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?
nth wrote:If that is true, it means the wealthy will still live in paradise while everyone else suffers.
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.
Alfred Tennyson wrote:We are not now that strength which in old days
Moved earth and heaven, that which we are, we are;
One equal temper of heroic hearts,
Made weak by time and fate, but strong in will
To strive, to seek, to find, and not to yield.
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.
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.
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.
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?
MOCKBA wrote:All those talks about Euro... Just ask yourself a question - Where would surplus Euros to run Iranian oil burse...
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