Posted on 01/07/2009 8:23:39 PM PST by lainie
The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.
Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.
The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.
Writing on his blog , Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."
He said that the dollar had been kept elevated in recent years by what some called "dark matter" or "American alpha" - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.
(Excerpt) Read more at telegraph.co.uk ...
They will ALL go down. What is unique about this situation is that for the first time in history, the entire globe is on on fiat money. Before, when one fiat currency regime collapsed, the rest of the world soldiered on and eventually the failed economy was lifted back up into the mainstream. This time, the entire global currency system is going to fail at the same time, sending us into totally uncharted waters.
About like it does now, if it’s denominated in $. The question will be “who holds title to the assets.”
These are general observations. They are not aimed at anyone in particular.
1) I believe it is foolish to casually dismiss a warning from someone with the credentials of Willem Buiter.
2) Gerald Celente, Peter Schiff, Max Keiser, Jim Rogers, Marc Faber, and similar people are all saying the exact same thing Willem Buiter is saying. They have been saying it for some time now.
3) Rising and falling prices is not the real danger to our economy. Supply vs demand is not the real danger to our economy right now.
4) If demand falls off far enough, we will have a demand-collapse depression. Many people believe we are there now. But we have survived one demand-collapse depression before. We can survive another one.
5) The size of our money supply is the real danger to our economy right now. The size of our money supply is growing at a frightening pace. So frightening that other nations holding our dollar-denominated debt, along with foreign private investors holding our dollar-denominated debt, are becoming frightened that the value of the dollar may collapse at some point, Weimar Republic style, which means the value of the dollar-denominated debt they are holding collapses as well.
6) People look at M2, see a mere 8% increase from last year, and come away thinking the money supply is not growing at a frightening pace.
7) However, M2 does not include bank and other financial institution reserves, which is where the bulk of the 8.5 trillion in new money created by the Fed Oct - Dec has gone. The Fed believes said money is technically not in circulation, and therefore should not be included in M2.
8) Other nations holding our dollar-denominated debt, along with foreign private investors holding our dollar-denominated debt, DON’T CARE if said money is considered to be in circulation or not. The mere existence of it is viewed by them to be part of our overall money supply, which would make our money supply approximately double the size of one year ago. That is not just inflation. That is hyperinflation in their eyes. Weimar Republic style hyperinflation.
9) When will these people suddenly decide they need to dump their massive dollar-denominated debt holdings? Who knows? Who can say when it will happen?
10) All of the people mentioned in #1 and #2 are saying it WILL happen at some point. None are saying when it will happen, because it is impossible to say when it will happen.
11) When it happens, the value of the dollar on world monetary markets will rapidly collapse. The value of every dollar-denominated asset in existence will collapse along with it.
12) We did not have this dollar-collapse danger in the ‘30s depression. The dollar was quite strong back then.
13) Many people, me included, believe the combination of demand-collapse depression and hyperinflation of the money supply will be too much to deal with, and the US economy will collapse completely.
14) What other currency may be turned to is academic. Lack of consensus on another currency to replace the dollar will not prevent nor delay the inevitable collapse of our economy from the one-two punch of demand-collapse depression and hyperinflation of the money supply with it’s inevitable collapse of the dollar.
15) Other nations are already quietly making moves to get away from the dollar.
This is when it will collapse...when the baby boom, which is the last generation in the US with a measurable degree of wealth, become Federal Dependents.
“Our nation is turning into a third world country, only without a youthful populace. And without even a common language. Only 50% of the kids in the LA Unified School District even speak English.....”
http://www.freerepublic.com/focus/f-news/2160790/posts
This is not a cohesive national or cultural group capable of generating a cohesive economic contribution to the world.
I wonder how comparable in length this “flight to safety” will be.
It still gives me the ooogs to think about Obama’s speech yesterday. He literally says that we need to get borrowing and lending moving again at all costs. Credit is King.
“If the authorities go ahead with the short-run Keynesian stimulus without having convinced the global capital markets and domestic producers and consumers that there will be a timely reversal, the policies will not work.” Buiter states.
“If the government is believed to be fiscally continent (future taxes will be raised and/or future public spending will be cut by enough to safeguard the solvency of the state) but turns out not be so after all, the Keynesian fiscal policy will be effective in the short run (as long as the public believes in the fiscal virtue of the government) but will become highly contractionary once the truth dawns.” he continues.
Buiter also states that he expects Federal authorities to allow the dollar to depreciate under an inflationary monetary policy, rather than default on Federal debt.
“The US Federal government has taken on massive additional contingent liabilities through its bail out/underwriting of the US financial system (and possibly other bits of the US economic system that are too politically connected to fail).” Prof Buiter comments. “Together will the foreseeable increase in actual Federal government liabilities because of vastly increased future Federal deficits, this implies the need for a future private to public sector resource transfer that is most unlikely to be politically feasible without recourse to inflation. The only alternative is default on the Federal debt. There is little doubt, in my view, that the Federal authorities will choose the inflation and currency depreciation route over the default route.”
Buiter warns that this course of action on behalf of the Federal government is unsustainable and will ultimately lead to a massive dollar collapse.
“If I can figure this out, so can anyone in the US or abroad who follows recent economic developments. The dawning of the realisation will lead to the dumping of the assets.” he concludes.
Link from baltische-rundschau
What's qualitative/quantitative easing?
Credit is king, until the crash. We’ll “go Argentina” in the next 2-3 years, max.
You are always reliable for a chuckle. I'll file that with your claims that real estate wouldn't crash and so on. But of course, "we know where you're coming from."
"I'd like to see mainstreet try to live for 6 months without financiers directing their activities. They be reduced to shooting each other over the last can of campbells."
5 posted on Saturday, October 04, 2008 3:38:33 PM by JasonC
I should join the chorus championing credit, too. That way I could finally sell my house and gtfo of California. :/
I haven’t been following Argentina very well but it’s bad. But didn’t it get especially bad once the country defaulted on its IMF debt? The US won’t even have that.
Only war can stop default?
Take heart -- millions of illegal aliens are reproducing at a prodigious rate. In two generations, they will own us and Spanish will become the official language. The likes of Obama will never get into office again -- he will way too far to the right to suit our new masters.
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