The World's Reserve Currency

This crisis is waaaay too short term and way too volatile to go there. Things are probably going to start getting better at some point. The fed, realizing that cutting the federal funds rate does not really improve business and consumer loans, is already talking about making direct loans to businesses. In other words, the fed is going to start bypassing investment banks. This may really shorten the credit crisis overall. In the mean time, I'm not sure that picking the Euro is that safe, or that picking gold is that safe. May as well ride it out.

I don't see how this could be a real concern, unless you believe that this crisis will be so severe to where it will bankrupt the United States government (seems like this is what you are suggesting)...ie we get into such terrible financial shape that we no longer have power to borrow, and US currency becomes worthless. It would take a crisis well beyond even the great depression to accomplish something like this...the US economy is still quite robust, relatively speaking.

That is indeed what I am suggesting, not as a certainty, but as an increasingly realistic possibility. 1) A nation completely dependent on consumption/retail will fall apart if credit is not forthcoming and 2) there is a finite amount of credit; the U.S. already consumes over 80% of the savings (spare capital) of the entire world. Our current economy will either change dramatically as a result of reform or totally collapse at some point.



How so? Consumption is down, housing values continue to fall, the major banks are being kept alive with new Fed money AND commerical real estate is by many accounts about to go the way of residential.




Perhaps you're right, I'm just hypothesizing, but what makes you think this is short term? :bigsmile: your optmism is pretty vague. Everything the Fed is doing accelerates the process I'm talking about. No doubt printing and loaning/giving trillions of dollars to banks will increase lending, but that's not really the point. I'm more worried about the inflationairy consequences of those moves. The same kind of thing happened in the 1970's, but there are some important differences between then and now; now the health of the dollar and the entire economy depend on the willingness of China, Saudi Arabia and others to lend us money to consume and thus we now have much more debt.

Right now, the government is spending far more than even these creditors can lend, so to keep the economy going, we have to keep printing and creating inflation. The only way to prevent this inflation from running amok is for the Fed to eventually raise interest rates.

Though, to raise rates would increase the cost of servicing our debts, public and private, causing more bankruptices and driving the economy down again.

So, the Fed can either trash the dollar or the economy, and it seems that they are choosing to trash the dollar. Basically, the Fed is doing what Argentina, Russia and other nation's faced with crushing debt burdens have done; deliberately devalue the currency in order to make the debt worth less. The question is whether or not they will be able to stop the inflation once it begins, especially considering that this is going to have to be one hell of an inflation to wipe out enough of our astronomical debts. I think the Fed has reached the point in their inane keynsian policy where they can neither inflate our of a slump nor deflate our of inflation without causing either severe inflation or severe depression.

The bahavior of other nation's seem to betray their understanding of this. China, Tiawan, South Korea ,Saudi Arabia and other gulf states are trying to trade some fo their dollar reserves. Russia and Iran are starting to price oil in euros rather than dollars. There are reports in Al Jazeera that the Saudi Royal faimily has been secreting jumojets full of gold bullion into the kingdom form the united states, where they traded dollars for gold. China has publicy announced the purchase of a few hundred tons of gold for their strategic mineral reserve. We just had the G-20 meeting to discuss a new international, finanical order. This is all circumstantial of course, but people have been imprisoned on less evidence.

No need to worry about the fed raising rates any time soon!

I'm optimistic, because I think that 1) we still have many assets, and the value of houses and businesses is nowhere near bottoming out, and 2) we may bury ourselves in debt in the process, but it may take nothing more than pumping the economy full of liquidity to unfreeze the credit system.

The debt may momentarily devalue our currency, but I have a feeling that all the financial regulations in Europe might make their recovery a bit more sluggish than ours.

I agree, the Fed's not going to raise rates anytime soon. Read my post again btw, I just edited it while you posted apparently.

Anyway, excuse me, I have to dissect your statements.

1) What assets do we have? Obviously we still own some things, but railroads, ports, large corperations, shares in banks, etc, have been purhased with increasing frequency by foreigners (why? because we have no money and have to sell real assets to get capital to pay our debts)
2) your right, if we print enough money, credit will flow.
3) Now that we've started along the path of currency devaluation, there is no reason for the dollar to rally unless we raise interest rates, which won't happen for a very long time methinks. In other words, there is reaslly no reason to think that this a temporary loss in the dollar.

If this crisis doesn't end in disaster, the reason will have been our success in persuading Asia and the Gulf to lend more or in convincing the European states to devalue their currencies as ours falls to mask its weakness. I think the latter is more likely; in fact that is already happening. China is less likely to be bullied and that may be the problem.

I think what you will see is a shift in the US economy from global to more local, and the economy naturally recovering as a result. By shifting money back into the country investment can turn back into wealth again.

The main asset that we do have...American ingenuity. When forced to do what would be best the American people typically pull through, as long as some outside force does not allow them to do so-- read the Bush administration.