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Former Bank of England Official Warns of Massive Dollar Collapse

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January 06, 2009 – Comments (11)

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http://www.telegraph.co.uk/finance/4125947/Willem-Buiter-warns-of-massive-dollar-collapse.html

Willem Buiter warns of massive dollar collapse Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.

The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.

Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.

The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.

Writing on his blog , Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."

He said that the dollar had been kept elevated in recent years by what some called "dark matter" or "American alpha" - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.

"The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."

He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise.

 

 

11 Comments – Post Your Own

#1) On January 06, 2009 at 11:57 AM, binve (< 20) wrote:

Yep, I totally agree. The bond bubble is starting to show signs of stress. The Fed will be somewhat successful at pegging long term rates for a time. But pretty soon that house of cards will collapse. When the treasuries go, and when the deleveraging hemorraging dies down, so will the short term demand for Dollars.

The dollar has technical resistance around 84-85 (which was support during the rally). UDN and TBT are very good calls right now. 

Gold looks like it is in the process of a correction. After it does, and once the dollar does it's final topping for awhile, this will be probably one of the best technical entry points we will get for gold in a while. Silver is also looking very strong right now too.

So that of course means CEF is a screaming deal right now :)

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#2) On January 06, 2009 at 1:53 PM, motleyanimal (92.15) wrote:

Damn, now that really hurts to be scolded by a British banker.

Has it occured to Professor Buiter that many of the problems in Africa and the Middle East are a result of the damage his nation's glorious empire caused when Britannia ruled the waves?

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#3) On January 06, 2009 at 2:38 PM, binve (< 20) wrote:

motleyanimal, seriously man, taking flak from the British is tough. Ohhh! Maybe we can blame the current financial crisis on the Brits! Yeah, something about a latent flaw in the system before the US independence, when we were still colonies ... :) I think we are on to something :)

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#4) On January 06, 2009 at 4:16 PM, motleyanimal (92.15) wrote:

Hi binve ,

That's a fair conclusion. If they were so good at managing an economic empire, then how come we revolted???

It took them over 20 years to get out of their last recession, so I hardly think we would solicit them for advice.

As for the lecture on morality, perhaps Professor Buiter should forward it to the British royalty in hope that it might curtail some of that fornicating with all those horse-faced women.

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#5) On January 06, 2009 at 4:38 PM, binve (< 20) wrote:

motleyanimal, no no, you are coming at it all wrong. We don't need advice from the British. We need a scapegoat. Instead of saying something like "the economy is in shambles due to our reckless inflationary policies", the Fed needs a way to say "It's the Brit's fault". Each outgoing President, Treasury Secretary, Fed Chairman needs a way to spin their legacy, right? ... :)

In all seriousness, your comment "It took them over 20 years to get out of their last recession, so I hardly think we would solicit them for advice" is right. British policies have hardly been pristene, so the comments in the article are very much like the pot calling the kettle black.

As for the lecture on morality, perhaps Professor Buiter should forward it to the British royalty in hope that it might curtail some of that fornicating with all those horse-faced women. .... Yeeeoucch!!!. But all I can really do is agree and LOL ! :)

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#6) On January 06, 2009 at 7:34 PM, jgseattle (34.92) wrote:

I think we will see inflation big time.  The interesting thing is that the last time we had big inflation and the fed raised interest rate to battle it the US debt was over 70% long term financed so the short term raising of interest rates did not hurt to much.  Today the 70% of the debt is short term financed so if the FED ever tries to battle inflation by raising rate they will bankrupt the government.

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#7) On January 07, 2009 at 3:58 AM, AnomaLee (28.58) wrote:

The title of this article sounded apocalyptic and should be re-titled "Massive dollar decline".

Otherwise this guy is a nut job.

That is feasible and highly probable, but currencies are valued vs other currencies, and currency trading is largely coordiated by a cartel of major financial institutions. If currencies weren't controlled by governments and highly influential institutions and were governed by a true free market then nearly every OECD country would have had to replace their currency at least once in the past 25 years

Case study:
Otherwise, Japan would've been a third world country after suffering one of the largest exoduses of investors in modern history.

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#8) On January 07, 2009 at 4:43 AM, DaretothREdux (46.43) wrote:

AnomaLee,

Have you look at the Nikkei since their crash? Try being a buy and hold investor since 1990 and their "new" monetary policy. You would only be down around 90% or so even today. Yeah. great case study.

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#9) On January 07, 2009 at 6:17 AM, kaskoosek (84.90) wrote:

DaretothREdux

Your comparison is too simplistic.

There is a huge difference between Japan and US.

Debtor vs Savor nation. Guess who's a debtor.

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#10) On January 11, 2009 at 5:29 PM, dwelllewd (27.74) wrote:

DOes anyone think that there are no subprime equivolent loans in Great Britian?  That Great Brittian and Europe don't have their own unique brand of securitizations?

Why exactly is the strictly the US's fault?

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#11) On January 11, 2009 at 6:09 PM, OtherOracleOfOMA (34.31) wrote:

Just one problem with that theory - the money being printed isn't being spent. It only exists electronically, in the reserve accounts of banks. Furthermore, you dollar doomers need to stop being so geocentric and take a look at the monetary aggregates in the rest of the world. Nearly all of the large economies are running the printing presses, and if they aren't now, they will be soon - yet no one's spending. Money, money everywhere, and not a dollar to spend. Nor a Euro, nor a Rupee, nor a Pound, nor a Looney, nor a Yen.

Perhaps that will change, but keep in mind: when someone defaults, the money that was their debt is destroyed. A lot of folks are going to be defaulting around the world, which means a lot of money being destroyed, and since there's no loans being made, the money being printed serves only an accounting function, not an operative (i.e., increasing the volume of exchange) function.

So what is to be done? Well, gold will likely continue rising, but the gold market is nowhere near large enough to absorb the money from equities and bonds. So buy gold, by all means, but the money 'round the world has got to go predominantly into currencies, not gold or precious metals. The US is screwed, but less screwed than a lot of other countries. Meanwhile, social instability is on the rise throughout the world, China and Russia being the two most vulnerable large economies. Now then, given that all the other countries are running the presses, yet are unable to halt the deflationary spiral, wouldn't you rather have your money in a stable, long-established democracy with a popular new leader, rather than a social basket-case, powder-keg developing market with a nominally communist government, like China? I think so.

As for Britain, if this guy thinks the Pound is going to fare better than the US dollar, he is so incredibly mistaken that it's laughable. While the US has a bloated financial sector that must be disposed of, a quick screen shows that there are still many excellent companies here stateside which actually make things. Across the pond, virtually the entire British economy is based around finance. "Business and Financial Services" is over 30% of the UK's GDP. The Pound will fall to parity with the dollar by Q3, mark my words.

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