Interest Rate Roundup

Wednesday, September 09, 2009

Dollar debasement keeps on keeping on

The dollar's collapse is gathering steam in early trading today. The broad-based Dollar Index is down 38 ticks to 76.95 as I write. It has taken out technical support dating back all the way to December. Certain individual currencies, like the Aussie dollar, are trading at the higest level against the buck in more than a year.

What's going on? I'm going to cut through the B.S. and lay it out as follows ...

First, the U.S. government has adopted an unofficial policy of U.S. dollar debasement or, at best, an official policy of not-so-benign neglect.

Second, despite a U.S. federal deficit that’s at least three times larger than the worst in history, there’s no reasonable plan to bring it under control.

Third, the U.S. Federal Reserve is monetizing the debt with printed money, a classic cause of rising gold, rising commodity prices, and a declining currency.

Concern about the dollar is rising sharply in places like China, and for good reason. The country has a $2 trillion-plus hoard of reserves. Experts believe that portfolio is overly concentrated in dollar assets – to the tune of roughly 75%. The problem? If the dollar keeps tanking, the value of those Treasuries, corporate bonds, equities, and other holdings will decline.

Cheng Siwei, the former vice chairman of China’s Standing Committee, warned in the London Telegraph newspaper that concern is rising, and rising fast. He said:

“If [the Fed] keeps printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies.”

No less an authority than the United Nations also said that dollar risk is on the rise. The UN’s Conference on Trade and Development said in a report this week that a new supra-national currency may be needed to reduce countries’ dependence on the slumping dollar.

Is this all just talk? Maybe not. China’s Ministry of Finance just announced that it would sell 6 billion yuan worth of government bonds in Hong Kong soon. That’s less than $900 million at current exchange rates, a pittance compared to the $100 billion-plus in U.S. Treasury debt that we’re selling every few weeks. But it’s noteworthy because this is the first issue of Chinese government debt targeted at global investors.

The G-20 failed miserably this weekend to halt the dollar bonfire. Fed officials act like they just don't care. So the question becomes, what's going to stop the rout? Anyone? Anyone? Beuller?


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