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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: lorne who wrote (35213)	6/12/1999 12:07:00 AM
From: Investor-ex!	Read Replies (1) \| Respond to of 116759

lorne, I guess what I still can not grasp is why the dollar would not have a drastic drop in value when it seems so obvious that debt can [be] created and forgiven out of nothing. Even though the system as a whole can generally continue to lend indefinitely, there is a real limit to the ability to borrow on a case-by-case basis. Also, even though debt creation is without restraint, the system does have a set of rules which much be obeyed. Chief among these rules is the "sanctity of principal". A great many sins may be routinely forgiven, but setting the precedent and then repeating the act of principal forgiveness is generally not one of them. If people, or groups, or nations got the idea that they could borrow and not have to repay both interest and principal, the whole game would be up. So, someone somewhere has to make the debt largely whole, or what passes for the internal integrity of the whole fiat system collapses. The dollar will fall or collapse when private and/or public debt denominated in dollars begins to falter, i.e., it is rejected as a negotiable asset in a competitive sense. For example, if the US government unilaterally changed terms on its existing bonds (lowering the rate paid or lengthening the term) the dollar would fall. It the US government completely defaulted on interest payments or return of principal, the dollar would collapse, a la Russia. Since the "dollar" is a creature of the private banking system (via the FED) as much as the public, private debt is likewise affected. If it appears a supply of private debt denominated in dollars is about to go into default, e.g., third-world debt, those holding these dollar-denominated bonds will quickly move to dump them. This unwanted inventory will add to the pool that competes for a home against debt in other currencies (and gold for that matter). These bonds will have to be sold at a discount to find buyers, and the discount against this large supply of dollar-paper will tend to create a discount against all "dollars" in general, which are simply represented in the market place as other debt obligations themselves. These declines can be mitigated by various means -- by temporary pulling supply off the market via central bank or private bank debt purchases, by backroom "stabilization" agreements, and by partitioning and off-loading risk via assorted derivatives arrangements. But all of these techniques have practical limitations as well. Ultimately, somebody (or more likely nearly everybody) pays or the system locks up. This process works in reverse as well. If the world imagines a superior ability to service US government debt, the dollar is stable or rising on a relative basis. If the world is eager to borrow "dollars" from the private sector in preference of other forms of debt, or the bulk of new debt supply is simply in dollars, the private sector obliges by lending and the dollar-based debt is bid up in relation to others, due to the "apparent" positive effects of debt expansion and increased liquidity, if nothing else. But if a government with a large national debt or trade deficit hits a wall via falling tax collections and rising foreign and domestic obligations, or the private system finds it has made far too many loans to be reliably maintained by its many borrowers, the piper WILL be paid. And it generally won't be paid by those responsible for directing the errant lending practices or inadequately maintaining the long-term viability of the system, such that it is.