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Politics : Dutch Central Bank Sale Announcement Imminent?
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To: sea_urchin who wrote (22612)3/12/2005 1:31:40 PM
From: The Vet  Read Replies (1) of 81176
 
Searle, how true .... players either have to put up or shut up. If they believe the USD will devalue, then they have to show who will revalue

Of course they have all been attempting to win the "race to the bottom" by matching the fall in the USD by issuing as much as their own currency as they possibly can. The Euro with it's more rigid bureaucratic structure is far more hamstrung in this regard than say Japan or China which has meant that to date, it has borne the brunt of the dollar devaluation.

But now with increasing long term US interest rates a new dynamic enters the picture. If the Japanese or others simply hold, but don't do any new buying of US treasuries, then their absence from the market will put even more pressure on bonds, dropping prices and raising yields.

The result would be an increasingly rapid drop in the value of the $800 billion or so US securities that they are holding. Inflation would rapidly increase in the US, the dollar drops and they are hit with the double whammy of lower bond prices and a lower dollar. If they buy more then they could hold the line on rates but they are simply putting off the inevitable as Greenspan continues to raise short term rates in the US and the Japanese continue to suppress the long term rates by their continued support of the market, simultaneously digging themselves and all other holders of US paper into a deeper and deeper hole.

The truth is that virtually all fiat currencies (with the possible exception of the Rand) have devalued together following the USD down. This has been largely disguised by the fact that currencies are always quoted relative to each other, and that overproduction of manufactured goods by low wages countries like China has hidden the normal inflation that should have been apparent. The truth of course is obvious to anyone who looks at the CRB but even that has been distorted by the existence of paper trading, hedging and derivatives which tends to blunt the real market forces of supply and demand.

These artificial monetary devices do not repeal the laws of supply and demand nor do they insulate the producers of real goods from the effects of rising costs except for quite short periods of time.

When real "stuff" gets to be in short supply, the price will go eventually up regardless of the market distorting effects of hedges, derivatives, long term contracts or futures. When supply is adequate these financial devices provide a dampening effect on prices, but when supply is limited they cause volatility and exacerbate the price rises.
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