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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: philv who wrote (15385)6/16/2004 11:01:44 PM
From: BEEF JERKEY  Read Replies (1) of 110194
 
"That can't be true because dollars are exchangeable for anything, just as long as the rest of the world keeps the dollar floating. Only a sudden loss of confidence and a massive crash can derail this ponzi US dollar scheme, but in that case, every other currency will crash alongside the dollar."

That’s not necessarily true. In Japan's case they have a large current account surplus with the US. They could convert these dollars into their own currency but that would cause their currency to rise in relation to the US dollar. To keep their currency competitive they "recycle" their surplus into US dollar denominated investments. This works out well for the US because they have to "fund" the current account deficit somehow. This has been the situation for many years now but has created massive imbalances. The whole scheme works as long as the US takes on more and more debt and surplus exporting countries continue to fund this debt.

What could seriously derail the US dollar (and will eventually) will be the US finally hitting a wall as to how much debt the rest of the world will accept. The US dollar will tank vis a vis other currencies when countries such as China and Japan balk at the idea of lending the US even more money and are reluctant to buy even more US securities. The current US real estate bubble is funded in part by these recycled dollars from Asia. There are good reasons why CB nation may want to pull back from investing or lending the US money - but it hasn't happened yet.

On the other hand if there is a total loss of confidence in the US dollar it may spread to other paper currencies as well.
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