Is buying dollars and/or treasuries irrational? Is buying dollars and/or treasuries ruinous IF the severe flu the U.S. has spreads to China, Japan and other exporting nations, developed and emerging? Isn't much of the money being printed by the U.S. being vaporized by financial entities essentially using the cash to replenish their capital after writing down bad loans? Who is sane and who is insane in a global deflationary environment? Won't eurozone countries have to keep printing money? Won't Japan have to keep interest rates low? Isn't the U.S. economy 7 times larger than the Chinese economy? http://www.bloomberg.com/apps/news?pid=20601039&sid=aCGCQtq7jyiE Investors in Treasuries, Dollars Defy Common Sense: David Pauly Share | Email | Print | A A A Commentary by David Pauly Oct. 2 (Bloomberg) -- The U.S. should lose its golden credit rating. Bankers and investors around the world should dump dollars. Read any economics textbook and you come to that conclusion. Massive government spending and money creation to rescue the nation from the Great Recession have deluged the U.S. Treasury market with new securities -- exacerbating the countryâs already massive debt load. Chronic U.S. trade deficits have led to the accumulation of vast stores of dollars in foreign bank accounts. Classic economics theory says supply should overwhelm demand in both markets. Treasuries should no longer be considered free of risk. The dollar should no longer be the key global currency. The U.S. has balanced its budget only five times in the past 50 years. The four straight years of surpluses starting with 1998 now look like a statistical error. Total government debt at the end of 2008 was $10.7 trillion, compared with $5.53 trillion 10 years earlier. A bit of nostalgia: In 1978, the debt was $789 billion, with a âb.â Thereâs little relief in sight. The latest budget deficit forecast for the new fiscal year that began yesterday is $1.4 trillion, according to the Congressional Budget Office. While the recession has curbed the U.S. appetite for foreign goods, Americans still spend more overseas than they sell, as they have consistently since World War II ended in 1945. The deficit in July was $32 billion. Using an index based on how much business the U.S. does with other countries, the value of the dollar has plunged about 13 percent since March 4. World Bank President Robert Zoellick, a former U.S. trade representative, said Tuesday that though the dollar remains the dominant global currency, ânothingâs guaranteed.â Stop Sign The double whammy of soaring Treasury sales and the decline of the dollar should stop governments such as China and Saudi Arabia from investing large chunks of their trade-earned dollars in U.S. securities. Instead, they are buying more. Foreign investors bought 43 percent of the $1.41 trillion of Treasury notes and bonds issued so far this year versus 27 percent of the $527 billion sold in the same 2008 period. China more than once has said it might move away from Treasuries. Still, its purchases have increased by 10 percent this year and it now owns $800 billion of Treasuries, the most of any foreign country. During the credit crisis, investors still considered America the safest bet. They were so eager that at one point they bought short-term U.S. paper that guaranteed them a small loss. What Inflation? As the economy begins to recover, they are buying Treasuries on the bet that inflation will stay tame even though the Federal Reserve is creating money rapidly in its recovery efforts. Pacific Investment Management Co.âs Total Return fund, the worldâs biggest bond fund, has increased its holding of government-related securities to 44 percent of its total investments, up from 27 percent in July. Bill Gross, the fundâs boss, says he views the move as protection against deflation, prices actually declining. Notions about inflation will change if the U.S. and other industrialized nations canât figure out when to ease off from their massive stimulus spending. No easy task. To protect the safety of Treasuries and the dollar, the U.S. government must soon get its budget under control. History suggests this is impossible. Canât Last Hard-pressed Americans now are saving more than they did a few years ago, curbing the demand for imported goods. How long will that last? Textbook economics suggests that before long, Japan and other Asian nations will start converting their dollars into euro-denominated securities -- or perhaps a new international currency backed by a basket of, say, euros and yen along with dollars. That would mean a significant decline for Treasuries and the dollar. The U.S. no longer will be supreme. Intuition alone should tell investors to look elsewhere for security. But who said investors -- be they governments or individual speculators -- had that much common sense? (David Pauly is a Bloomberg News columnist. The opinions expressed are his own.) To contact the writer of this column: David Pauly in Normandy Beach, New Jersey dpauly@bloomberg.net Last Updated: October 1, 2009 21:00 EDT
Non-U.S. denominated currencies, commodities, non-U.S. denominated treasuries... Maybe there's a reservoir of people and policy makers that see a future global crisis looming, and the value of the U.S.D., despite all the central bank injections and quantitative easing, will be a smart safety trade.
Dollar crash = end of globalization, world as we know it It won't happen. Central banks won't let it happen. Devaluation will occur, but not a collapse of the USD. Not yet. This time isn't different. I predict the USD will collapse eventually due to resource depletion driving costs of production very high. While the problems facing the US economy loom large, they are solvable. A crisis of resources is not solvable in the economic sense and cannot be fixed by boosting consumption.
Which of those are going to retain more value than the USD in the event of an actual collapse in USD?
Euro is not much better either. Total dept in terms of GDP exploded with the crisis. So as someone said, where are the alternatives ? Maybe the stock prices which are way ahead of the economic facts are already showing a flight in other assets coming. But in the end, its all about trust. As long as the average Jo trusts that threasuries have some real value, the game can go on much much longer. Investmentwise, it makes no sense to bet against it but rather to wait for the first signs of a collapse and then take action. I have to admit, that I have right now a very hard time to decide where to put my money after this stock market run but still favor countries like Brasil, Vietnam, Russia in the long run.
You could have used all of these arguments to be bearish on JGBs and the Yen for the last 15 years ... and that trade would have landed you in the poorhouse over and over and over again. The US is suffering from deflation - there are not enough dollars out there, and there is nothing the Wizard of Oz (Big Ben) can do about it.