Good question. Looks like Bretton Woods 1 & 2 might be over. Just what comes next is causing quite a bit of anxiety.
The Vet pointed out that "The Chinese (and Japanese, Russians, Arabs et al) are now faced with the obvious. In order for Paulson to maintain the value of Freddie and Fanny bonds he has to issue more treasury bonds which somebody has to buy... Guess who has to buy them just to protect what they already hold? This is the same as lending your no-good brother in law $50 so he can pay back the $20 he borrowed from you last week......" (http://siliconinvestor.com/readreplies.aspx?subjectid=55997&nonstock=False&msgid=24926672)
I imagine the Asians, et. al., if they are determined to get rid of $US but are inclined to stick with their export model, will want to use their US$ to buy raw materials of all kinds wherever they are available. But their export model, to date, has called for them to print their own currencies to keep them from appreciating against the US$ (and other currencies) and that takes us back to square 1. Their purchases of US agency paper and Treasuries have helped keep interest rates in the US lower than they would be otherwise. If they are counting on the US consumer to buy their exports, they will need to keep supplying cheap credit. Whoops, square 1 again. As the man said: Who will buy the treasuries to fund the bail out of the agencies held by the exporting creditor/bond holders?
We now see them lighten up on agency paper. Next: do they lighten up on Treasuries? If so, and they all do so in concert--that is, they all begin to come to the same conclusion, i.e., holding US$ denominated notes does not have a bright future--can they co-ordinate one way or another to let their currencies rise together against the US$ but not against each other, thus maintaining their export model? Will they grow exports to one another sufficient to take up the slack if, as they lighten up on US paper of all kinds, US interest rates rise and US consumption and employment fall, cutting the US ability to import finished goods? I saw recently (http://www.reuters.com/article/marketsNews/idUSN0736676820080907) that Brazil and Argentina have decided to settle trade between them outsdie the US$ Is that the trailer for this movie?
This is bound to get very dicey sooner rather than later, given the sums involved. The process has that "exponential" feel to it: when you hit the incline part of the curve the ride gets very wild very quickly: chrismartenson.com
Ready or not, Bretton-Whose Woods 3, here we come. |
