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THE Dollar Crash Thread pt 2

For discussions of events and conditions not necessarily related to Peak Oil.

THE Dollar Crash Thread pt 2

Unread postby nth » Fri 11 Nov 2005, 14:39:38

A lot of people believe USD will crash and will lead to US depression or something similar. I got a question... since US is biggest consumer of energy, once US crashes, won't the price of energy drop dramaticly?

If that is true, it means the wealthy will still live in paradise while everyone else suffers.
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Re: Question about USD$ crash.....

Unread postby lakeweb » Fri 11 Nov 2005, 15:07:10

nth wrote:A lot of people believe USD will crash and will lead to US depression or something similar. I got a question... since US is biggest consumer of energy, once US crashes, won't the price of energy drop dramaticly?


I'm not sure what a 'USD crash' implies. Does it assume that all other world currencies maintain their values? I don't see how this is possible. For example, Japan and China's holdings of U.S. treasuries. While Japan holds some$150 billion China now holds over $600 billion. Both of their economies are very dependent on our market. This is why they have pegged their currencies to ours. If the currencies were to suddenly decouple, what happens to them?

nth wrote:If that is true, it means the wealthy will still live in paradise while everyone else suffers.


Wealth inequity must be enforced. You can only take it so far without bigger guns. Venezuela is an example.

Best, Dan.
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Re: Question about USD$ crash.....

Unread postby threadbear » Fri 11 Nov 2005, 15:19:38

The Chinese yuan depeg has already begun, if only incrementally. Meanwhile, the Chinese are taking their hoarded Yankee bucks and buying up natural resources wherever they can. The American dollar should drop relative to other currencies and relative to gold. However as Lakeweb describes, there is still going to be a certain amount of currency entanglement that will enable the US dollar to retain some of it's purchasing power. As in, if the US goes down, it will take other economies with it.

But the US dollar's strength relative to oil price is a poser. The MiddleEast could start to demand payment in euros, the one currency that maintains a bit of a firewall. In that case, the dollar will be losing some strength, relative to other currencies and will have lost all panache as the petrodollar. So, the cost in American dollars could climb, even with the attendant demand destruction of a major recession.
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Re: Question about USD$ crash.....

Unread postby nth » Fri 11 Nov 2005, 15:35:13

How can USD drop if we are not talking related to foreign currencies?

Ain't USD value determine by how much other currencies you can buy with USD?

If there are other methods of evaluation please enlighten me.

If USD falls in value against Gold and not against Foreign currencies, then this means that Gold went up in foreign currencies, too. That is simply inflation and not really devaluing the currencies.

May question has to do with price of Oil and availability... it seems like it won't affect the wealthy.

Venezuela's wealthy are doing quite well from my understanding. Am I wrong?
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Re: Question about USD$ crash.....

Unread postby threadbear » Fri 11 Nov 2005, 16:16:31

I was talking about a drop related to foreign currencies, North. To the extent that foreign economies are entwined, the effect will be modified or exaggerated.

The european economy isn't as dependant on the US, so it has, in effect, a firewall between it's currency and the American dollar.

All fiat currencies should see depreciation against gold. The American dollar will see the greatest depreciation. The Euro will likely see the least.

It's an inflationary scenario that governments will try to control with higher interest rates. Recipe for stagnation and poverty.
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Re: Question about USD$ crash.....

Unread postby richardmmm » Fri 11 Nov 2005, 16:22:06

The USD is no better or worse than any of the other fiat paper currencies.

The ones that might be strong, the Asians ones have been depressed by buying USD holdings so those will take a wack also if the USD falls.

The Euro and GBP and other european currencies are also mired in debt and politics and just as false as the USD.

If the US suffers, then so too do all their trading partners so in the event of a USD crash or crisis, then everyone suffers and the economy goes into global depression.

No, Euro, Yen or other currency is going to make any difference to that really.

In histroy we have never been able to escape these massive currency crashes, perhaps we have become smarter at extending it and increasing the complexity of the financial system, but in time it all has to come out in the wash.

printing up oodles of paper money, be it euros, usd or whatever, basically results in borrowing from the future to finance today. eventually the future arrives and there is no money to spend because it's already been spent.

eventually consumers stop buying stuff because beyond basic staples there isn't much more they need. how many condos in miami and home theatre systems do you really need ??

eventually the debt can't be rolled over because there is no liquidity to roll it over with, because people stop spending. partly because they have what they need due to easy credit and partly because they can't afford the credit they have.

then it's whammo time alla 1929 and no amount of derivates and complex US treasury instruments held buy foreign governments can prevent it.

A USD collapse will be like a heart attack to the global economy.

Worrying about what happens to the rest of the body if a heart attack happens is meaningless. Physically the legs and arms might still be in good shape, but when the heart attack occurs they are all stuffed regardless.
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Re: Question about USD$ crash.....

Unread postby Daryl » Fri 11 Nov 2005, 16:59:57

Maybe I can put some of this into perspective. China accumulates USD reserves because the have a trade surplus with the US. They receive USD in payment for the goods they sell to the US. Now what do they do with the USD once they receive them? Well, they might buy some gold, which they do, they might sell some USD and buy Euros and invest in the Frankfurt stock market for instance, which they do. In other words, like anybody with some money, they try to diversify their holdings. One problem very very large investors have is that the US financial markets are very broad and very liquid. Some people don't realize how large the US economy is. California's GDP, for example, is larger than France's GDP. China accumulates so many USD so quickly that every year they end up holding alot more USD than they would probably like to. This occurs year after year until today they hold some $600 billion of USD.

Now, some people read that China is holding $600 billion and they think, hey, that is not such a good thing. What if China decided to screw the US and sell all their USD at once and buy, say, Euros. This would precipitate a panic and the USD would collapse in value against major currencies. Because the US is a debtor nation (negative trade balance), they would have to raise interest rates very high to attract other foreign capital. This in turn would cause a collapse in the US economy and we are stuck in a bad movie (Mad Max). This is a possible scenario in theory. In practice, however, it is very unlikely for 3 reasons:

1) the US government can freeze China's USD assets whenever they please. They are ultimately just bookkeeping entries at banks in NY anyway.

2) the foreign exchange market is not liquid enough to convert that large a sum in a short amount of time. Even it were, foreign capital markets are not liquid enough to invest that much money in a short amount of time. That was part of the problem in the first place.

3) even if 1 and 2 weren't true, it would be a very poor investment strategy by the Chinese. By the time they were done converting 10% of their holdings, the dollar would have collapsed and they would made their remaining USD holdings worthless.

I think it was Donald Trump who said a long time ago that if you are going to borrow money from somebody, borrow a whole lot. If you do, then the banks are your hostage, not vice a versa.

PS. I am not an expert in this subject. I'm sure I have made some errors. Be gentle.
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Re: Question about USD$ crash.....

Unread postby threadbear » Fri 11 Nov 2005, 17:13:33

What do you mean by other currencies being false? Debt backed by debt systems can go on forever without backing by gold if debt is paid back somehow, AND there is confidence that it will continue to be paid back in the future. You can use paper, sand, doorknobs, lace doilies or cowrie shells to represent this system, as long as the wheels keep turning and there's no anticipation that they'll grind to a halt.

The US is very likely to default on debt, as Argentina did, in other words, it's wheels are going to grind to a halt. You're right that other economies who have been involved in lending to them, or whose economies are reliant on them, will suffer. But suffer just as much? Their wheels will grind, but more slowly. China is scrambling to prepare for this scenario right now. Don't know what Japan is doing, but the obvious solution is to align it's economy even more with China's to help buttress each other and let the US twist in the wind.
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Re: Question about USD$ crash.....

Unread postby hull3551 » Fri 11 Nov 2005, 18:57:29

If there was a sell-off in US dollars and the US froze the assets of China, this would of course cause a major panic in the market - not just in China, but across the globe. Furthermore, you’d see a huge increase in interest rates to entice ongoing investment in US debt, as the arbitrary freezing of assets (due to political or military reasons, I am assuming) by the US government would cause a major reluctance in any foreign government or investors to purchase US debt instruments. Especially with the ever-deteriorating standing of the US in the global community. As stated, governments need to reinvest trade deficit dollars into US Dollars, as it would otherwise entirely disrupt other currencies if the dollars were converted in bhat, yen, yuan (when/if it floats freely), euros, etc. Couple this with the dollar being the primary (sole?) reserve currency, petrodollars, etc., and the scenario basically allows the US to be as fiscally reckless as is wants.

This scenario obviously cannot go on forever in the US. And it’s only a matter of time before something triggers the sell-off in US dollars. It could be the Iranian Oil Bourse in 2006, some type of spat with China, improved economic strength in the Euro zone, or just a question as to the ongoing ability of the US to sustain huge debt loads for perpetuity.
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Re: Question about USD$ crash.....

Unread postby Tanada » Fri 11 Nov 2005, 21:55:22

</q>
Daryl wrote:Maybe I can put some of this into perspective. China accumulates USD reserves because the have a trade surplus with the US. They receive USD in payment for the goods they sell to the US. Now what do they do with the USD once they receive them? Well, they might buy some gold, which they do, they might sell some USD and buy Euros and invest in the Frankfurt stock market for instance, which they do. In other words, like anybody with some money, they try to diversify their holdings. One problem very very large investors have is that the US financial markets are very broad and very liquid. Some people don't realize how large the US economy is. California's GDP, for example, is larger than France's GDP. China accumulates so many USD so quickly that every year they end up holding alot more USD than they would probably like to. This occurs year after year until today they hold some $600 billion of USD.

Now, some people read that China is holding $600 billion and they think, hey, that is not such a good thing. What if China decided to screw the US and sell all their USD at once and buy, say, Euros. This would precipitate a panic and the USD would collapse in value against major currencies. Because the US is a debtor nation (negative trade balance), they would have to raise interest rates very high to attract other foreign capital. This in turn would cause a collapse in the US economy and we are stuck in a bad movie (Mad Max). This is a possible scenario in theory. In practice, however, it is very unlikely for 3 reasons:

1) the US government can freeze China's USD assets whenever they please. They are ultimately just bookkeeping entries at banks in NY anyway.

2) the foreign exchange market is not liquid enough to convert that large a sum in a short amount of time. Even it were, foreign capital markets are not liquid enough to invest that much money in a short amount of time. That was part of the problem in the first place.

3) even if 1 and 2 weren't true, it would be a very poor investment strategy by the Chinese. By the time they were done converting 10% of their holdings, the dollar would have collapsed and they would made their remaining USD holdings worthless.

I think it was Donald Trump who said a long time ago that if you are going to borrow money from somebody, borrow a whole lot. If you do, then the banks are your hostage, not vice a versa.

PS. I am not an expert in this subject. I'm sure I have made some errors. Be gentle.


I do find all the knashing of teeth and scowling a bit amusing in this reguard.

Everyone is ignoring the fact that China is now importing large volumes of Crude which is priced in USD. How many bbl of crude can you buy with a measely 600 Billion? About a 10 year supply of their current total consumption if the price is stable at $60.00. However not being fools the Chinese PTB know the price is likely to escalate considerably, and that at some point the crude may be converted to trade in Euro's. Either scenario, or any combination, makes their 600 Billion go less distance in securing the crude they need from the world market. A 10 year buffer is nothing for those who take the long view of history, and the long view is something the Chinese excell at.
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Re: Question about USD$ crash.....

Unread postby Daryl » Sat 12 Nov 2005, 06:17:58

Tanada wrote:</q>
Daryl wrote:Maybe I can put some of this into perspective. China accumulates USD reserves because the have a trade surplus with the US. They receive USD in payment for the goods they sell to the US. Now what do they do with the USD once they receive them? Well, they might buy some gold, which they do, they might sell some USD and buy Euros and invest in the Frankfurt stock market for instance, which they do. In other words, like anybody with some money, they try to diversify their holdings. One problem very very large investors have is that the US financial markets are very broad and very liquid. Some people don't realize how large the US economy is. California's GDP, for example, is larger than France's GDP. China accumulates so many USD so quickly that every year they end up holding alot more USD than they would probably like to. This occurs year after year until today they hold some $600 billion of USD.

Now, some people read that China is holding $600 billion and they think, hey, that is not such a good thing. What if China decided to screw the US and sell all their USD at once and buy, say, Euros. This would precipitate a panic and the USD would collapse in value against major currencies. Because the US is a debtor nation (negative trade balance), they would have to raise interest rates very high to attract other foreign capital. This in turn would cause a collapse in the US economy and we are stuck in a bad movie (Mad Max). This is a possible scenario in theory. In practice, however, it is very unlikely for 3 reasons:

1) the US government can freeze China's USD assets whenever they please. They are ultimately just bookkeeping entries at banks in NY anyway.

2) the foreign exchange market is not liquid enough to convert that large a sum in a short amount of time. Even it were, foreign capital markets are not liquid enough to invest that much money in a short amount of time. That was part of the problem in the first place.

3) even if 1 and 2 weren't true, it would be a very poor investment strategy by the Chinese. By the time they were done converting 10% of their holdings, the dollar would have collapsed and they would made their remaining USD holdings worthless.

I think it was Donald Trump who said a long time ago that if you are going to borrow money from somebody, borrow a whole lot. If you do, then the banks are your hostage, not vice a versa.

PS. I am not an expert in this subject. I'm sure I have made some errors. Be gentle.


I do find all the knashing of teeth and scowling a bit amusing in this reguard.

Everyone is ignoring the fact that China is now importing large volumes of Crude which is priced in USD. How many bbl of crude can you buy with a measely 600 Billion? About a 10 year supply of their current total consumption if the price is stable at $60.00. However not being fools the Chinese PTB know the price is likely to escalate considerably, and that at some point the crude may be converted to trade in Euro's. Either scenario, or any combination, makes their 600 Billion go less distance in securing the crude they need from the world market. A 10 year buffer is nothing for those who take the long view of history, and the long view is something the Chinese excell at.


Yes Henry Kissinger was once at dinner with Deng Xiaoping. They had a wide ranging conversation. At one point, Kissinger asked Deng what he thought about the French Revolution. "Too early to say," was Deng's reply.
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Re: Question about USD$ crash.....

Unread postby RacerJace » Sat 12 Nov 2005, 07:20:29

But the question is "when will the USS Enterprise, the unsinkable, hit the iceberg?". Me thinks March 2006 if Iran is sucessful in the switch to selling oil in euro.
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Re: Question about USD$ crash.....

Unread postby falser » Sat 12 Nov 2005, 10:03:24

hull3551 wrote:This scenario obviously cannot go on forever in the US. And it’s only a matter of time before something triggers the sell-off in US dollars. It could be the Iranian Oil Bourse in 2006, some type of spat with China, improved economic strength in the Euro zone, or just a question as to the ongoing ability of the US to sustain huge debt loads for perpetuity.


I think the Fed knows full well that the only solution for the US is to devalue the dollar. It's going to happen one way or another, and so they'll attempt do it on their terms over a long period of time, say 10 years. They'll keep rates low-ish, but high enough to avoid a sudden collapse. That's my prediction at least.
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Re: Question about USD$ crash.....

Unread postby threadbear » Sat 12 Nov 2005, 13:43:30

Falser, That is exactly what they're planning to do. But managing an economic downturn and dealing with the revenge of unintended consequences and random events, is going to be like watching a troupe of clumsy monopedes try to wrestle chain saws, while simultaneously jumping through flaming hoops.

There's a limit to what the jackasses can do. A managed downturn would be great, but I think they're going to lose control of events and then have to hike interest rates well into the double digits to keep foreigners from dumping bonds.
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Re: Question about USD$ crash.....

Unread postby MOCKBA » Sun 13 Nov 2005, 00:14:55

All those talks about Euro... Just ask yourself a question - Where would surplus Euros to run Iranian oil burse or to be accumulated in China central bank or whatever... where would those surplus Euros come from?

What ECB would copycat US and start printing just to help out Iran to sell their oil, or Chinese Communists to keep a billion of half starved people under control with a promice of communism and great China? And what ECB would do it at the expence of manufacturing jobs in Europe? And their would do it without guarantees from "house of Sauds" to recycle money back?

All in all, 2003 was the best year for EURUSD. From 2004 levels Euro has only one way and this way is down. And this is exactly what we are seeing in 2005 and will be seeing in 2006.
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Re: Question about USD$ crash.....

Unread postby MrBill » Mon 14 Nov 2005, 11:20:39

MOCKBA wrote:All those talks about Euro... Just ask yourself a question - Where would surplus Euros to run Iranian oil burse or to be accumulated in China central bank or whatever... where would those surplus Euros come from?

What ECB would copycat US and start printing just to help out Iran to sell their oil, or Chinese Communists to keep a billion of half starved people under control with a promice of communism and great China? And what ECB would do it at the expence of manufacturing jobs in Europe? And their would do it without guarantees from "house of Sauds" to recycle money back?

All in all, 2003 was the best year for EURUSD. From 2004 levels Euro has only one way and this way is down. And this is exactly what we are seeing in 2005 and will be seeing in 2006.



Mockba you are new here? If you want to be popular don't going pouring cold water on these folks petrol-euro fantasies or introducing facts into the equation. They don't want to know details. Just come back in April 2006 and listen to their excuses why Iran did not open an oil bourse in euros. The excuses will likely center around global conspiracies and threats from the USA/Israel.

Why just today those outstanding world citizens of Iran spurned an offer from Moscow to difuse the ongoing debate about duel use nuclear technology by offering to help them with the civilian bits if they gave up their bomb making ambitions. No thanks said the Iranians.

No, if you wanna be popular here you have to call the US dollar a worthless IOU and use terms like WTSHTF and other similarly colorful vernacular to hide your lack of knowledge about foreign exchange and capital markets.

Or as Daryl pointed out, you cannot sell USD without buying euros, or yen, or yuan or something else. Therefore, a USD devaluation would have to be by definition against one of America's trade partners. Europe insulated? A number of EU13 countries (Greece, Italy) run substantial deficits and have large debts or are bumping up against deficit levels (France, Germany, Italy). And, of course, Europe does export to Asia, who in turn export to America. How they will thrive while America goes down the tubes is the best kept secret on Peak Oil. Cheers.
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Re: Question about USD$ crash.....

Unread postby thuja » Mon 14 Nov 2005, 12:16:28

Good post Mr. Bill- I have to agree that the currencies are so interrelated that it makes no sense for a unilateral dollar devaluation. What is your opinion about likely monetary scenarios if we see inflation due to energy spikes?
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Re: Question about USD$ crash.....

Unread postby MrBill » Mon 14 Nov 2005, 12:43:02

thuja wrote:Good post Mr. Bill- I have to agree that the currencies are so interrelated that it makes no sense for a unilateral dollar devaluation. What is your opinion about likely monetary scenarios if we see inflation due to energy spikes?



Higher global interest rates. The Fed and the BoE have already started. The ECB is sounding a lot more hawkish lately. Central bankers are tightening up the easy money to choke-off secondary spikes in inflation from higher energy prices and to keep inflation expectations lower so that they do not end up in wages. Even the BoJ is removing its accomodative bias, but are not actively raising them.
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Re: Question about USD$ crash.....

Unread postby MOCKBA » Mon 14 Nov 2005, 12:43:25

How about EURUSD 1:1.10, USDCAD 1:1.10, inflation outlook for North America and Europe - stable?
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Re: Question about USD$ crash.....

Unread postby hull3551 » Mon 14 Nov 2005, 14:45:11

MOCKBA wrote:All those talks about Euro... Just ask yourself a question - Where would surplus Euros to run Iranian oil burse...


Well it’s not really the fact the EU needs additional Euros for the IOB. The EU already buys most oil on the international market in dollars. This basically creates an excess of dollars globally, which allows for both cheap credit in the US and the ability for the US to continue its fiscal obliviousness. The EU buys oils in Euros, which it must convert to US Dollars – thereby incurring transactions costs (of converting currencies) in addition to the currency fluctuations of the dollar versus euro.

It would eliminate a variable for the EU in purchasing oil if they could deal directly with the oil suppliers and also be less expensive. It’s a win-win situation for all parties involved except the US, as the dollar is propped right now due to its petrodollar role.

Yes, this would cause a huge shock throughout the world, but primarily and ongoing in the US: the US would lose its dominance as the premier reserve currency – not overnight, but eventually due to the US’ irreversible spending habits (form the federal level down to Mr. & Mrs. Consumer) that are unsustainable both intermediate- and long-term.

Again, the question remains, how will the US stop the IOB from operating? Whether it is this March or in five years, transferring from dollar-based oil sales to another form is the greatest threat to US dollar hegemony. One would think militarily, but Iran will not be a walk in the park like Iraq was (supposed to be). Especially since Iran is increasingly aligned with Russia, China, the EU, the ’Stans, etc.
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