@EmperorNero,
I think that recent developments pretty well validate our thesis; i.e. that the dollar is going to be replaced as the world reserve currency, and that as a consequence the global hegemony of the U.S. will wane. Today on Drudge, and briefly on CNBC, there was a report that the Arab states have been negotiating with China, Russia and France to replace the dollar as the medium of exchange for the oil trade; and this at the same time that we hear Russia has just surpassed Saudi Arabia as the largest oil producer in the world. Power is shifting away from the west.
In terms of monetary policy itself, there's been suprising demand for US government debt. No treasury auction has failed, or even come close; the last auction had 3 bidders for every bond. This seems odd? Yes. Most of the demand comes from foreign 'indirect bidders,' which are assumed to be central banks; nothing strange here, nations with budget surpluses tend to invest in the dollar (hence its the reserve currency of the world). But
which nations have acquired the most treasuries in recent months? Britain and Japan. Hold on a minute...both of those natons have
massive budget deficits. Britain is especially laughable; it's debts are far higher per capita or relative GDP than ours in the U.S. How on earth did these nations buy treasuries:
with what money?
It appears that these nations have been selling agency debt (e.g. Fannie and Freddie) acquired over the last decade, which they keep in special accounts with the Fed in the U.S, and then using the money to buy treasuries. Alright, sounds fair enough, but
who do they sell the agency bonds to? The Fed! And where does the Fed get the money? You guessed it...the printing press. In other words, the Fed is
indirectly monitizing most of the new debt issued by the U.S. government. And, don't forget, the Fed has
openly been buying up to $300 billion in treasuries this year. My assumption is that something similiar is happening at the Bank of Japan and the Bank of England; i.e. the major western central banks are each printing money and using it to buy each other's debt covertly. It's really very clever. In the past, they woould have just monetized their own debt, but that leads to fear of inflation. Now, they can make it appear that there's real foreign demand for their respective currencies by buying each other;s debt secretly, so they don't stoke inflation fears. Eventually, this arrangement will collapse though, when the debt being amassed becomes impossible to service.
Also, gold and silver have continued to move upwards in light of a weakening dollar. Mahor news from China has also helped; China has for the first time allowed its citizens to buy gold and silver bullion for investment, and also has hinted (threatened) that it may default on its gold derivatives obligations to western banks. These moves betray an increasingly nervious China, unwilling to sit back and watch a decade of savings vanish into thin air through inflation. They are literally buying anything and everything (food, coal, iron ore, copper, gold, oil, etc.) with their spare dollars. If this dynamic doesn't change, and if the U.S. government doesn't get its fiscal house in order, I can't see any other possibility but that China will soon depeg its currency from the dollar and make a decisive move toward replacing the American consumer with the domestic Chinese consumer. Of course, their stimulus package (much larger as a percent of GDP than ours) was aimed at stimulating domestic consumption in anticipation of just such a move.
I was watching Niel Ferguson in a debate with some other intellectual (forget his name at the moment). He's the man who coined the term 'Chimerica,' in reference to the (supposedly) mutually benificial, symbiotic relationship between Chinese manufacturing and savings on the one hand, and U.S. consumption and debt on the other. He now (as of when this video was made a few months ago actually) has changed his tune and thinks that not only is Chimerica no longer advantageous for the Chinese, and that its breaking down, but that the souring of Sino-American relations might lead to trade wars, and possibly war itself. He sees a growing similiarity between the situation in Europe before the First World War and that now in the Pacific. Germany was a rising power, which was set to quickly overtake Great Britain in manufacturing, and which was threatening her traditional naval superiority. China is on the same ascending economic path, and it too is developing a naval capacity that will eventually be able to neutralize any American superiority (there ate alot of people who believe that the U.S. nuclear carrier force is already obsolete in the face of modern anti-ship ballistic missiles, such as China has purchased from Russia).
Cheerful, eh? :whistling:
Well, my prediction is that we will continue to see a gradual decline of the west, esp. the U.S., until at some point we reach a tipping point and see a real conflict, probably over Iran, which is now firmly supported by China and Russia.
