The "end of the dollar's reign" is no prediction... It's here right now

[alan_coaks_3]

April 25, 2011

From Bloomberg:

Timothy Geithner says borrowing more from China to finance tax cuts for the most affluent Americans would be irresponsible.

The Treasury secretary has it backward. The real question is whether Beijing is willing to double down on a nation whose balance sheet makes Italy look good. Holding $1.2 trillion of U.S. debt is a fast-growing risk to China.

Traders have a theory about why the euro is reasonably stable amid a broadening debt crisis: Asian central banks are converting proceeds from recent intervention moves into other currencies. "Asian central banks" has become a euphemism for China, whose reserves now exceed $3 trillion.

China is making deals with nations such as Brazil to conduct trade in yuan. It's also making noises about the Federal Reserve's zero interest-rate policies and Congress playing games with the debt limit. If you were managing China's reserves, how many more dollars would you really want in this environment?

Heck, China is even loading up on Spanish debt these days. "China's open admission of continual purchases of European debt shows it doesn't consider the U.S. any safer," says Simon Grose-Hodge, head of investment strategy for South Asia at LGT Group in Singapore.

America's Sugar Daddy

The risk that America's sugar daddy is getting fed up hasn't escaped U.S. officials. It's probably no coincidence that Fed officials are talking about dismantling their quantitative-easing program, while Washington is homing in on the deficit.

This enough-is-enough dynamic was on display last week as the leaders of Brazil, Russia, India, China and South Africa, the BRICS economies, met in the Chinese resort city of Sanya. Chinese President Hu Jintao called for reform of our international monetary and financial systems. A commentary by Zheng Xinli may offer a clearer view of what Hu meant.

Zheng, an executive vice president of the China Center for International Economic Exchanges, wrote in China Daily that the "root cause" of the financial crisis was U.S. "long-term abuse" of sovereign credit. He called for the Group of 20 Nations to devise a multicurrency system.

The U.S. takes its AAA credit for granted, knowing that neither Moody's Investors Service nor Standard & Poor's has the bravado to downgrade it. Yet we may now be observing the flipside of the 1971 musing by Nixon-era Treasury Secretary John Connally that the dollar is our currency, but your problem. The dollar may soon be Washington's problem.

Crash Threat

The path was set by Geithner's predecessor, Henry Paulson, who visited China last week. On Paulson's watch, the U.S. morphed into a huge debt-issuing machine. It has remained in overdrive since, and Asia is getting antsy. What if Moody's or S&P grew a backbone and took away America's top rating? What if the dollar crashed?

In recent years, the answer to both questions was Asia; it would always be there come auction time. Until now, this faith made sense. Asia's reserve arms race since 1997 was about keeping exchange rates competitive and avoiding the humiliation of going to the International Monetary Fund for handouts. The trouble is, it's a Faustian bargain.

The reference here is to Johann Wolfgang von Goethe's novel "Faust," in which an alchemist makes a deal with the devil. He compromises principles for fleeting gains. That, in a nutshell, is where Asia finds itself as the U.S. re-inflates its economy. Asia is kind of trapped.

Ponzi Scheme

The trillions of dollars stuffed in U.S. debt could fund infrastructure, education and health care back home. Asia can't easily withdraw its savings because that would cause a run on U.S. assets, which might put the world's biggest economy back in crisis. Not knowing what else to do, Asia buys more and more dollars. Ponzi scheme, anyone?

Asia must now decide to continue gambling on U.S. debt or cuts its losses. The $886 billion Japan parked in U.S. debt would come in handy to rebuild its earthquake-devastated northeast. Any sign Japan is drawing down its pot would send shockwaves through markets. Ditto for oil-exporting nations facing people-power revolts.

China, too, is worried about Middle East-style protests, and heading off inflation is vital to taming the masses. Billionaire George Soros last week called Chinese inflation "somewhat out of control." In March, inflation accelerated to the fastest pace since 2008.

China's Call

Accumulating dollars exacerbates the problem as it pumps up China's money supply. Buying fewer would help boost the yuan and give policy makers more control over the economy.

It's China's call, though, and that's a big risk for the U.S. It should worry officials in Washington that speculation Friday about Chinese rate increases had investors rushing into the safety not of dollars, but yen. For some, the risks of quake aftershocks and radiation leaks in Japan seem more manageable than folks playing politics with America's debt-borrowing ceiling.

As Geithner worries about paying for stimulus, he should remember that it's not really Washington's call. The decision will be made by America's banker 7,000 miles away, and he may be having doubts.

My link

[jg1]

Just like most attics, have to wake up in the gutter one day and decide if we want to live or die. Our addiction is spending for votes.

[Buckeye Pilot]

Just like most attics, have to wake up in the gutter one day and decide if we want to live or die. Our addiction is spending for votes.

Just like most attics......... Huh?

[freeze]

Timmy had to get H & R Block to file his extention as Obammy forgot to sign his expense voucher.

[Dalite]

This may give some insight as to why the Fed's first ever Presser will be delayed until after Wednesday's currency auction.

Maybe they wanted to see if anyone is still buying their brand.

The United States run as the worlds number one breeding ground for Economic Terrorism is rapidly drawing to a close.

The Federal Reserve, not content to merely condemn the US Citizen to a life of servitude to their compound interest decided to move on to bigger things. And as you can now see, even the world was not enough for their voracious appetite for the fruits of the labors of others.

Many have been watching this for years; if not decades, wondering if this was going to happen in their lifetime.

Equally many hoped this would happen while they were young, and had a chance to recover, now afraid it will happen in their golden years.

Some even decided not to have children to leave this mess to. Family trees ended, rather than leaving this mess to children and grandchildren.

Folks, this is serious stuff. We are approaching the corner of Walk and Don't Walk.

It appears it is too late to stem the tide, and time to start making plans as to how we are gong to survive what is coming, and how we will emerge from the other side of it.

In 2003, OPEC was on the brink of requiring all oil purchases to be paid for in Euros. Large and small nations alike started shedding their dollar reserves. Only Saudi Arabia seemed willing to stay with the dollar. It seems a mere coincidence that we chose this time to end the suffering of the Iraqi people and topple the regime of Saddam Hussein.

The US had already started relying on an infusion of new money designs every 7 years to "foil counterfeiting". It effectively doubles the money supply without the need for bond sales to back it, as it is expected to replace the previous design. However, it is the Fed's choice to determine how aggressively to contract the money supply. The fear of the EuroDollar became so strong that the planned October 2003 release for the next 7 year release of "new money" was scheduled to be moved up 6 months. I guess all realize what happened in March of 2003. Needless to say, after the invasion, the Fed quietly reverted to their normal schedule.

Even with this kind of sleight of hand, the Fed still printed more, and, as more and more obvious with each passing day, has reached a debt level that cannot be maintained with the anticipated GDP of America. When I say maintained, I don't mean paid back, I mean the ability to service the interest on our debt is now coming under question.

China had been drinking from the well of American debt; they had imbibed long and deep. Dollars had always been the mainstary for reserve currency, and by this time they were in too deep to start dumping. To keep the value of their dollar holdings up,they had to spend it back into our economy. We countered by buying more of their goods and sending it back to them. They countered by keeping their currency undervalued. China ended up as a major owner of American Real Estate and the number one importer of our inflation. Naturally, they weren't real thrilled about this arrangement.

They now have a thirst for other currencies, and a voice in the world economic community. In all likelihood, their currency will become the main reserve for their side of the world. The Dinar stands a good chance to be the standard for the Middle East. The BRICS countries are weighing their options. The Dollar isn't one of them. It is looking more and more like the Dollar will have a much smaller scope of inflation abusers to appeal to.

Is it any wonder that Gold and Silver are at all time highs?

Everyone should start paying attention to the story that is unfolding before our eyes. The US has always found clever ways to emerge from economic doldrums. This time, it looks like they stole their own wind...