blamed, just like Hitler and the Nazis were after the global bankers destroyed Weimar (must add the obligatory footnote:  Hitler was horrific, as the polish jewish side of my ancestral family was exterminated, so I'm not saying he was unfairly blamed...I'm just saying the disaster from which Hitler emerged was setup by financiers a decade or so prior)

 

 

knldgskr's picture
knldgskr
Status: Member (Offline)
Joined: Jun 17 2009
Posts: 2
Re: A Dollar Crisis in the Making

Re: where is Japan getting the money?  The chart is one of those damn percent change things which can be very misleading.  If Japan had very little and then increased a little it would show up as a large percent increase. 

plantguy90's picture
plantguy90
Status: Gold Member (Offline)
Joined: Jan 26 2009
Posts: 271
Re: A Dollar Crisis in the Making

The only difference between what CM is saying and what the bloggers he took to task are calling for is that some bloggers have chosen a date or period, namely the 3rd and 4th quarters.  Lets see what rabbits the govt has up their sleeve.  I agree with Strabes, the plug will be pulled by the senior banking cartel.  Personally, I am not betting on the dollar getting another reprieve; CM's chart showing the bankrupt UK has been the major buyer is an eye-opener to say the least, since they are the ultimate shills.   To think that only Anglo's have the brains to see the fix is downright naive and wishful thinking.  Be safe everyone...

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: A Dollar Crisis in the Making
plantguy90 wrote:

Personally, I am not betting on the dollar getting another reprieve...

I wonder what will or would happen if the stock market went down first. Would there be a preceived flight to safety? Would that strengthen the USD? I also remember when all the settlements took place last fall, there was a strong demand for the dollar to do those transactions.

I do agree, the Uncle Buck is a dead man walking. I think, almost without any doubt that if the banks go first then it is a goner.

Who knows though?

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: A Dollar Crisis in the Making

While I thought Dr. M's analysis was excellent, I think it is a mistake to infer an eminent dollar collapse from it. When was the last time something of this magnitude was foreseen by so many? Never? With a dollar sentiment index of 3% bulls, how likely is it that the current decline in the USD is proceeding an all out crash? Not very likely in my experience.

I think we all know the dollar is doomed, but right now is the time to be bullish on the dollar. We are not seeing a significant rise in oil or gold, so if the smart money is getting out of the dollar, where are they moving their capital to?

I'm sorry for a dissenting opinion and I mean no disrespect to anyone, but as Dr. M advises, I have to trust myself on this one. Its just one lonely opinion.

ejanea's picture
ejanea
Status: Bronze Member (Offline)
Joined: Oct 2 2008
Posts: 53
Re: A Dollar Crisis in the Making

If the billionaire cartel members are planning to maintain their assets after a collapse,  could they be sending money out of the country?... and where would that be seen?  the  and is it enough to make the balance of payments look different?  

Nothing surprises me now.

bluebird's picture
bluebird
Status: Bronze Member (Offline)
Joined: Sep 4 2008
Posts: 75
Re: A Dollar Crisis in the Making

Jag, I don't think the dollar will collapse soon either. In my simple brain, I think the dollar will be around for awhile. Currently, it is the world's reserve currency, so just about everyone uses it. I think Bernanke will save the dollar to the detriment of the stock market. Eventually, as everything else collapses, so too will the dollar. Time will tell.

 

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: A Dollar Crisis in the Making

JAG,

I reach the same conclusion, and though I don't arrive at it through market sentiment, that just adds to my confidence.  I do see a US Government deficit funding crisis, but not a dollar crisis just yet.  Other countries are experiencing similar or worse conditions.  Most debt is dollar denominated, not just ours.  If there is a global funding crisis, dollars will be more sought-after.  Even if the Fed/Treasury duopoly creates more FRNs, that inflation will take time to work its way throughout the globe.  One of the lessons of the Crash Course is that inflation benefits the counterfeiters and those receiving the money the soonest the most, and and hurts everyone else in a progressively worse fashion the further they are from the point of origin.  

Finally, I find Dr. Martenson's research to be flat-out awesome.  You cannot beat raw data analysis, and he is the raw data hound!

plantguy90's picture
plantguy90
Status: Gold Member (Offline)
Joined: Jan 26 2009
Posts: 271
Re: A Dollar Crisis in the Making

Call me a cynic, but in order to maximze the theft of everyone's wealth, what I expect is a massive whipsawing of the markets, enough to put the fear into all of us in order to make us outsiders capitulate and give up ALL our positions at the worst possible moment.   So my strategy is to stick with the same assets that they are ultimately after, get back to my business, and forget about them.  They are front-running everyone's trades, shaving their cut at every turn.  Do they want paper dollars in the end?

Morpheus's picture
Morpheus
Status: Diamond Member (Offline)
Joined: Dec 27 2008
Posts: 1200
Re: A Dollar Crisis in the Making
JAG wrote:

Dr. M,

I was hoping you would offer a rebuttal to these articles, and you sure didn't let me down. Thank you.

Can you offer any insight to why gold has not responded to all this massive printing by the central banks? 

Thanks in advanced.

Because the precious metal markets are criminally manipulated.

Nice letter from a law firm to the CFTC in 2008 over precious metal manipulation in the COMEX

http://news.silverseek.com/SilverSeek/1212764222.php

Ironsun's picture
Ironsun
Status: Member (Offline)
Joined: May 11 2009
Posts: 1
Re: A Dollar Crisis in the Making

Japan got his money from the surplus on exports, so this is why they could run in red and with 0 % interest without collapse.But the Yen is now strong and the japa guys hate his, they want the carry trade back.

USA is trying the same thing without trade surplus... so ... USA will collapse.

memorrison's picture
memorrison
Status: Bronze Member (Offline)
Joined: Apr 16 2008
Posts: 90
Re: A Dollar Crisis in the Making

I have to agree with JAG - I am bullish on the dollar in the short term... with so many betting against it, the majority is wrong more times than not.  When this market starts to fall and fall big, people are going to move into a "perceived" safety play of the dollar via treasuries.  In my opinion, the US dollar is doomed, but it is still perceived as the best looking horse in the glue factory! 

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5568
Re: A Dollar Crisis in the Making

Let me reiterate my position: "My conclusion from all this is that the US has a date with a funding crisis and probably an associated dollar crisis, and increasing foreign indebtedness is an absolutely vital component of that pair of risks."

I think I see things backwards from a few others here.  I don't see a dollar crisis as a cause, but as an effect.

I am convinced the US has a date with a funding crisis.  Full stop.  Discuss.

Next, I cannot conceive of how a funding crisis can be resolved without an associated currency crisis.  They go hand-in-hand like Argentina in 2001 or Mexico in 1984 or... etc., etc., etc.

Timing?  Here I really have no particular position on the short or even intermediate term direction of the dollar or any other currency because they are all manipulated to an incredible degree by central banks.  This is not idle speculation, they write papers about how to do it best and post them to the BIS website.  I've read them.

The issue for me comes down to merely trying to assess when the strain of propping the current US fiscal nightmare grows too large for the other central banks.

My hypothesis is that such a break will happen like a pencil snapping - all at once and rather suddenly.  Right now I view the pencil as heavily strained and flexed but obviously not yet broken.  3% ten year yields and 0.24% 6-month yields tell us that the US government is not yet out of borrowing room.

But is the US insolvent?  Yes.  Is the US government borrowing at unsustainable levels?  Yes.  Will the US government willingly stop borrowing too much money on its own?  No.  Does the US government therefore have a date with a funding crisis?  Yes.  Is the chance of an attendant dollar crisis high or low?  High.  Very, very high.

 

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: A Dollar Crisis in the Making

Dr. M,

Thank you for all your research and for reiterating your conclusions.  I understand what you are saying and understand the research.

However, I see some big differences between the dollar and the Argentine and Mexican Pesos.  Holders of those countries' currencies could not use  them for anything other than to buy Mexican or Argentine products.  When each of those governments decided to print their way out of their funding crisis, foreigners naturally dumped the currencies, noting that the only things they could buy with them, namely products from each of those countries, would hyperinflate - making whatever amount of the currency they were holding worth less.  The flood of each currency re-entering each country created a double-whammy hyperinflationary effect - adding to what the government was already printing.

In contrast, the US dollar is not just accepted in the US.  It is the world's currency and is accepted everywhere.  It is also the currency in which the vast majority of debt - both public and private, is denominated - debt that is getting ever more difficult to pay as the global economy and the outflow of dollars from the US has slowed to a trickle.  They can be used to pay off debt, which is not a choice - debt must be paid off, so demand for dollars must exist at least until debt is paid off.  Besides debt, dollars can be used to purchase any commodity from any country, including oil.  Thus, despite the Fed/Treasury money creating binge, those dollars are still finding "homes" other than US goods and services which are still not rising in price.  Debt is still payable in dollars, and dollars are still accepted everywhere.

I fully agree the dollar is toast long-term.  Before there is a currency crisis, however, and in my humble opinion, we should see creditors (both public and private) demand some other form of payment other than dollars, and start seeing commodities start trading in something other than dollars.  Until then, our situation is really far different from that seen in Argentina, Mexico, and other self-inflicted victims of hyperinflation, because our currency is not good just here at home - it is good throughout the world.  They did not have the incredible advantage of being world reserve currrencies.  Right now, it is hard to imagine anyone demanding another form of payment other than dollars.  China is trying to get others to accept their Yuan, but who in their right mind would prefer Yuan to dollars?  Even with all our profligacy, other countries currencies are perceived to be even worse. 

Anyway, just my two cents and me trusting myself.  Thanks again for all your work.

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: A Dollar Crisis in the Making
cmartenson wrote:

Let me reiterate my position: "My conclusion from all this is that the US has a date with a funding crisis and probably an associated dollar crisis, and increasing foreign indebtedness is an absolutely vital component of that pair of risks."

I think I see things backwards from others here.  I don't see a dollar crisis as a cause, but as an effect.

I am convinced the US has a date with a funding crisis.  Full stop.  Discuss.

Next, I cannot conceive of how a funding crisis can be resolved without an associated currency crisis.  They go hand-in-hand like Argentina in 2001 or Mexico in 1984 or... etc., etc., etc.

Timing?  Here I really have no particular position on the short or even intermediate term direction of the dollar or any other currency because they are all manipulated to an incredible degree by central banks.  This is not idle speculation, they write papers about how to do it best and post them to the BIS website.  I've read them.

The issue for me comes down to merely trying to assess when the strain of propping the current US fiscal nightmare grows too large for the other central banks.

My hypothesis is that such a break will happen like a pencil snapping - all at once and rather suddenly.  Right now I view the pencil as heavily strained and flexed but obviously not yet broken.  3% ten year yields and 0.24% 6-month yields tell us that the US government is not yet out of borrowing room.

But is the US insolvent?  Yes.  Is the US government borrowing at unsustainable levels?  Yes.  Will the US government willingly stop borrowing too much money on its own?  No.  Does the US government therefore have a date with a funding crisis?  Yes.  Is the chance of an attendant dollar crisis high or low?  High.  Very, very high.

I thought your report above was a 9.98 our of 10. This snippet is a 20! (On a scale of 1-10)

crazyhorse's picture
crazyhorse
Status: Bronze Member (Offline)
Joined: Nov 16 2008
Posts: 56
Re: A Dollar Crisis in the Making

Chris,

Are you increasing your holding of PM's due to this observation? 

Historically I've read where one needs to keep around 5% to 15% of one's wealth in PM's.  If we indeed are headed for a currency crisis, would you recommend that percentage increase to 30% - 50% or some other percentage?

 

plantguy90's picture
plantguy90
Status: Gold Member (Offline)
Joined: Jan 26 2009
Posts: 271
Re: A Dollar Crisis in the Making

FB,

My simple mind just does not fully understand your hypothesis on the dollar.  Please bear with me.  When you say debt denominated in dollars, what kind of debt ?  Major construction projects?  Sovereign debt?  Local demand deposits?  Is this debt long or short in duration?

Also, when you say "that the outflow of dollars from the US has slowed," how does that happen/work?  And isnt that trend reversible in the blink of an eye?  When you buy a t-bill, you can get dollars in 3 months, no?

You have a very good point that even though the US is acting in a very untrustworthy manner, other countries have even built up less "trust capital," amazing that the US has defaulted twice in history and still maintains that trust.

 

 

mainecooncat's picture
mainecooncat
Status: Gold Member (Offline)
Joined: Sep 7 2008
Posts: 488
Re: A Dollar Crisis in the Making

Good observations, FB. Some thoughts.

FB wrote: "Right now, it is hard to imagine anyone demanding another form of payment other than dollars."

Well, that may be our problem right there: a lack of imagination. That something is hard to imagine is not in and of itself an argument -- as I'm sure you well know, FB, nor is it a true barometer of actual likelihood. Most events of the past eighteen months were hard to imagine eighteen months ago.

FB wrote: "China is trying to get others to accept their Yuan, but who in their right mind would prefer Yuan to dollars?  Even with all our profligacy, other countries currencies are perceived to be even worse."

Again this is an area of relative perception. Meaning, are the "other" currencies actually worse or just "perceived" to be by a world stuck in an old paradigm (I noticed you used this caveat here, so maybe even in your own mind you're questioning this statement). I would think because of the inevitability of the US' financial situation that any country who is a creditor and has a decent manufacturing base would be more appealing -- though in the end there'll probably be a new reserve basket of currencies. Isn't it dangerous and inflexible only having one in the first place anyway?

As far as debt and deleveraging go and the dollar holding up until dollar-denominated debt is taken care of, doesn't this presuppose that said debt will/can actually be paid off? It seems to me that most of this debt will not be paid off (mathematically can't be in many cases), perhaps positioning us closer to a final deleveraging than you think. The phrase "cutting your losses" is seeming as apropos as ever these days.

A contrarian view I hold is that the threat of the US military and economic sanctions/blackmail levied through proxy organizations such as the UN, World Bank, and IMF is as much reason for the dollar's strength as any so-called market fundamental.

I also think a view that I see some hold that is terribly misleading -- though admittedly not much here -- is this black and white idea of a dollar crash being bad and a propped up dollar being good. Whether the dollar collapses or not the average American is up the creek. And whether it's deflation or inflation, the average American is still up the creek. Why? Well, because much of these discussions are theoretical -- albeit with some real-world translation -- and very relative. So for example, deflation or a strong dollar doesn't help out Joe Average if he's still making what he made when milk cost $1.50/gallon or if he's unemployed. Deflationists often jump into the mode of, "Well, now that my dollar buys more..."

Most of these discussions also do not take into account scarcity or pricing forces driven on the supply end -- they tend to assume most things to be plastic widgets of which there are an infintie amount. So, as I've said before, we could be stuck in a world that screams theoretical deflation while all around everything we really need is skyrocketing in price -- energy, food, petroleum-products (say, like asphalt roofing materials, etc.).

 

 

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: A Dollar Crisis in the Making

Plantguy:  When I refer to ex-US public/private debt, I am referring to any private or public debt denominated in dollars.  Do you ever read a financial headline announcing a corporate merger or acquisition in a currency other than dollars?  Yes, there are some in Euros, but for the most part they are in dollars. 

Commodities purchasers borrow the capital they need to secure futures contracts in dollars, and commodity suppliers borrow dollars for further exploration and exploitation of resources. 

Countries lend to each other in dollars. IMF and the IDB make billions of $ worth of loans to developing countries- in dollars.

Private parties price and demand payment in dollars in many non-US dollar currency nations.  In my country (Costa Rica), for instance, all major and many minor contracts are priced in dollars.  My cable-tv bill is quoted in dollars for example.  Colones are accepted, but the price quoted is in dollars and they are immediately converted to dollars by those receiving them.  Speaking of CR, we took on a $300 million loan from China just a few years ago - even the Chinese must lend in dollars! 

Granted, these are all anectodal examples, and I wish I had the data mining skills of Dr. M to back all this up, but everything I see seems to point to quite a bit of dollar-denominated debt out there. 

What about the empty skyscrapers in Dubai, and all over China?  Who financed them?  In what currency?  What about the major infrastructure projects in Europe?  I was recently in Madrid's airport and for a moment I thought I was in the Taj Majal.  The display of excess and luxury was overwhelming.  Maybe the bonds used to finance that debt is in Euros, who knows.

 

Maine Coon:  You are absolutely right in that my arguments are based on mental exercises of logic (or lack thereof!).  I do not have any data, just my perception of what is going on, and I do not pretend otherwise. 

When I say it is hard to imagine anyone accepting Yuan it is because the only thing you can buy with Yuan are Chinese goods and services.  Accepting Yuan for payment is akin to partnering with a non-transparent government that despite its recent succeses, still censors freedom of speech, does not allow true property ownership, and runs a state-mandated economy.  Now I fully admit the US puts on a facade of transparency, and has no doubt been manipulating the markets and its reporting of its economy for decades.  However, the world "knows" the American and the US.  There is an inherent trust there that, while possibly undeserved at this point, will take some more time to tarnish and decay.  More importantly, the dollar is accepted everywhere.  It is the bully in the world pond, and the odds are heavilly stacked against any other currency taking its place.

Quote:

Again this is an area of relative perception. Meaning, are the "other" currencies actually worse or just "perceived" to be by a world stuck in an old paradigm

The other currencies are worse.  China is printing Yuan the same way it pumps out $1 toys.  All currencies are derivatives of the dollar.  Again, it may not be fair, and we certainly do not deserve the cushion the coattails of our currency status have afforded us, but that is the way things still stand up to now, and until dollar-debt is extinguished, I so not see demand for dollars decreasing.

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: A Dollar Crisis in the Making

Perhaps I spoke too soon with my inquiry about gold. It does seem to be making a move higher over the last 24 hours. Given the content of this thread, and  Mish's latest post:

So What's Behind Moves In Gold?

(and favorable sentiment indications), perhaps its time to add to my gold allocation, something I haven't done for several months. I have been waiting for another de-leveraging (crash) event to increase my PM allocation, but I'm starting to think that might be a ways off. And besides, dealer premiums are relatively low now.

Still, the current price is very hard to swallow.

 

presentmoment's picture
presentmoment
Status: Bronze Member (Offline)
Joined: Sep 22 2008
Posts: 57
Re: A Dollar Crisis in the Making

Farmer Brown,

I do really appreciate your postings!  It is so nice to see discussions between you and Maincooncat. 

I think you hit something when you talk about "an inherent trust" in the US by the world in comparison to non-transparent Chinese government.  I think the US is getting extra extra credit than it deserves right now from many good deeds done by the previous generation of Americans such as defeating nazi Germany and imperial Japan, thereby liberating so many people around the world and then rebuilding Europe and Japan.    The way I see now, it seems this country has been hijacked by an oligarchy and the Wall Street...  I hope this county can reclaim some of the best it has shown to the world previously.

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: A Dollar Crisis in the Making
JAG wrote:

Perhaps I spoke too soon with my inquiry about gold. It does seem to be making a move higher over the last 24 hours. Given the content of this thread, and  Mish's latest post:

So What's Behind Moves In Gold?

(and favorable sentiment indications), perhaps its time to add to my gold allocation, something I haven't done for several months. I have been waiting for another de-leveraging (crash) event to increase my PM allocation, but I'm starting to think that might be a ways off. And besides, dealer premiums are relatively low now.

Still, the current price is very hard to swallow.

 

Gold doesn't go up or down. Gold is a store of value. So was the dollar. The gold I purchased in 2002 can buy as much then as it can today. The dollars I saved from 2002 can't. 

Store of value.

 

SteveS's picture
SteveS
Status: Gold Member (Offline)
Joined: Sep 6 2008
Posts: 358
Who has been pushing up stocks?

I really like to see these reporst taht show what is behind all the reported numbers. And this brings up a question that has me perplexed: Is it possible to see who has been buying into the stock market over the past few months? Are there statistics on large vs. small buys, institutional vs private, etc. I just find it hard to believe such a rapid rise can happen with no obvious bubble to push it up. It's not like there is something out there that this motivating people like a new technology or rising construction. So who is buying?

memorrison's picture
memorrison
Status: Bronze Member (Offline)
Joined: Apr 16 2008
Posts: 90
Re: A Dollar Crisis in the Making
cmartenson wrote:

My hypothesis is that such a break will happen like a pencil snapping - all at once and rather suddenly.  Right now I view the pencil as heavily strained and flexed but obviously not yet broken.  3% ten year yields and 0.24% 6-month yields tell us that the US government is not yet out of borrowing room.

But is the US insolvent?  Yes.  Is the US government borrowing at unsustainable levels?  Yes.  Will the US government willingly stop borrowing too much money on its own?  No.  Does the US government therefore have a date with a funding crisis?  Yes.  Is the chance of an attendant dollar crisis high or low?  High.  Very, very high.

 

I agree we are heading toward a funding crisis.  Simplistically, we have two choices to "entice" people to buy our debt:  1. Let interest rates rise or 2. let the dollar devalue.  The Fed. has already stated they want to keep rates low and for good reason.  All future debt (ie mortgages, car loans ) are set based on current interest rates.  If rates are allowed to rise, the socalled "rebound" in home sales could slow or stop if mortgage rates get back over 6% .  So in my mind the only thing we can do is to let the dollar devalue so our debt is a little more attractive than the rates would suggest.  The problem, as I see it,  as the markets are selling off around the globe this week, the dollar is strengthening - and our treasury rates are dropping. 

The US dollar is perceived as a "safe" investment.  But for how long? Like I said before, out of all of the worlds Fiat currencies, it is perceived as the best looking horse in the glue factory.  If the dollar continues to strengthen and rates continue to drop, the funding crisis may be  closer than any of us would guess.  A low interest rate and a higher dollar does not entice foreign money to buy our debt. 

I know there are a lot of variables, but in my simple mind, these are the main points but I think I am missing something...?

yagasjai's picture
yagasjai
Status: Martenson Brigade Member (Offline)
Joined: Apr 18 2009
Posts: 59
Re: A Dollar Crisis in the Making

STRABES:

Just to be precise...it's not "our country"...it's "the powers behind the central banks" (just look at CM's data...this stuff is being done by banks or their stooges like Geithner, not governments)...though when history is written, the country and some politicians will be blamed, just like Hitler and the Nazis were after the global bankers destroyed Weimar (must add the obligatory footnote:  Hitler was horrific, as the polish jewish side of my ancestral family was exterminated, so I'm not saying he was unfairly blamed...I'm just saying the disaster from which Hitler emerged was setup by financiers a decade or so prior)

I would like to know more about this. Can you recommend any books, articles or resources?

Headless's picture
Headless
Status: Gold Member (Offline)
Joined: Oct 28 2008
Posts: 363
Re: A Dollar Crisis in the Making

It's...uh...well...let's say...dissapointing to see references to the U.S. as having a reserve of "trust" in the worldwide community.  I can only say that those who are claiming that the U.S. still has some elevated status as a country worthy of admiration and emulation--and  as a place to put one's Actually-earned wages--seem to have spent not a minute with any of those People  that are presumed to hold such opinions.

The average citizen in Asia is fully ready to "burn the exploitative capitalist dogs." It's the governments (Asian) who understand 'The Art of War' (they invented it) and how the "wretched enemy" will be decapitated.  Thus, the "quiet" reorganization of the Asian Industrial Machine; something that has an innate speed limit; one which is painfully slow for an internet-enlightened Asian population that understands--FAR TOO WELL--the exploitation that has been visited upon them by a corrupt American Oligarchy, aka, Goldman Sachs and its subsidiary, the legislative and "executive" branches of the New Third World.

A little information for the America bound (as in those who wouldn't even know where to go to get a passport):

  •  
    • Asians make houses out of bricks and concrete; Americans make houses out of sticks out in the sticks.
    • Asian high school students spend 12 to 18 hours a day studying; American students attend classes--some of the time.
    • Asian parents think the greatest responsibility of a parent is to focus all available time, energy, and finances on their children's education; American parents can't wait until their kids turn eighteen, as they can legally kick them out of the house at that age.
    • Asian families are often three or more generations deep at all times during a child's upbringing, which means that there is, by definition, an inescapable love of family that any child must reasonably respond to by doing the absolute best he or she can do in every way; American kids have keys to get in the house when they get home.
    • Asians  have dreams of contributing to the wealth of their nations; Americans have delusions of wealth and a wealth of delusions.

Of course, I generalize. But  that is why statistics was invented; i.e., to declare when "Values" are so far removed from the Average that they can be considered "Outliers" and, thus, unworthy of consideration...

memorrison's picture
memorrison
Status: Bronze Member (Offline)
Joined: Apr 16 2008
Posts: 90
Re: A Dollar Crisis in the Making

Headless-

 

You bring up some very good points, but they seem to relate to family values rather than the Yuan vs the Dollar.  I could not agree with you more about the work ethic, schooling and such, but it does not address why people "currently" still invest back into the dollar when a "downturn" in the markets occur.  The current market sell off strengthened the dollar against a lot of major currencies.  I do not understand nor agree with it, but it is still the perceived "safe" currency and still the reserve currency of the world.  I do not believe for very long.  The world and most importantly China is pulling away from us, via contracts with other countries for trade in non-us dollars.  But overall, most of the worlds trade is still in US dollars.  Help me understand your point, because your first sentence is very  condescending.  Your points state that China is better organized, schooled and has better houses than the US, so we are going to be using Chinas currency soon?

Headless's picture
Headless
Status: Gold Member (Offline)
Joined: Oct 28 2008
Posts: 363
Re: A Dollar Crisis in the Making

memorrison,

My apologies for the first sentence "seeming" (it was) condescending: I have been in these conversations about the way the world perceives the U.S. with so many people that have never been out of the U.S. that I don't have anything left but ire for that type of encounter.

I understand that I don't know some things, I understand that there are things I don't know that I  don't know, and I know that I am guilty of representing Twain's maxim with inimitable stupidity: "...what you know for sure that just ain't so..."; thus, I actually do try to stay within the boundaries of my experience so that I don't waste people's time, look stupid, and get angry at myself.

To the  point--my point that bounced off of the point of the conversation here: Those people who have bought the sanitized story about the U.S. as a force for good in the world--especially those that don't have passports--Are The Problem!

What?

Well, when is a problem generally addressed? Well, depending on a, b, and ... sometime after it becomes one; not before. We are in serious need of one of those five-stages-of-grief processes here in America (to address the problem), yet we can't get past denial because we don't know what we don't know, and what "we" know "just ain't so..." ; and to say we "have no interest" in knowing would be like saying we have no interest in denying the existence of the "Celestial Teapot"; that is to say, we (Americans, in general) aren't even aware that there is something to deny; thus there really is no culpability  on the part of the average MSM-cocooned  U.S. citizen; no way to say: "Hey! You should be apologizing for the sins of your fathers because humble is the only thing that will save you from a forward-marching world of hard-working people (Asians) that have come to perceive you as fat, lazy, dumb, and pampered by virtue of having a corporo-government that has been out sacking the rest of the world  for the last 100 years and is only ramping up its efforts as of late. Yes, be humble, and we will show some lenience in the sentencing phase of the trial..."

The problem is, in contrast to the Celestial Teapot,  there is something to deny (in the 5-stages sense), and we need to get busy denying now so that we can get started on the other four stages of the process and move on to assemble the New American Paradigm that replaces the old one of World-Wide Exploitation.

The Dollar: Picture an Asian (graying Japanese gentleman, for example)  that works in a factory building widgets for export to the world. Imagine him watching the nightly news while his son, who is studying to be a diplomat and who is headed toward the best university in Tokyo next semester, is dutifully studying in the small bedroom that he shares with his sister; a sister who is also studying , but in her case, to be a banker. The man  has recently been warned that if exports fall more than X-percent this year, the company will have to lay off a portion of the employees; he is one of them.

As he watches the nightly news, the anchor explains that exports are down X+ percent due to the losses various countries are suffering as a result of investing in toxic American financial products. The man realizes he will lose his job and will not be able to support  the educational efforts of his children as is the duty of every good parent--unless...

The children (high schoolers) are diligently studying in the quiet apartment. The man turns off the television and softly crosses the room and opens an ancient wooden chest that has been passed down through the family since the beginning of the Tokagawa Period; it is charred on one end from the fire bombing of Tokyo in World War II. He kneels before the chest and slowly lifts the top, softly leaning it against the wall behind. From within the chest, the man removes a red pad which he placed there some few nights before ("So that it will not be as horrific in appearance..."). He then reaches in and removes an item that will only ever be used once: a knife with which he will perform Seppuku, thus "doing the honorable thing."

He reaches in again and slowly, with a solemn look of shame, almost cowering, lifts an old black-and-white photo that has no frame; it is rigid and yellowed with age, but it is not damaged. He apologetically, eyes to the floor, thanks the man and woman who are in the photo; an expressionless couple who stand beside each other in traditional dress below a blossoming cherry tree. He apologizes for his failure, for the efforts that they made--with hope--on his behalf. He gently returns the photo to  the chest without looking up at it, closes the chest, stands up with the knife in one hand the red mat loosely hanging from the other, and walks to the center of the dimly lit living room, where he carefully places the mat, kneels, holds the knife before him with elbows wide, and draws the knife from its diminutive scabbard...

His children have fallen asleep studying; they are awakened the next morning by the sobbing of their mother...

They go on to become a diplomat and a banker...

This is a bit of theatre, melodrama. But the emotions that the children experienced in this story is a fair representation of what children who are truly loved are feeling when they see their loving parents suffer the injustices inflicted by a "a government of criminals" half a world away.

My point: The dollar lives by perception; it is dying by perception now. Just because the average American has no knowledge of the shift in perception that is occurring, doesn't mean it is not  occurring. Every day more Asians with a very different perception of American "integrity" are entering the workforce and key positions in government, etc...

The dollar is beginning to be equated with a Hara Kiri knife...

 

DrKrbyLuv's picture
DrKrbyLuv
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 1995
Re: A Dollar Crisis in the Making
cmartenson wrote:

P.S. Where is Japan getting all that money from to buy US Treasuries?  Not from thin air, one hopes!

Could the run up be partially explained by Japan's currency carry trade?

The BOJ has been running zero interest rates in Japan for around 10 years.  Big players (central banks, hedge funds, insurance companies, etc) were borrowing Yen at 0% and then buying US treasuries at about 3%, for a net gain of 3%.  Free money, not a bad deal.

This theory makes sense, at least until Oct 08 when China stopped the carry trade by buying lot's of Yen.  But it looks like the run-up continued after that period so that kinda pokes a hole in my theory.

joemanc wrote:

I'll be darned if I can find it, but I thought I had read the other day in one of the U.K. papers that the new government in Japan wanted to reduce it's investments in the U.S. I wonder if the story has been "misplaced".

You're right, FXstreet.com for one, has an article "Japan: Major political change coming in Japan" -

DPJ may buy less US bonds and boost relations with Asia

The leader of the DPJ party has said that if he is elected (he won) Japan would no longer look to buy US denominated bonds and would only buy JPY nominated bonds.  The Japanese election could have significant impact on the financing of the US budget deficit as Japans current government is a major buyer of US bonds.  The DPJ party leader has expressed concern about what he labels US “unilateralism.”  The election change may also mean that Japan would be less supportive of USD reserve status.  70% of Japanese currency reserves are reported to be held in USD.

It's not clear that the DPJ pledge to boycott US bonds will come to pass or is practical. The new Japanese government will not want to undermine its large holding of USD with any significant shift out of the USD. This is particularly true because there are limited reserve currency alternatives to the USD. The DPJ party also plans to shift focus away from trade relations with the US and seek to build relations within Asia. Expanding trade with the Asian block is likely to be a positive for Japan's economic outlook and it's unlikely that US Japanese relations would deteriorate because of an effort Japan to expand export trade with Asia. China recently became Japans leading trading partner.

Larry

mblackman's picture
mblackman
Status: Member (Offline)
Joined: Aug 26 2008
Posts: 4
Re: A Dollar Crisis in the Making

Chris;

I also take exception to the statement that the US doesn't need foreigners to finance the US fiscal deficit.

First, its not just about the deficit, its the debt (stupid). Here's my arthmetic...

The federal fiscal deficit this year is projected to be $1.8 trillion. The total government debt (the cumulative effect of annual deficits) is projected to hit $12.9 trillion this year (whitehouse.gov estimate). This means that it's just not this year's deficit that needs to be financed, its the whole debt.

As you point out, this year's estimated personal savings rate for the US = $403 billion. Clearly, even if all the personal savings of every American when towards financing this year's deficit, there is a shortfall of more than $1.2 trillion this year.

And what about the debt? Total on deposit of all 8200+ FDIC-insured US Banks (Q1-09) = $13.4 trillion. In other words, just to finance US federal government debt would require nearly every dollar currently on deposit in US banks. Then there is total credit market debt which including the total federal government budget deficit equaled $52.9 trillion in Q1-09. (This has grown 35% faster than the GDP since 2000 and now represents 375% of total annual US GDP).

Now add future unfunded liabilities to the equation which is another $59 trillion. (usdebtclock.org) (Let's put aside for a moment that future liabilities aren't due today)..

Here are the totals per US household (115 million). Oh, and there is also the interest on the debt (let's assume 3.5% per year which is the approx. 10-year T bill yield which works out to an additional $450 billion/year).... To put these numbers in perspective, this is what it works out per US household.

TCMD of $53 trillion = $461,000 per household.

Medicare, Social Security liabilities $59 T = $513,000/household.

Grand total per household = $974,000.

I'd love to see how the Pollyanna prognosticators can explain how the US can finance its own current debt and how will we'll finance our future liabilities without help from foreigners?

And while they're at it could they also explain how we'll fill the $1 trillion gap that foreigners have invested in US Treasuries in the last 18 months as Net Treasury international capital flows reverse? I have been tracking TIC flows since 2005 and the results aren't pretty..  (See Chart 2 at http://tradesystemguru.com/content/view/286/58/)

Thanks...

Matt Blackman Host TradeSystemGuru.com

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: A Dollar Crisis in the Making
Quote:

This means that it's just not this year's deficit that needs to be financed, its the whole debt.

Is that really correct?  The existing debt has already been financed.  Prior year's bonds maturing presently do have to be rolled over into new financing, but I do not believe it is accurate to say the "whole debt" needs to be refinanced.

That may become true in a few years when we have transferred all our debt to the short end of the curve and foreigners refuse to buy anything than 1-yr bills.  I think that's where England is right now (90% of their debt is due by Christmas).

mblackman's picture
mblackman
Status: Member (Offline)
Joined: Aug 26 2008
Posts: 4
Re: A Dollar Crisis in the Making

I think its important to keep one's eye on the big picture. The whole debt needs to be continually refinanced and the exact amount each year depends on the maturity of bonds being financed. But it is the debt, not the deficit that is the problem!

In examining US Treasury international capital flows (line 30), there is a clear trend toward increasing redemptions and falling new investment. At the end of the day, its to debt we need to worry about not the deficit. If confidence falls in either the dollar or the ability of the US to make good on its debt payments, redemptions will skyrocket which will require that we find new buyers for those bonds sold as well as for the new ones being issued.

MY math was designed to highlight the fact that with all out debt obligations, both present and future, there is no way personal savings can finance total obligations nearing $1million/household (and growing rapidly). 

There is also the interest payments on the total debt that needs to be considered. Let's forget the concern for a moment about bond redemptions, as total debt increases so do interest payments. If we assume the interest on the government debt ($12.9 trillion in 09) is 3.5% (10-year yield) it means taxpayers will have to pay more than $450 billion in interest each year before taking a dollar to fund spending. That equals the total deficit in 2009 ($455 billion)..

What I found interesting in Michael Pettis's piece ( http://mpettis.com/2009/08/the-usg-doesn’t-need-foreigners-to-finance-the-us-fiscal-deficit-who-knew/) is that he first started talking about the government deficit but didn't discuss the size ( its $1.8 trillion in 09) then magically switched to the current account deficit (a much smaller $409.5 billion) to do his math. He then goes on to say that current account deficit is falling and that is good news. But as I understand it, the current account deficit does not include the federal government deficit. and it is growing at  a current rate north of 20% per annum. Its the growing government spending and deficits (not the current account deficit) and the growing size of total debt (both government, private and corporate represented by total credit market debt) and the rate at which it is growing in real terms (35% faster than GDP since 2000) that presents the real challenges as I see them.

Matt Blackman

Host www.TradeSystemGuru.com

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: A Dollar Crisis in the Making

Matt,

Just wanted to make it clear that not all the debt has to be refinanced every year. 

I am not disputing that we face a huge deficit and an already huge debt.  As for the inability for the level of savings to finance the current deficit, I would be curious to know your thoughts/opinions on the following piece by Albert Edwards (w/ Societe General).  You will find he makes the case that banks can and will allocate their reserves to Treasuries, and remove them from corporate debt.  I wonder if they have enough reserves to do that.  Anyway, here is the piece:

http://www.scribd.com/doc/19368407/Prepare-for-Deflation

mblackman's picture
mblackman
Status: Member (Offline)
Joined: Aug 26 2008
Posts: 4
Re: A Dollar Crisis in the Making

Farmer;

I'm not saying that all debt has to be refinanced each year. But the cost of the debt, not just the cost of the deficit, must be paid for by someone on a continual basis.

To only focus on the deficit is like the father of the family celebrating his new-found financial independence after paying of the loan on a small car while ignoring that he has two other car loans and a home mortgage, the costs of which depend on the kindness of those who finance it. But unlike a mortgage or carloan, the cost of US debt is not locked in with a multi-year (usually) maturity date. An increasing amount of this debt is financed by shorter-term instruments which means they must be refinanced more often.

Pettis is focused on the shrinking chimanzee (falling current account deficit) while ignoring the the rapidly growing 800-pound gorilla (total debt and future liabilities) in the room.

As for Edwards piece, it is very interesting but he gives much more weighting to official government CPI, PCE and GDP figures than is prudent in my opinion. These numbers are really not reliable from my perspective. We are not in deflation right now, real inflation is expanding at somewhere between 4-6 percent annually according the John Williams' CPI-ALT estimate which calculates CPI as it was before all the changes post 1982. That rate is falling rapidly and we could enter deflation at some point but we are certainly not there yet. 

My concern that in real terms, T Bond investors lost more than 9% in the last year. T-bonds investors lost an average 4.5% plus real CPI of 5.4% according to Williams giving  a total real loss of 9.4%. I don't care whether you are a foreigner or domestic investor but once investors realize how they are really doing in their T-bill investments, they'll run for the hills. This I think goes a long way in explaining the decline in Treasury international capital flows and concerns for the safety of the dollar in the future. 

Total credit market debt has doubled in nominal terms since 2000. Let's assume for a moment (even though I don't think its true) that the US could finance all its debt needs domestically today, unless debt starts dropping (something that has not occurred since 1981), it is only a matter of time before the debt becomes too big to finance at home and then before it becomes too big to finance globally.... 

Saying that we don't need foreigners to finance our debt a) ignores the total debt picture b) ignores the need for all investors to earn a profit no matter where they are and c) assumes that money will magically materialize out of thin-air and is therefore economically stupid.  

I am amazed at the amount of self-delusional analyses (like the Pettis piece) that take disparate statistics to make a case. From a real big picture situation, the US has had a fiat currency since 1971 by definition. A 2008 book by Ralph Foster (Fiat Paper Money: The history and evolution of our currency) does an excellent job of examining the history of fiscal paper money occurrences in history and here is how I summed up the fiat currency life cycle in an article recently.

Without exception, every fiat paper currency since the beginning of time has suffered a strikingly similar fate. As we mentioned last month, the U.S. dollar became a fiat paper currency backed by nothing more than the faith and good will of the government following the move by Richard Nixon to take the nation off the gold standard in 1971. 

Fiat paper money is currency not backed by gold, silver or other semi-precious metal. Its first recorded use provides valuable insight into the challenges nations employing it have faced throughout history.  

According to Foster, fiat currency for general use first appeared in recorded history in the 11th century AD in Szechwan, China. Following a long period of peace and prosperity, the area around Szechwan suffered a shortage of copper which was used for coinage. Iron was tried but it proved too heavy and impractical.   Paper had been used in money shops in the exchange of deposit receipts to transact business so the next logical step was to use it as a currency. In 1024 it made its debut as a national currency for general use by the Sung Empire. 

Armed with the best of intentions, bureaucrats for the imperial Sung treasury intended the currency to be redeemed for coin after three years. However, whenever there is potential for abuse the temptation becomes unbearable and over time, the Sung treasury kept printing an increasing number of notes and redeeming fewer at the allotted time. By 1077, only 29 percent of the issue was backed by coin. 

But in spite of these abuses, the note called the chiao-tzu held its value for seven decades. As time went on, the treasury gradually and quietly slipped into the practice of issuing series after series of notes with little regard for the regulatory controls. The days of 29 percent backing quietly slipped into oblivion as the state discovered how easy it was to pay its obligations in paper (sound familiar yet?). By the first decade of the 12th century, over 20 times as many notes were circulating as had been originally authorized in 1024 and prices were quickly rising. Then the Sung Empire was attacked and war began, further increasing the need for money by the rulers. Laws were enacted to contain inflation but it was too late. In 1127, the leaders of the Sung Empire ceded the territory in dispute and fled south by which time the chiao-tzu had become worthless.  

This set of events with different casts played out four more times over the next two centuries in China and then countless times in other parts of the world over the next nine hundred years in just about every civilized nation in the world. And although the characters and locations changed, the plot remained strikingly similar that like a Shakespearian tragedy, could be broken down into five all-too predictable acts.  

Act 1 – A form of currency, usually a metal, which had been in use, became impractical as the economy grew causing bureaucrats to adopt a paper replacement due to its light weight, ease of use and versatility. Often but not always, the new note was initially backed either by gold, silver or copper and would often have a redemption date. 

Act 2 – As time progressed and prosperity grew, the temptation to create something from nothing was too great to resist and an increasing number of notes would be printed by those in charge of the treasury. This would not be immediately noticeable which led to an increasing number of notes being printed to the benefit of those in charge. Generally the ruling classes enjoyed new found prosperity, wealth and status. It was generally at this stage of the fiat currency life cycle that Ponzi schemes like Tulip Mania (1637) in the Netherlands or the South Sea Company bubble (1720) took root. Without the availability of large amounts of ready and portable cash, such schemes and bubbles are nearly impossible. 

Act 3 – Often a war, attack, military action or other crisis then erupted that required huge sums of money from the ruling classes. Debt replaced greed as the primary motivator to print more money. Any checks and balances still in place to curtail money supply would be abandoned and the printing presses were kicked into high gear. Debt continued to mount as inflation began in earnest.   

Act 4 – The result was always the same – hyperinflation ensued after attempts to pay off unmanageable levels of debt failed and the currency plunged in value until it became worthless. The unfortunate aftermath in nearly every case was all-too predictable.

Act 5 – In the wake of financial collapse which was often but not always the result of a failed expensive military campaign or war which the subject country usually lost, economic collapse gripped the nation and economic chaos followed. Citizens stripped of their property struggled to feed themselves and their families. Barter became the primary form of currency. Often laws would be passed banning the use of paper currency again. But in a generation these lessons were forgotten laying the foundation for the next fiat currency cycle.  

Foster’s Fiat Paper Money is an essential read for anyone concerned about their future financial well-being. In the appendix, Foster lists the instances he found in which national notes became worthless, breaking the list into decades starting from the beginning of the 20th century.   

In total, there are an incredible 431 examples (pages 216 and 217) in which a national note or currency became worthless between 1900 and 2009 which works out to an average of four fiat money collapses per year. And a number of nations have been repeat offenders.

Foster also discusses four interesting examples of fiat paper money in the U.S. since our nation’s beginnings (not including the current dollar) that like every other case of every fiat currency in history, eventually became worthless and had to be taken out of circulation.   

----------------------

So as you see, debt is only one of the horsemen in this tragedy but it is one that eventually brings the house of cards down. The big unknown is when...

Matt Blackman

Host www.TradeSystemGuru.com

gonegolfin's picture
gonegolfin
Status: Member (Offline)
Joined: Aug 6 2009
Posts: 11
Re: A Dollar Crisis in the Making

The analysis on China's treasury purchases is not correct. China continues to be the most important purchaser of US treasuries. 

China's purchases have been understated recently (while others have been overstated), despite the initial Treasury report. International money flow experts (such as Brad Setser) have noted in the past that middle eastern (Oil Exporters) and certain countries in Asia (most notably China) funnel some of their purchases through the London subsidiaries of US primary dealers. So, with respect to the Treasury data, these purchases are reported as UK purchases. This has happened several times in the past with the numbers revised at a later time. This explains the most recent significant jump in treasury purchases (according to TIC) by the UK.

These numbers are revised once the annual survey is published.

Brian

 

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: A Dollar Crisis in the Making

Gonegolfin:  Thanks for the really good info.  Do you have any idea WHY some purchasers funnel things through London?  Is it just because it's a major financial center and that happens to be easier for some reason or other, OR is this a deliberate choice of some sort, whereby they are sending the money there for this very reason, and that helps the purchasers some how?  

gonegolfin's picture
gonegolfin
Status: Member (Offline)
Joined: Aug 6 2009
Posts: 11
Re: A Dollar Crisis in the Making

I have my theories ... which are in concert with some other folks I respect and converse with on occasion.

First, I think that time zone plays somewhat of a role and because it is a major financial center.

Second, and more controversially, this allows the Chinese to hide some of their own currency intervention (at least for a period of time) ... necessary to keep the Yuan from strengthening against the Dollar. IOW, it would be less noticeable if the US treasury purchases attributed to the Chinese were lower.

There are other tricks that the Chinese use to disguise their currency intervention. But that is another topic.

Brian

 

 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: A Dollar Crisis in the Making
mblackman wrote:

To only focus on the deficit is like the father of the family celebrating his new-found financial independence after paying of the loan on a small car while ignoring that he has two other car loans and a home mortgage, the costs of which depend on the kindness of those who finance it. But unlike a mortgage or carloan, the cost of US debt is not locked in with a multi-year (usually) maturity date. An increasing amount of this debt is financed by shorter-term instruments which means they must be refinanced more often.

Pettis is focused on the shrinking chimanzee (falling current account deficit) while ignoring the the rapidly growing 800-pound gorilla (total debt and future liabilities) in the room.

As for Edwards piece, it is very interesting but he gives much more weighting to official government CPI, PCE and GDP figures than is prudent in my opinion. These numbers are really not reliable from my perspective. We are not in deflation right now, real inflation is expanding at somewhere between 4-6 percent annually according the John Williams' CPI-ALT estimate which calculates CPI as it was before all the changes post 1982. That rate is falling rapidly and we could enter deflation at some point but we are certainly not there yet. 

My concern that in real terms, T Bond investors lost more than 9% in the last year. T-bonds investors lost an average 4.5% plus real CPI of 5.4% according to Williams giving  a total real loss of 9.4%. I don't care whether you are a foreigner or domestic investor but once investors realize how they are really doing in their T-bill investments, they'll run for the hills. This I think goes a long way in explaining the decline in Treasury international capital flows and concerns for the safety of the dollar in the future. 

Total credit market debt has doubled in nominal terms since 2000. Let's assume for a moment (even though I don't think its true) that the US could finance all its debt needs domestically today, unless debt starts dropping (something that has not occurred since 1981), it is only a matter of time before the debt becomes too big to finance at home and then before it becomes too big to finance globally.... 

Saying that we don't need foreigners to finance our debt a) ignores the total debt picture b) ignores the need for all investors to earn a profit no matter where they are and c) assumes that money will magically materialize out of thin-air and is therefore economically stupid.  

I am amazed at the amount of self-delusional analyses (like the Pettis piece) that take disparate statistics to make a case. From a real big picture situation, the US has had a fiat currency since 1971 by definition. A 2008 book by Ralph Foster (Fiat Paper Money: The history and evolution of our currency) does an excellent job of examining the history of fiscal paper money occurrences in history and here is how I summed up the fiat currency life cycle in an article recently.

Without exception, every fiat paper currency since the beginning of time has suffered a strikingly similar fate. As we mentioned last month, the U.S. dollar became a fiat paper currency backed by nothing more than the faith and good will of the government following the move by Richard Nixon to take the nation off the gold standard in 1971. 

Fiat paper money is currency not backed by gold, silver or other semi-precious metal. Its first recorded use provides valuable insight into the challenges nations employing it have faced throughout history.  

According to Foster, fiat currency for general use first appeared in recorded history in the 11th century AD in Szechwan, China. Following a long period of peace and prosperity, the area around Szechwan suffered a shortage of copper which was used for coinage. Iron was tried but it proved too heavy and impractical.   Paper had been used in money shops in the exchange of deposit receipts to transact business so the next logical step was to use it as a currency. In 1024 it made its debut as a national currency for general use by the Sung Empire. 

Armed with the best of intentions, bureaucrats for the imperial Sung treasury intended the currency to be redeemed for coin after three years. However, whenever there is potential for abuse the temptation becomes unbearable and over time, the Sung treasury kept printing an increasing number of notes and redeeming fewer at the allotted time. By 1077, only 29 percent of the issue was backed by coin. 

But in spite of these abuses, the note called the chiao-tzu held its value for seven decades. As time went on, the treasury gradually and quietly slipped into the practice of issuing series after series of notes with little regard for the regulatory controls. The days of 29 percent backing quietly slipped into oblivion as the state discovered how easy it was to pay its obligations in paper (sound familiar yet?). By the first decade of the 12th century, over 20 times as many notes were circulating as had been originally authorized in 1024 and prices were quickly rising. Then the Sung Empire was attacked and war began, further increasing the need for money by the rulers. Laws were enacted to contain inflation but it was too late. In 1127, the leaders of the Sung Empire ceded the territory in dispute and fled south by which time the chiao-tzu had become worthless.  

This set of events with different casts played out four more times over the next two centuries in China and then countless times in other parts of the world over the next nine hundred years in just about every civilized nation in the world. And although the characters and locations changed, the plot remained strikingly similar that like a Shakespearian tragedy, could be broken down into five all-too predictable acts.  

Act 1 – A form of currency, usually a metal, which had been in use, became impractical as the economy grew causing bureaucrats to adopt a paper replacement due to its light weight, ease of use and versatility. Often but not always, the new note was initially backed either by gold, silver or copper and would often have a redemption date. 

Act 2 – As time progressed and prosperity grew, the temptation to create something from nothing was too great to resist and an increasing number of notes would be printed by those in charge of the treasury. This would not be immediately noticeable which led to an increasing number of notes being printed to the benefit of those in charge. Generally the ruling classes enjoyed new found prosperity, wealth and status. It was generally at this stage of the fiat currency life cycle that Ponzi schemes like Tulip Mania (1637) in the Netherlands or the South Sea Company bubble (1720) took root. Without the availability of large amounts of ready and portable cash, such schemes and bubbles are nearly impossible. 

Act 3 – Often a war, attack, military action or other crisis then erupted that required huge sums of money from the ruling classes. Debt replaced greed as the primary motivator to print more money. Any checks and balances still in place to curtail money supply would be abandoned and the printing presses were kicked into high gear. Debt continued to mount as inflation began in earnest.   

Act 4 – The result was always the same – hyperinflation ensued after attempts to pay off unmanageable levels of debt failed and the currency plunged in value until it became worthless. The unfortunate aftermath in nearly every case was all-too predictable.

Act 5 – In the wake of financial collapse which was often but not always the result of a failed expensive military campaign or war which the subject country usually lost, economic collapse gripped the nation and economic chaos followed. Citizens stripped of their property struggled to feed themselves and their families. Barter became the primary form of currency. Often laws would be passed banning the use of paper currency again. But in a generation these lessons were forgotten laying the foundation for the next fiat currency cycle.  

Foster’s Fiat Paper Money is an essential read for anyone concerned about their future financial well-being. In the appendix, Foster lists the instances he found in which national notes became worthless, breaking the list into decades starting from the beginning of the 20th century.   

In total, there are an incredible 431 examples (pages 216 and 217) in which a national note or currency became worthless between 1900 and 2009 which works out to an average of four fiat money collapses per year. And a number of nations have been repeat offenders.

Foster also discusses four interesting examples of fiat paper money in the U.S. since our nation’s beginnings (not including the current dollar) that like every other case of every fiat currency in history, eventually became worthless and had to be taken out of circulation.   

----------------------

So as you see, debt is only one of the horsemen in this tragedy but it is one that eventually brings the house of cards down. The big unknown is when...

 

 

a good read.

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5568
Re: A Dollar Crisis in the Making

Brian,

based on your patterns here I see that you have a strong need to be seen and heard.  However, I wish you would first read my postings before complaining about them being innaccurate or incomplete. 

Where you wrote "International money flow experts (such as Brad Setser) have noted in the past that middle eastern (Oil Exporters) and certain countries in Asia (most notably China) funnel some of their purchases through the London subsidiaries of US primary dealers. So, with respect to the Treasury data, these purchases are reported as UK purchases."

I wrote:

While part of the answer lies with the fact that the UK banking center often operates as a pass-through for other entities (like Saudi Arabia, for example), it could also be operating on the behalf of other official parties.

This is not the first time you have utterly misread one of my posts, failed to understand it, and attempted to drag down my name.  Frankly, I am quite tired of it.

Second, if you are going to make the claim that you have better data than the Treasury Department ("China continues to be the most important purchaser of US treasuries") you really need to back that up with some, you know, data.  We don't trade in egos and heresay around here.  neither are helpful to furthering our understanding.

If you find these bars a bit too high, then perhaps this is not the right spot for you.

DrKrbyLuv's picture
DrKrbyLuv
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 1995
Re: A Dollar Crisis in the Making

mblackman -

Don't forget that fiat currencies also have many great success stories.  For example, the tally stick system in England ran well for around 600 years.  When the private bank of England set up shop, within 75 years 75% of the budget was going to service the new debt.

BTW, the gold standard failed in 1933, in the U.S., and it failed a few years earlier in Great Britain.  In fact it failed everywhere it was applied through-out Europe.

Look at the debt numbers CM is showing, imagine if we had to pay the interest with gold.

Larry

gonegolfin's picture
gonegolfin
Status: Member (Offline)
Joined: Aug 6 2009
Posts: 11
Re: A Dollar Crisis in the Making
cmartenson wrote:

Brian,

based on your patterns here I see that you have a strong need to be seen and heard.  However, I wish you would first read my postings before complaining about them being innaccurate or incomplete. 

Where you wrote "International money flow experts (such as Brad Setser) have noted in the past that middle eastern (Oil Exporters) and certain countries in Asia (most notably China) funnel some of their purchases through the London subsidiaries of US primary dealers. So, with respect to the Treasury data, these purchases are reported as UK purchases."

I wrote:

While part of the answer lies with the fact that the UK banking center often operates as a pass-through for other entities (like Saudi Arabia, for example), it could also be operating on the behalf of other official parties.

This is not the first time you have utterly misread one of my posts, failed to understand it, and attempted to drag down my name.  Frankly, I am quite tired of it.

Chris,

#1 I did not complain. I merely made a point.

#2 I did not misread your post nor did I fail to understand it. As a principal point in your post you speculate that the Fed is reticient to be audited because of what an audit might show concerning the uptick in reported purchases of US treasuries.

"As an aside, one reason that I suspect the Federal Reserve is reticent to be audited concerns the UK purchases of Treasury bonds." 

You say that part of the answer "may lie with the fact that the UK banking center often operates as a pass-through for other entities (like Saudi Arabia, for example)". But you also make no mention of China or Japan funneling purchases (which is key to this topic). I wanted to make it clear that China and Japan do funnel purchases through the UK and historically have been the reason for inflated UK numbers in the TIC report, but are then adjusted when the annual survey arrives. But you also speculate that the UK banking center could be operating on behalf of the Fed ("it could also be operating on the behalf of other official parties. Like the Federal Reserve, perhaps?"). There is nothing at all to support this.

This speculation and the Treasury data you used is what I was challenging. I was not doing it in a mean spirited manner. I am sorry if you took it that way.

#3 The other time I corrected something in your post was in your 8/6 article. I did not misread and my corrections were sound. If you disagree and wish to debate those points, please do. But you did not and thus I assume you accepted them or simply did not want to respond. I am fine with that. BTW, I do think your "The Shell Game" article has some problems in it (which I did not post to your blog). I would be glad to discuss if you like. But I get the sense you are not interested. Also, if you do not want me to post on your blog, I will refrain from doing so.

cmartenson wrote:

Second, if you are going to make the claim that you have better data than the Treasury Department ("China continues to be the most important purchaser of US treasuries") you really need to back that up with some, you know, data.  We don't trade in egos and heresay around here.  neither are helpful to furthering our understanding.

If you find these bars a bit too high, then perhaps this is not the right spot for you.

Unfortunately, the Treasury data has some problems with it. Measuring international data flows is a very difficult thing. There are some very good economists that do only that. One of them is Brad Setser. Yes, there is better research available than entirely relying on the Treasury data. This very topic has been studied for some time and is accepted work. I suggest you take a look at Setser's bog and utilize the search function liberally. There is some really good work there.

http://blogs.cfr.org/setser/

He also has an excellent research paper that studies China's money flows. You can find it here ... http://www.cfr.org/content/publications/attachments/CGS_WorkingPaper_6_C.... I would start with this, particularly beginning with page 10.

BTW, I really liked your FDIC article.

I hope you have a good Labor Day weekend and opening college football weekend.

Brian

 

 

 

 

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5568
Re: A Dollar Crisis in the Making

Brian,

your attempts at revisionism are disturbing.  You absolutely mis-read my 8/6 post and I counted over 10 separate sites where you not only went to great lengths to point out that you had broken  the story of the Fed buying on the run recent Treasuries but went on to state, without any further evidence or backing, that my article "was full of inaccuracies."  This was extremely bad form for two reasons.

  1. You utterly misread sarcasm in my post for realism and ran off with the wrong impression that I do not know how the Fed/Treasury auction process works, and:
  2. You did not break the story about the 7-year treasury CUSIPs that I was pointing out specifically in the context of the failed 5-year auction the day prior, which was the whole point of that article.  I did.  You had pointed out some earlier ones of which I was completely unaware, as I would have certainly referenced your work had I been aware of it.  But you openly hinted in several comment areas on various blogs that I read that you thought of my article as a form of theft of yours.  Everybody here can vouch that I am the absolute king of providing links back to source work and attributing ideas to where they properly belong.  So let's be clear, you did not write any articles about the 7-year auctions prior to mine, but that did not prevent you from energetically spreading a very different version of the story all across the web.  I considered that extremely bad form and I've not forgotten it (and wonder why you choose to participate here at all if you think my work steals from yours and is full of errors?). 

Now, if I wasn't so busy trying to write articles, research and run a  thriving website I would have gone out to all these various places where you had sown your ill-seeds and inaccuracies to feed your ego, but I regrettably did not have the time. Nor the energy.  

You have a perverse style of engagement, not terribly constructive to be honest, and I find it to be a real strain to argue with on-the-spot revisionists.  There are fresh examples are right there in your "counter post" and I only will spend time here on them so that others might draw some lessons.

One:  I clearly indicated that I was engaging in "rank speculation" (my exact words) in regards to the source of the UK funds while you argumentatively stated your case as 'fact'; "The analysis on China's treasury purchases is not correct. China continues to be the most important purchaser of US treasuries."  

Do you appreciate the difference?  I clearly label my opinions as such where you state yours as fact.  Further, where is your evidence?  Being a constructive member of this community means that you provide the facts to back up your case, you do not drop in links to 26 page working papers with vague claims that the data to make your case might, or might not, be in there. 

Two: 

If you are going to boldly claim that my "analysis on China's Treasury purchases is not correct" then exactly how is it not correct, where, and what's the data to reveal the "correct" view?   Frankly I seriously question anybody who would claim to have "the correct view" besides the Chinese and they aren't telling.  I've already challenged you on this once and your entire response, lengthy though it was, consisted of hinting that you have additional problems with other parts of my work but, once again, opting for innuendo over proof or data.  If you were operating a website I would never dream of opening up a comment on it saying "The analysis on China's treasury purchases is not correct" because it would have been bad form and because it would never occur to me to think I was the possessor of the correct view.  When it comes to China, the honest view is that we're all speculating to some degree.

But, alas, you are probably correct in assuming that I do not have an interest in debating you about your issues with my work as I suspect, based on your response here, that it would be a wasted effort on my part.  Your interests seem not to lie in illuminating the larger situation, just yourself.

For the record, I am deeply committed to figuring things out, will readily admit when I am wrong, and know that I do not know everything.  Nobody does.  Things are developing at an incredible pace, I am learning as fast as I can modifying ideas and beliefs on the fly, and I really only have energy for illuminating the path ahead.

If you are game for that, then grab an extra slice of humble pie and hop on board, I'd be most pleased if you did.  If not, then this is not the right place.

----

P.S. Brad Setser writes for the CFR and, as such, is writing for a powerful political organization famous for delivering scripted analyses that support various policy initiatives.  I tend to discount all CFR-sponsored work as I am never sure which is real and which is spin.  He might be truth itself, but how would I know?  I consider him a source, like many others, but not a trusted source.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments