Hyperinflation, national bankruptcy, dollar crash and other exaggerations

Submitted by Edward Harrison of Credit Writedowns.

Earlier today I wrote a post featuring comments by Marc Faber as I like to do from time to time.  In this particular case Dr. Faber was waxing prosaically about an eventual bankruptcy of the U.S. government.  His money quote was:

“Next station is when the U.S. government goes bust.”

I love this guy. Quite frankly, the man is a quote machine.  He makes a lot of outrageous statements that get him noticed.  Here are a few that I have featured in the past:

The last one is my all-time favorite.  And there are many more available at Credit Writedowns and elsewhere.  Dr. Doom is very entertaining indeed – which is why I quote him so often.  But, is he right?

That’s a good question – one I will take up indirectly by introducing the latest piece by Martin Wolf, another author I have featured at Credit Writedowns from time to time. You may have seen me tweet this earlier today. I had intended to add it to the links for tomorrow, but Niels Jensen, who I also feature often, convinced me to write it up as an ‘antidote’ to Faber.

Here’s how Wolf begins his article:

It is the season of dollar panic. These panic-mongers are varied: gold bugs, fiscal hawks and many others agree that the dollar, the dominant currency since the first world war, is on its death bed. Hyperinflationary collapse is in store. Does this make sense? No. All the same, the dollar-based global monetary system is defective. It would be good to start building alternative arrangements.

This is exactly what the Chinese are doing. They are preparing themselves for a non-dollar future. This is why the Chinese are buying gold. This is why the Chinese are settling trade in Yuan. And this also why the Chinese are getting a bunch of other countries onside.  But they are not looking for a dollar crash as I indicated last week.

Then, there is the part about Dollar weakness being a sign of inflation. Here’s what Wolf has to say about this idea:

The dollar’s correction is not just natural; it is helpful. It will lower the risk of deflation in the US and facilitate the correction of the global “imbalances” that helped cause the crisis. I agree with a forthcoming article by Fred Bergsten of the Peterson Institute for International Economics that “huge inflows of foreign capital to the US facilitated the over-leveraging and underpricing of risk”.* Even those who are sceptical of this agree that the US needs export-led growth.

I hope this argument sounds familiar because it is one I made when I asked is the Fed just jawboning? The U.S. wants – it needs a lower dollar to avoid deflation. Quantitative easing is not solving the deflation question. The U.S. government wants a strong dollar? Well, policymakers say one thing and wish for another. The U.S. insistence on focusing on global imbalances at the G-20 should tell you what policy makers really want. This is why the dollar is falling.

The problem of course is that the dollar’s recent rout is not necessarily helping the U.S. because the dollar is overvalued vis-a-vis a host of pegged currencies. And while those currencies are under pressure to drop the peg, they are resisting because they do not want to move toward a more re-balanced global growth paradigm unless forced to do so.  Unless these countries (read China) do something on the currency front, expect more of this, this and this – protectionism.

Then, the question arises, if everyone hates the dollar, what are they moving to? Wolf says:

Finally, what can replace the dollar? Unless and until China removes exchange controls and develops deep and liquid financial markets – probably a generation away – the euro is the dollar’s only serious competitor. At present, 65 per cent of the world’s reserves are in dollars and 25 per cent in euros. Yes, there could be some shift. But it is likely to be slow. The eurozone also has high fiscal deficits and debts. The dollar will exist 30 years from now; the euro’s fate is less certain.

This view may be too complacent. The danger of a collapse of the dollar is small and of its replacement by another currency still smaller. But a global monetary system that rests on the currency of a single country is problematic, for both issuer and users. The risks are also growing, particularly since the emergence of “Bretton Woods II” – the practice of managing exchange rates against the dollar.

I liken this argument to George Soros’ comments on dollar weakness: “The dollar is a very weak currency except all the others.” Right now, there is no alternative to the dollar.  Some people are fleeing U.S. assets if they can. But the alternatives are limited and this limits how far the dollar will fall. And this is unfortunate because the monetary system now in place is in need of change.  Without it, we are likely to see nationalistic policy responses to economic weakness, which will induce conflict.

Wolf says:

I arrive, by a somewhat different route, at the same conclusion as Mr Bergsten: the global role of the dollar is not in the interests of the US. The case for moving to a different system is very strong. This is not because the dollar’s role is now endangered. It is rather because it impairs domestic and global stability. The time for alternatives is now.

Apropos alternative monetary systems, we might start with Paul Davidson’s ideas, which I first highlighted in November.  So there is no hyperinflation, no U.S. national bankruptcy, and  no dollar crash coming. But, the financial crisis demonstrates we are living on borrowed time and need a new monetary system. The time is now.


The rumours of the dollar’s death are much exaggerated – Martin Wolf

Print Friendly, PDF & Email
This entry was posted in China, Currencies, Doomsday scenarios, Guest Post on by .

About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com


  1. lark

    It all makes sense …

    “So there is no hyperinflation, no U.S. national bankruptcy, and no dollar crash coming. But, the financial crisis demonstrates we are living on borrowed time and need a new monetary system. The time is now.”

    EXCEPT getting a new monetary system takes urgency that we don’t have. Absent a crisis, dollar or otherwise, where does urgency come from?

    There seems to be an assumption above and elsewhere that the West will resort to protectionism if Asian countries don’t get rid of their pegs.

    The problem with this, for the USA at least, is govt capture by the financial industry.

    Labor plus manufacturing might want protectionist measures, but the financial industry won’t, and they call they shots.

    1. Edward Harrison Post author

      I agree that the urgency is not there. I increasingly am concluding that a crisis of epic proportions is the only thing that will wake up our complacent policy makers.

      And as regards capture, you are on the money.

  2. David Mercanus

    Martin Wolf is great. Unlike certain bloggers (cough, Smith, cough), he doesn’t make emotional, off-the-cuff half baked black and white judgments of politics. He knows it’s messy, gray, and sees the long game.

    1. ohwilleke

      Social security and Medicare obligations are projections, not legally binding debts. Benefits are, by design, capable of being adjusted going forward.

      1. mannfm11

        Eating all your life is a projection too. The idea that something less than a trillion a year adds up to $50 trillion is based on all that needs to be paid. But that it the other side of the equation. Social Security has been used as a tax program and not as a trust fund as politicians insinuate. It is clear that the shortage that is always put out there has more to do with frightening the public into giving them more money than funding social security. The fact there are bonds means we have to pay again.

  3. Joseph

    Where’s the tens of trillions of $ of unfunded Medicare and Social Security obligation going to come from? The printing press.

    It seems that the apologists don’t want to talk about that.

  4. ohwilleke

    I agree that neither national bankruptcy nor hyperinflation are in the cards.

    The contracts clause of the United States Constitution doesn’t have a lot of meaning, post-Lochner, but it certainly means, at least, that the United States Government is not permitted to default on its T-bills and bonds. In other words, default isn’t just bad policy, it is unconstitutional.

    In the absence of a bankruptcy, the government has two ways to make the payments that come due on the national debt: collect taxes and pay them out of that, or issue new debt.

    To the extent that the U.S. government wants to issue new debt, hyperinflation is not in its interest. While the nominal value of the dollar may fall, hyperinflation discourages anyone from paying nominal interest rate t-bills and bonds at anything less than hyperinflationary interest rates. Even the plausible possibility of hyperinflation makes refinancing the national debt prohibitively expensive.

    In contrast, in times when there is no inflation or even deflation, and that is what is anticipated in the future, people are willing to buy bonds that pay low interest rates. This makes possible the refinancing of the national debt at lower interest rates, which allows the interest payments due on the national debt to get quite small. So, fewer tax revenues go to Treasury bond holders and more go to providing goods and services at government direction. The smaller the current interest rates are, the less likely that it is that Congress and the White House will have to do something right away about the national debt.

    Even if you want to use taxes to pay off the national debt, hyperinflation is a mixed blessing. You need to do it in a way that devalues the national debt, which is mostly not inflation adjusted, while maintaining tax collections, which do rise with inflation. The trouble is that hyperinflation, because is throws immense static into the monetary system and destabilizes private contracts drawn in nominal dollars with the expectation that inflation would stay within historical bounds, turns the economy to shit and undermines tax collections.

    If the U.S. Treasury really did want to “cheat” by using inflation to devalue the national debt, it would want not what historians think of as hyperinflation, but instead would want steady, high inflation announced well in advance at a time when the U.S. government wasn’t deficit spending, so it didn’t need to issue new debt. High inflation doesn’t cause nearly as much economic harm if everyone expects it as it does if it is unexpected. If the Fed announces that it is targeting 5% a month inflation for the next ten years, then markets will adapt, tax collections will take only a modest hit, and the capital gains tax will start looking like a gross sales tax. But, far lower inflation, which is unexpected, say 1-3% a month varying from month to month, at a time when the Fed says it is trying for 1-3% a year inflation, would cause catastrophic harm to the economy.

  5. Carol

    What IS scary is that Dr. Faber ‘may’ be correct. Everyone likes to tag people as ‘doom sayers’ only because they discuss potential outcomes. Just because the man may be labeled a ‘doom sayer’ does not make him wrong. Personally I feel a day of reckoning is around the corner for our nation.

  6. Robert

    There is one more ingredient necessary in order to become the world’s largest reserve currency, in addition to deep, liquid, and convertible markets: becoming the world’s largest debtor.

    People forget that this is what it means to be a reserve currency: other nations accumulate your assets on a net basis to hold as reserves, meaning that they are your creditors.

    So the next “reserve king” — whoever that may be, and God help them — will by definition be the world’s largest debtor, in terms of the foreign account. The Yuan cannot play this role. Same thing for any oil exporter, or any exporter. These nations are confusing “creditor” with “debtor”, and “net reserve accumulator” with “net reserve issuer”. You cannot be both.

    On the other hand, there is no reason, with floating exchange rates, for any nation to be a net reserve issuer. In that case, everyone would run a balance of trade. No currency needs to be held in reserve by anyone else, as we have forex markets that can exchange currencies and equalize trade.

    Moreover, in order for the foreign sector to “dump” dollar assets, the U.S. would need to run a trade surplus. A foreign holder can certainly sell an asset to another foreign holder, but that is irrelevant, as the foreign sector as a whole cannot “dump” even $1 of an asset, unless we are the buyer, which means that we run a current account surplus for that dollar 1 vis-a-vis the rest of the world.

    So any talk of “replacing” the dollar requires that either the U.S. runs a massive surplus to “buy back” the dollar assets of the foreign sector, or that some other country comes along and runs deficits so much larger than ours, that their cumulative foreign account debt dwarfs that of the U.S., at which point that currency will be the #1 held by foreign nations as reserves. No way that is going to happen with the Euro.

    Finally, the U.S., as a currency issuer with no foreign-denominated obligations cannot go insolvent. The only thing it can do is disappoint those who expect more government services than our productivity will allow. Social Security, Medicare, etc — these are all pay-go programs. There is no “trust fund”, or “savings” at a national level. It is impossible, at the national level, to “save” for the future anymore than it is possible to send goods back into the past. Each generation consumes what it produces, and each year’s output is consumed that year:

    There is no hole in the ground that we are piling medical services for retirees into, to be dug up later. There is no safety box in the sky that we are shoving food into, in order to “save” to be able to feed the poor of the future. Food not eaten in 2009 is not available in 2019. Medical Services not delivered in 2009 cannot be transported to 2019. And in 2019, it will be the congress of 2019 that decides how much to spend on medicare or social security, or any other government program; They are not bound by the decisions of our Congress, and they are certainly not bound by the wishes of the congress in LBJs era.

    1. mannfm11

      that is a really good explantion of how it works. The idea they would trash the dollar is one of the biggest pieces of nonsense going around today. For one, where would the demand come from to keep the world going. Second, the liquidity of the system would collapse. Also, how much of Chinas and Koreas dollars do they owe back to investors? The oligarchy of these countries take in dollars quite often, buy bonds then issue currency on the collateral. Thus they get to spend the money twice, just like any other bank. Never forget this is bank paper. Never forget the US government needs credit to fight a war.

  7. rd

    The US (and also Canada) are in the fortunate position of being able to mine or create most of what we need within our own boundaries for decades to come. The major exception that can’t be easily recreated in the US is oil right now.

    The US should be undergoing a crash program right now to end up with a Brazil-like energy system so that we are not reliant on imported oil. If we aren’t reliant on imported oil, the the whole question of the value of the dollar and its position as a reserve currency becomes much less important.

    At this moment, I am seeing articles bemoaning that the mutual fund flows are going into bonds instead of stocks. However, that also means that the small investor in the US is putting more money into US government and corporate debt. That is good for us as it makes us less reliant on foreign debtors.

    1. mannfm11

      Stocks are not priced to produce a return. They are priced to produce a loss. You can discount the SPX to a 3% yield and match the CPI of 1/1966 when the SPX hit 3% yield and find that the return on stocks has been risk free 3%. You can’t make long term money on stocks paying for a 3% yield. Even more so with a 2% yield. Bonds generally have some value in a default. This brings to mind, what are they doing with AIG, FRE, FNM and the other bankrupts? IS wall street stealing the shorts? What was the idea of reverse splitting AIG?

  8. But What do I Know?

    Great summary of the issue. Marc Faber, like a lot of financial pundits, gets paid to say “newsworthy” things. Whether or not he is “right” depends on your timeframe and the definition of the terms used. It is pointless to argue with or rely on such people.

    Your thoughts on whether the US can avoid deflation are interesting–I mean, who would think that it is so darn hard to cause inflation? We are conditioned to think that we need to fight against it; now we are asked to root for it? Surely Mr. Bernancke, who has the power to create infinite amounts of currency out of nothing, can do it?
    The ability to create inflation, then, is a question of policy, of will, and like all questions of policy comes down to who benefits and who loses. This, I think, is the ultimate matter for discussion.

    1. Edward Harrison Post author

      The conventional wisdom in policy circles had been that a determined central bank can create inflation if it so desires. That was what Bernanke said in his famous helicopter speech in 2002. Krugman was saying pretty much the same to the Japanese in 2002.

      I see this as American arrogance. Somehow, everyone convinced themselves that the Japanese were idiots and that this could never happen in the U.S., the bastion of free-market capitalism.

      Now we see things are a good deal more difficult than we thought, in particular in regards to creating inflation when demand for credit is not increasing. Just because the Fed is printing money does not mean this money makes its way into the real economy.

      The irony is it does require a re-think to go from fighting inflation to fighting deflation. Are we prepared for this paradigm shift? The jury is out.

      1. But What do I Know?

        Agreed, it was arrogant to think that we could do any better at generating demand for credit than the Japanese. But it would be easy to cause inflation if Uncle Ben were indeed a determined central banker and serious about his helicopter. An EFT of $10,000 to the checking account of every taxpayer (or a debit card in the mail, etc.), with the promise of the same next year, would surely do the trick.

        The real question to me is when the government gets desperate enough to do this–and who stands to gain and lose from it. That’s what I meant by a policy decision.

        As I see it, our economic system needs inflation, but it also needs to believe that it doesn’t need inflation.

  9. biofuel

    I meant in the above an “arrangement” as a global “reserve system”, instead of some other currency assuming the role of the reserve currency. We assume that things would somehow return to where they were before. Apocalypse or no apocalypse, the world changed dramatically in the past few years. With global trade down, could the global reserve system break up altogether and not be replaced by anything: countries will collect currency of countries with whom they trade or barter.

    Wolf makes a good sour grapes argument about the dollar as a reserve currency: if you can have it, say you don’t want it anyway. Faber says glass 3/4 empty, wolf says it’s 1/4 full. With devaluing the dollar versus yuan; what will happen when people go to Walmart, and not only Walmart as Saks also seems to have lots of things made in China – and I am not even talking about electronics, and find that numbers on the price tags went up by factor of 2-3? Put this in the context of raising gasoline prices, high unemployment, deflation in wages… Maybe it will save the country from deflation, but it will not be pretty…

    Whatever it will be, the coming years will be a calamity and instability.

  10. David Pearson


    No alternatives to dollar reserves?

    Step back a moment. What is the FIRST alternative to holding dollar reserves? Not the Euro or gold. Its using reserves to finance an increase in imports.

    The dollar’s reserve status is unlikely to die at the hands of Euro strength. It is much more likely that China and other exporters will discover that export-led growth is no longer feasible given the indebtedness of their customers. This will produce a political imperative to stimulate domestic demand, which in turn will create a trade deficit. Some would argue that the Chinese are simply incapable of growing consumption. I say this is nonsense: every emerging market, including current export power-houses such as Brazil, has been able to generate a consumption boom by overvaluing their currency and printing money.

    So when you say that there is no alternative to dollar reserves, what you really assume, IMO, is the following:

    1) There will be sufficient global import demand for the excess production of dollar-reserve countries…

    2) …if there is not enough demand, then these countries will do nothing about rising unemployment; they will refuse to stimulate domestic demand by revaluing their currency…

    3) …and even if they did respond to the political imperative of creating jobs, there is nothing these countries can do to stimulate consumption.

    I’ll take “none of the above” on this set of assumptions. The dollar’s reserve status is in jeopardy because, if the reserve countries go into deficit, the increase in U.S. GDP from growing exports is likely to be swamped by the effect of rising long term interest rates. The Fed will have no choice but to continue to finance the fiscal deficit in an effort to lower the government’s interest burden, and, of course, everyone else will realize this is not the nature of a reserve currency.

    Farfetched? I don’t know…not any more farfetched than arguing that reserve countries can continue to run trade surpluses post-crisis.

  11. bankrupcy

    Great Article,

    People are continually believe that this is the recession that will end world! But it’s cycling.. and no ones starving in a developed nation. We will all end up trading in Euro’s, it’s inevitable.

  12. Namke von Federlein

    No serious inflation?

    Calculated Risk is reporting today in ‘House Buying Frenzy’ that some houses are getting many offers (up to 44 offers as an extreme case) and that 40% of buyers are paying cash.

    Why is that?

    a) they expect their cash to be worth something in the future and house prices to fall or

    b) they want to dump their cash as quickly as possible and turn it into an asset – any asset. Even a ‘price deflating’ house.

    As the dollar falls and inflation rises : one house is always worth one house in terms of purchasing power.

    No serious inflation ?

    Have you seen the chart of the S&P adjusted for the fall in the dollar? Or the chart at Jesse’s Cafe Americain that shows that the expansion of the Fed balance sheet matches exactly the rise in the stock market prices. The stock market prices seem a tad inflated compared to fundamentals? The insiders (who report by law) have been selling like crazy while the market rises?

    No serious inflation ?

    Gold was rising in USD but not in other currencies. For instance, Kitco now quotes gold as a price in a basket of currencies because the USD is becoming irrelevant as a measure of pricing. Global investors do not calculate their net worth in USD anymore?

    Central banks are reducing their purchase of foreign reserves to reduce the percentage of USD they hold. Stockpiles of oil and most commodities are building because people would rather have the hard asset than the USD?

    No serious inflation ? Of course. Salaries are falling, hours worked is falling, candidates per job is now at 6:1 (?) and the ratio is rising, etc. People’s income is falling but the price of everything that people buy daily (in USD) is going up?

    No serious inflation ? In one sense, I agree. Inflation is not a blob (an average). Some things are deflating while other things are inflating. Salaries are deflating while stocks and commodities are inflating. Great.

    But there is one simple rule of inflation. Nothing can inflate unless the supply of “pricing units” (money) is dramatically increased without a corresponding increase in production. (Not to mention the effects of fractional reserve lending and leverage through securitization).

    Average it all out and there is no inflation right now.

    Of course, if you average it out there is also no economy and a ton of printed money looking for a hard asset to buy.

    To put it another way (rhetorical question) : how much of your own assets do you hold in USD cash today? How many of your own assets have you moved out of USD cash positions and into commodities and other hard assets (or the stocks of companies that produce/hold/broker hard assets)? How about your friends? Are they ‘loading up’ on USD cash?

    Oh well, I still think there is a simple solution to all this craziness (at least for the next 4 weeks or so). In any case, we’ll see if gravity is still working over the next few months.

    Just my opinion.

    Thanks for your great blog. I really enjoy reading it. I personally tend to be ‘long of opinions and short on facts’. You always seem to get a good overview of useful opinions into your posts.

  13. jonrent

    When it comes to the dollar I think it’s all about who needs whom more, right now they need us (the U.S.A) more than we need them,
    If need be North America (Canada/U.S.A//Mexico) have enough resources and could create our own economy and not have to rely on any port of the rest of the world for anything.

  14. purple

    The U.S. ‘elite’ is trying to force a re-balancing by more or less crashing the U.S consumer. Then it’s up to China to increase their domestic consumption. Which they can’t do – if they could have, they would have already. Where this ends up is somewhat obvious.

  15. don

    Currency intervention is equivalent to taxing imports and simultaneously subsidizing exports – a very effective way to promote a trade surplus, especially if capital controls are used to deter private capital flow responses. Yet to push back is ‘protectionist.’ I don’t think so.

  16. Mark

    Edward, the reasoning in the article is impeccable and lucid, as usual. There is really not much else to say.

    A point made in one of your responses is more complicated (at least to my humble brain). Here is a quote.

    “The conventional wisdom in policy circles had been that a determined central bank can create inflation if it so desires. That was what Bernanke said in his famous helicopter speech in 2002.”

    From a theoretical standpoint, this statement is true. If the fed multiplied the rate of Treasury and agency MBS purchases by ten, we would get severe inflation. It is the balancing act that is tricky. You illuminated this in an article about Bernanke’s description of inflation and deflation as the two funny-named sea monsters (Scylla and Charybdis).

    I assume your basic view has not changed. From a practical standpoint, it might prove very difficult to use inflation as a policy tool. We might avoid deflation, but then realize that it reveals an equally destructive monster (inflation and price instability), but then battling inflation leads to deflation, etc. We might not find the harmonious balance that fixes things. Is this basically what you are saying?

  17. Vinny G.

    Dr. Faber has just revised his date predicting US national bankrupcy and total collapse of the dollar to January 1, 2012. This way he’s better alligned with the end of the Mayan calendar, the rise of the Antichrist, rapture of the faithful, sinking of California, and… reellection of Oh’bama… :)

    Dr. Vinny G., MD, Ph.D.
    PS — my offer for free lifetime psychotherapy to Mr. …oops, “Dr.” Faber, still stands… :)

  18. Robert

    I did some digging:


    China: 150-180%
    Japan: 150%
    Eurozone: 50%
    U.S.: 12%

    So I’m not sure where this hyper-inflation dollar collapse fear mongering is coming from. The real question is why we have printed so little.

    I also think there is confusion about inflation and the price of the dollar on the forex market. We could print 20 Trillion dollars, but as long as we ran an export surplus, the dollar would appreciate against our trading partners, as they would experience a shortage of dollars, while the U.S. domestic population would experience a glut. In some sense, this is exactly what has been happening in Asia: domestic inflation in those countries even as their currencies appreciate against ours.

    Finally, the relationship between M1/GDP and inflation is complex. You cannot assume that we will have inflation because either M1 or currency increases. This depends on many factors: capacity utilization, who gets the money, do they spend it on consumption or assets, etc. Here is a bit more data for the U.S.

    m1/GDP, currency/GDP
    1959 0.28 0.06
    1970 0.21 0.05
    1980 0.13 0.04
    1990 0.14 0.04
    2000 0.11 0.05
    2009 0.11 0.06

    So currency/GDP was roughly constant, decreasing somewhat as inflation increased, and increasing slightly as inflation decreased. M1, as it consists of both credit and currency, grew as rates fell during the disinflation, and shrank as rates rose during inflation. So the hyperinflationists need to propose a serious empirical model to explain why would have hyperinflation, or even serious inflation, given the both M1/GDP and currency/GDP are at extremely low levels vs. our trading partners.

    In fact, I don’t hear much commentary about the global dollar shortage that forced all the swap agreements. European banks had 800 billion in dollar liabilities that they could not roll over, which would be hard, given that only about 800 billion dollars existed before the crisis. If anything, we have too few dollars, and the ones that exist are spoken for too many times. Flooding the world with dollars is good for many reasons, if only to provide some actual backing to the trillions in swap agreements that exist in the forex market, and all of that is based on a precariously tiny position of only tens of billions of actual dollars that can be deployed at any time in the swap market. The whole thing rests on massive offsetting agreements, swaps, and other mechanisms to leverage that relatively tiny amount of actual available forex currency into a multi-trillion dollar powerhouse.

    Deflating this situation and increasing the currency/GDP ratio to something matching our trading partners is needed.

    1. Robert

      Sorry for the many typos in that post — to avoid confusion, the M1/GDP fell throughout, and I believe this was because money was pumped into assets when rates fell. e.g. capital investment that pumped up asset prices rather than consumer prices. Also it should read “only tens of billions of actual dollars that can be deployed at any time in the *spot* market.” It’s really fascinating how the forex market can turn over trillions of dollars a day when the actual flow of currency into and out of the U.S. is a thousandth of that volume. A good discussion of how foreign banks can up with almost a trillion dollars worth of liabilities via derivative agreements not actually backed by any real dollars is in this BIS paper: http://ideas.repec.org/a/bis/bisqtr/0903f.html

  19. Jim in MN

    Well reasoned, impeccable logic, a sound strategic framework…check, check, and check. The dollar can’t collapse.

    So…cue market speculation/greed/animal spirits-based ‘shocking and unexpected’ close facsimile of dollar collapse…but OH MAH WHAT A HEAD FAKE not the real thing in….3…2…1…place your bets

  20. Praedor Atrebates

    Any new international monetary system to replace the current broken system is unacceptable if it gives (or leaves) private banks and bankers in charge. Those bastards need to be chopped off at the knees and kept absolutely subservient to their respective society’s best interests rather than their own.

Comments are closed.