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July 06, 2009 – Comments (5)

Big Picture did a post referring to discussions by the G8 about the US remaining the reserve currency.

So basically the US remaining the reserve currency isn`t about a belief that the US is deserving of its place, but rather protection of the massive holdings of US dollars.

One thing, with the US holding the reserve currency status the debasement of the currency has been hidden or delayed.  I would suggest that there is a far greater debasement of the currency then people realise.  Because of holding of US dollars it means the dollars are effectively not in the money supply, which keeps prices down and over the years the demand for US dollars also means the currency has remained stronger then its foundation.

So, there are two ways the currency goes down in price from this, first is the reduced demand to continue buying US dollars and the second is more come back as holdings are reduced.   Without the constant removal of US dollars from the system price will eventually reflect the money supply that is out there. 

The US still has an advantage that its debt is in its own currency.  This is huge compared to other counties that got themselves in trouble and the price of their currency went down to debt ballooned without any further borrowing.  The price of the US dollar goes down and it is the holders of this debt that take the hit, which is why I think interest rates will have to go up.  There is too much risk holding US debt.

This is where treasuries, especially long term treasuries, plummet in value.   I wrote about treasury bonds last year in Stop What You Are Doing Moment.  I did a calculation and found that if rates went up to 10% treasury bonds that were supposed to yield around 4% would lose more then half their face value.

No kidding the G8 doesn`t want to get rid of the US reserve currency status.  What they want is to rid them selves of US holdings first.

5 Comments – Post Your Own

#1) On July 06, 2009 at 4:38 PM, davejh23 (< 20) wrote:

If China could dump their Treasuries at once without hurting their own economy, they would have done it already.  They've been working to keep their currency artificially weak for a long time, because their economic growth has largely depended on Americans buying their cheap exports.  They realize that if we devalue the dollar, we won't be able to afford their exports.  At some point there has to be a rush to get out of US holdings, as the US will likely be forced to adopt the new reserve currency as well...at least for foreign trade.

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#2) On July 06, 2009 at 5:15 PM, starbucks4ever (97.98) wrote:

With my Eucledian mind, I can't understand the non-Eucledian logic according to which China should get out of treasuries in an orderly manner by purchasing more treasuries.

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#3) On July 06, 2009 at 5:39 PM, nottheSEC (80.37) wrote:

The US dollar will take a battering but it would seem too much of a battering will be counter productive to the countries vested in it. i.e if you own a house and do no repairs because you dislike your tenant eventually it will be to your detriment.

@ZLOG Eucledian mind = Rational explanation for everything and nothing of a supernatural = POP references Spock, DR House= logical

I quote Shakespeare and Einstein "there are greater things on Heaven and earth then are dreamt of  in your philosphy"

"Not everything that counts can be counted, and not everything that can be counted counts." (Sign hanging in Einstein's office at Princeton)

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#4) On July 06, 2009 at 11:18 PM, cthomas1017 (98.77) wrote:

zlog,

If China continues to buy dollars but at a deminishing rate so as to make dollars a lesser percentage of the makeup of their total portfolio, then they maximize (in theory) the total asset value (yes, part of the assets are fiat dollars) of their entire "reserve".  It's kind of like dollar cost averaging, only in reverse, sorta.

I completely muddled that one, didn't I? :o

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#5) On July 06, 2009 at 11:37 PM, russiangambit (29.40) wrote:

> The US still has an advantage that its debt is in its own currency.  This is huge compared to other counties that got themselves in trouble and the price of their currency went down to debt ballooned without any further borrowing.  The price of the US dollar goes down and it is the holders of this debt that take the hit, which is why I think interest rates will have to go up.  There is too much risk holding US debt.

It is not necessarily a good thing because the US can continue along the path of self-destruction longer while other countries are stopped by hyperinflation much sooner. When the US finally has to stop, the hole will be very deep indeed.

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