Good clear expression of your assessment.
Thanks.
What do you think of the Pentegon assessment that we are subject to a Sovereign fund being able to kill our currency by dumping our T-Bonds. G. Beck and others have cited this report that came out with little fanfare.
I haven't read the actual report. If you have a link to it, I would appreciate it.
I do think that our markets are subject to manipulation due to uncontrolled derivative use.
I also think whether or not there was external manipulation in the price of oil, that oil is our Achilles hill. We should have been building nuclear plants, refining capacity, and drilling capacity long ago. We've known this since the first oil shock in the 70's and we've done little to guard against it. And I do suspect manipulation in the price.
As far as a Sovereign being able to destroy our currency by dumping T-bonds, I think that's a little bit of chicken little. I think they could cause some economic disruption, but lets take a practical look at what happens if China dumps there 880 billion in U.S. debt on the market all at once.
It's not like that those bonds get converted to US currency instantly. They are still bonds, they get paid on schedule and not before. So there would be a bunch of debt on the market, which would depress the demand for current US issues. Because there is so much supply at once the market would demand a discount to buy them, which would drive up interest rates until the excess is absorbed. But the FED could step in and buy them up, so that there is no effect on the markets at all except that the dumper takes a haircut. That's to our benefit, we'd be buying back debt cheaper than we issued it. Certainly doesn't "kill the currency".
The other scenario is that actual currency held abroad suddenly comes flooding back. I'm not sure what percent of our currency is held abroad. I've seen some reports that I don't believe that estimate it's half of what is in circulation. I doubt it's that high, but lets assume that.
What happens if a group of sovereigns arrange for all that money comes to come flooding back all at once. Absolute worse case is that you have twice as much money chasing the same amount of goods, so you get a one time spike of 100% inflation. Certainly enough to cause economic disruption.
But more likely as prices rise, more goods become available, and the effect is mitigated probably by as much as 50%. Still wouldn't want to see 50% inflation.
The FED, though could sell treasuries into the market soaking up that excess currency. I suspect that such an event could probably be mitigated to 10% inflation. The dumper would take a haircut for dumping so much at one time and life would go on.
In reality, that currency held overseas is held by many countries, people and businesses. A coordinated attack isn't going to return but a fraction of it. If they got 20% of it, it would be an impressive attack, but it would be mitigated for all of the above reasons, and we might see a couple of percent additional inflation for a year.
In the scenario where China dumps their debt, if the FED buys it off the market, it does convert it to currency, and we'd see inflation from it.
So I don't see the FED buying them all. I think they would let the market's absorb them. The debt securities would be a bargain, so the world wide market would probably step up pretty quick to absorb them.
The biggest implication would be for the U.S. trying to issue debt while the market adjusts. We'd either have to pay a high rate to issue during that time, or the FED would have to step in and buy the U.S. issues at a below market rate. That could avoid both an increase in currency and a disruption to US debt issuance.