Not sure what exactly you want me to respond about. I'm thinking the main difference is in the timing of a collapse, so that is what I will start with. If that isn't enough let me know and I'll respond to more specifics.
First off, thank you for taking the time to support your arguments.
Our dollar isn't collapsing anytime soon, and that is plain and simple. Everyone has a vested interest in the dollar...and a huge one at that. Let's start with the oil industry since you seem to think they will be the first to start the collapse. The United States consumes 25% of the world's oil, and most of that consumption comes from the middle eastern oil obviously. Now with that in mind, do you really think they want to piss of America and stop pegging the dollar to oil? I don't really think that would be a good idea unless they want to suffer losses too. To make things worse the Euro is fiat too so why would they go to that if fiat money is the problem to begin with? I do see your logic behind wanting to dump dollars before it is to late, but I think it is to late to just dump dollars. Maybe once China or other nations start consuming more oil than America they may think about it, but no time soon.
The United States does consume a lot of oil, but depending on inflation rates for different currencies, 25% of sales does not necessarily equate to 25% of profits for oil producers in terms of buying power. What must Venezuela, Saudi Arabia, etc. do with the dollars we pay them? They're not worth anything in isolation from global trade. Instead, these oil-rich countries must deposit the dollars they receive into US banks, invest them via petrodollar recycling, or use them to buy imported goods. However, their first two options don't look so great when their rate of return - adjusted for inflation - is either low or in the negative numbers. Their third option only works out for them so long as the dollar remains the dominant currency used for trade, and its status as such is beginning to erode. Similarly, people in other countries will only accept dollars so long as they believe they too can use them again to buy things (such as oil). This is indeed circular, but the point is that if some people around the world believe that the dollar will be inflated at a faster rate than other currencies - such as the Euro - they will begin to prefer those other currencies for transactions, and this cycle will accelerate and feed itself as more people follow.
You're right that the Euro is fiat as well, but unlike us at RPF, the governments and bankers of the world have no problem with fiat currency in general. Their worries are specifically about the dollar and the tendency of the United States to continually inflate it. Worldwide trust in the dollar in particular may be at its lowest point ever, though it's fair to say that over the past couple months, confidence in just about everything has been going down . Anyway, you might think it preposterous that oil-rich countries would stop pegging the dollar to oil and risk angering the US, but many countries are
already gradually shifting away from dollars. This isn't speculation about what countries "might" do; I'm talking about what's actually happening right now. Kuwait already broke their dollar peg. Venezuela - the country we receive most of our oil from - is and has been trading oil with various third world countries via direct commodity barter. Iran is slowly making a transition to other currencies as well (Euro, Yen, etc.), and before we invaded them, Iraq was moving to the Euro. Before an ominous visit from Bush this year that apparently brought them "back in line," Saudi Arabia was preparing to do something similar. One by one, oil-rich countries are starting to accept and even prefer currencies other than the dollar. It's really just a matter of time before OPEC decides that the financial benefits of denominating oil prices in Euros or something similar (or even a basket of currencies) will outweigh the threat of US military retaliation.
At the same time, it's important to note that it would not necessarily even take dollar-dumping to initiate a global panic and firesale of dollars. As I mentioned, we're only borrowing so much from China because our more traditional "banking allies" have decided to cut their losses and stop lending to us, themselves. Once China decides to simply stop buying up new Treasury securities as well, who will, other than the misled American public? At that point, the government will be forced to rely much more heavily on inflation alone to finance its ever-increasing budget (and I have little hope that it will actually <gasp> cut spending). Unless some "greater fool" with lots of money is willing to start buying up bonds instead (unlikely), the end of China's borrowing will signify greater and greater inflation, and that inflation could destroy the dollar by itself, in addition to making conditions more ripe for actual dollar-dumping. China's lending also goes hand-in-hand with exporting its goods to the US, because they buy up bonds with the same dollars we send over in exchange for manufactured goods, and to a degree, we as a nation buy goods from them with the same money we're borrowing from them. If they decide to stop lending, they'll have to either do something else with the dollars they're accumulating via trade, or more likely, they'll start selling to other consumer markets besides the US, and that includes turning inwards and selling to their own people. It's also possible that China will cut back on their exports to the US first and then cut back on their lending.
As gonegolfin explains in this post in another thread, there will come a point when our interest payments become so large compared to the money we're spending on imports, that combined with the depreciating currency, it will no longer make sense for China to continue selling to us anyway. You could once again say there's no way this is going to happen anytime soon, but I disagree...the thread containing gonegolfin's post was actually created to discuss
this Associated Press article, "China looking inward as foreign economies slow." Sure, the reasons given are different from the points I'm underscoring, but as the Chinese become more accustomed to consuming their own goods, they may find they're better off doing so than selling them to us.
Many of the shifts I'm speaking of are already underway, and they're not good news for the US dollar. The geopolitical climate is changing very rapidly, and any long-term economic predictions have to take this into account.
I do agree that our policies will eventually run us into ruin, and we must change them if we ever want to get back to a sound economic system. At the same time the main reason no one gets rid of the dollar is because countries are already to dependant on the dollar. Because of this, there is a fear factor involved with dumping dollars. I think that fear factor is so huge everyone is scared to be the first to start the dumping.
Think about this...let's say the middle eastern countries start pegging oil to Euros because they decide to be the brave ones and start the avalanche. China would probably be the next to try and get rid of dollars, but as everyone starts running to dump dollars the ENTIRE global economy will be hit with huge losses. Who wants that? Who knows how long the effects of the losses will last, and how deep it will hit these countries. It may, for example, knock China 20-30 years back. I don't think any country wants to start this avalanche simply because they know it will cause a severe GLOBAL economic crisis. I mean just look at what this financial crisis is doing to the world. Now imagine China dumping dollars...that's huge.
I agree with this, and I made sure to address it in my earlier post. Right now, other countries are tempering their economic concerns with their fear of our military response and their fear of angering their
own allies by rocking the boat unnecessarily and ruining the worldwide economy in the process of trying to save their own asses. However, as I mentioned above, it might not even take dollar-dumping to destroy the dollar; if China merely decides to stop lending more money (not as drastic as dollar-dumping), the Fed's increased inflation might then spark a demand-side panic all by itself, and the actual dollar-dumping may only follow afterwards.
Of course, that's assuming national currencies like the US dollar remain at all a few years from now and aren't all converted into regional or even global fiat currencies...
The day will probably come, but considering that we still have one of the strongest mililtary, and our economic activity is so huge it effects the entire world, it won't be for a while. If the Fed can manage to keep the dollar from losing to much value during this crisis...which they will do by prolonging inflation...we will be okay...at least until the next big burst.
Here's the thing, though...we may have the strongest military in the world, but it's spread very thin due to our overseas interventionism. We're not exactly in the position to continue holding the rest of the world hostage for very much longer.
In addition, our economic activity may be "huge," but it's based largely on borrowing and spending. We may affect the rest of the world, but that doesn't actually mean they "need" us. In fact, our tendency to borrow and consume is becoming more of a liability than an asset to the rest of the world, and if it weren't for our military and the fact that certain countries have too much of their wealth stored in dollars already, they'd be better off just cutting us loose.
M2 is about 7,670 right now...and we are pumping about 1 trillion into the economy...that's a 13% inflation once it finally kicks in...but the fed also plans to suck money out of the system...which it is easily doing...just look at the Treasury market right now...at one point interest rates we're at 0.20% because everyone was demanding bonds (pushing up prices lowers yields). Everyone is scared of investing elsewhere so they will invest in the safest asset out there...and Government bonds are the safest regardless of what anyone on these forums believe...the proof is there...just go look...everyone is demanding government bonds.
You're right that because everyone is scared of investing elsewhere at the moment, many people are running to buy up government bonds in the meantime (and by people, I mean Americans)...but temporary consumer confidence does not inherently make bonds "safe," so to speak. Bonds are "safe" because no matter what, the government will "make good" on their nominal value, come hell or high-water (even if the government has to print the money for them). The same cannot be said for stocks, mutual funds, CD's, corporate bonds, etc. since companies and financial institutions can fail entirely. Domestic investors used to be quite confident in both the stock market and housing market, but just as those crashed, so can the bond market. While I cannot make any predictions about when, I will say this: Eventually, more and more investors in long-term bonds will realize the impossibility of being paid back in dollars that are valuable enough to justify their initial investment. After that point, they will only stick with bonds if they feel utterly trapped. As soon as they find a better investment or even just a store of value, they will direct their investments away from bonds and towards those other avenues. In other words, do not mistake American investors' relative confidence in government bonds right now compared to other investments for an absolute level of confidence in bonds. In addition, it's important to remember that long-term confidence in bonds is dependent on the geopolitical climate, and as I mentioned above, that climate is not exactly the most stable.
In any case, I understand that your main point was not to advocate bonds, but rather to explain that a strong bond market will extinguish some of the inflation the Federal Reserve is creating, as you mention below...
If the fed can issue enough bonds to suck up even 500 billion of the 1 trillion that cuts the inflation in half. About 6%...and where are we right now with inflation...about 5.5%. Also, this crisis is also lowering prices too. If people aren't investing in Government bonds, their second choice is to simply hoard cash. When you hoard cash you increase the demand for dollars, which in turns increases the purchasing power of the dollar. Look at oil...it has dropped 50% since July...that is huge.
Cash hoarding, saving, and tight liquidity may cause price level deflation, but that effect will be only temporary if the government has any say in it. Further inflation will convince people to resume their old borrowing and spending habits, assuming these liquidity injections "work." Just to make sure we're on the same page, where exactly are you getting the $1 trillion figure? Are you taking the $850 bailout bill and rounding up? If so, remember that we have a $438 billion deficit this year, and we have a similar deficit every year (and it's rising). Not all of that is funded through inflation of course, but the cumulative nature of the problem is important to keep in mind, and we shouldn't consider any particular inflationary action in isolation. That said, I may be misunderstanding you. Are you saying the total M2 inflation for 2008 will be about $1 trillion? Is that counting the inflation the bailout bill will cause, or are you counting that separately for the 2009 budget? If you're counting the bailout separately, what's your total inflation projection for 2009? The reason I ask is, I find it hard to believe that the bailout bill and similar "liquidity injections" will only raise our M2 inflation from 5.5% to 6%, even if half of the debt is bought on the market through bonds. If you're talking about 6%
in addition to our current 5.5%, that sounds much more realistic. In any case, repeated 5.5% or 6% annual M2 inflation is no laughing matter, let alone 11.5%.
Of course, all of this is still assuming people, foreign banks, etc. are going to buy up $500 billion of new bonds entering the market this year alone...which remains to be seen.
Bottom line...The fed will issue enough bonds to at least absorb half of what they print out of thin air...most people believe this recession isn't ending anytime soon...so you will see a lot of people investing in long term Government bonds...Bonds can be as short as 1 month and as long as 30 years. I'm saying the problem of issuing this money back to bond holders won't get to bad until about half way through...or 15-20 years from now. OF course this is just my esitmate just like your 10 year estimate is just your estimate...no one knows for sure, but the way other countries are already neck high in dollars, the economy being more global than ever in history because of technology, and our military power we won't see a collapse of our dollar anytime soon.
Here's the thing: In order to pay off bond holders as the years go by, the government will just have the Fed print more money (and try to issue more bonds to cover it). They will probably never actually "default" on paying the bond holders back (even 15-20 years from now or 30 at that), so that's not the issue. The issue is the continued inflation paying bond holders back will cause, and it's important to remember that the government is not starting from scratch today, where it doesn't have to worry about paying significant numbers of bonds back for years. In reality, the government is paying bonds back every day already, and the interest we're paying on the national debt is already astronomical: It was about $406 billion in 2006, $430 billion in 2007, and it's already $451 billion in 2008 with two months to go. On one hand, if you believe that the critical mass will finally be reached around 15-20 years from now and the dollar will then collapse, your guess is as good as anybody's, though I believe that all factors considered, we're looking at a shorter timeframe. On the other hand, if you're starting the clock today and predicting the bonds issued this year in particular are going to set things off about halfway through their life cycle all by themselves, I'd have to strongly disagree.
and to all of the people reading this and saying no the dollar is worthless...it has lost 95% of it's value, the government solves everything by printing dollars, numbers are scewed...that is true to a point. Back in 1940 did anyone think prices would be double or triple in 2008...I don't think so, but we've managed to still have an increase in living...regardless of the na-sayers. Technology has improved and my standard of living has increased drastically compared to someone in 1940. How do you know that in 2070 we won't have another doubling in prices, but a better standard or living?
How is it not possible to have a median salary of 100k in 2070. I mean in 1940 I'm sure the median salary wasn't even half of what it is now, but we still trust the dollar and it's still here.
Aside from the solvency of the government and the dollar, the main reason the gravy train cannot continue from now to 2070 like it has between 1940 and today is because inflation and other factors are already destroying the middle class. Our standard of living has indeed improved since 1940, but it's now on the decline. It's important to remember that when prices increase due to inflation, it's not only current dollar holders who get screwed when their saved dollars lose purchasing power. In addition, everyone in the middle and lower classes get screwed over the long term as well, because under inflationary conditions (especially in a regulated market like ours), wages and salaries can never keep up with the increase in prices, and relatively speaking, they just fall farther and farther behind.
Hundreds of you have lived decade to decade saying the samething, but for some magical reason the dollar is still here LOL. I've even read articles from the S&L crisis in the late 80's claiming the end of the dollar was here....what happened?
Apparently they underestimated the power of central planners to "paper our problems over."
Every subsequent crash is getting worse and worse, though. Is this "the big one," the day of reckoning that cannot be postponed any longer? Perhaps not, but I could be wrong, and I think anyone would be foolish not to at least consider the possibility. However, I do believe that such a day is coming much sooner than twenty years from now. I'm not saying your argument is entirely without merit, and I suppose my guess is probably no better than yours, but I do believe we're looking at a closer timeframe than you think.
LIKE I SAID BEFORE...I'm a supporter of Austrian economics and believe in sound money...want a truely free market economy, but I'm also being a realist here...It's not happening anytime soon. All countries are on fiat systems now if I'm not mistaken...If one currency ever fails...where just going to start another fiat currency.
I totally agree that "the powers that be" will push a new fiat currency on us before ever considering allowing us monetary freedom. In fact, I'm starting to believe that a new international currency might possibly be introduced and that the dollar might be phased out/converted to that new currency
before a complete dollar crash even happens. This is certainly in the interests of China and other countries who are sitting on huge dollar reserves, and as I mentioned in my original post, it's probably why China is now pushing for exactly this "solution." A new global fiat currency would protect such foreign interests from the Federal Reserve single-handedly devaluing their holdings over the coming years, and it would remove any need whatsoever for them to dollar-dump to protect themselves, thereby preventing all of the after-effects of dollar-dumping, too (such as global markets tanking and the possibility of US military intervention). Of course, this wouldn't prevent inflation in general...it'd just put the power into the hands of a "new" group of central planners, who will in the long term be even more despotic and destructive than our current planners. Anyway, I think the governments and bankers of different countries have some opposing interests here, because the "elites" of some countries have more to gain from creating an international currency before a dollar crash, and the "elites" of other countries have more to gain from creating an international currency in the aftermath of a dollar crash (and/or by instating a regional currency first, or bringing about any other variation of the general theme).
There may be an international summit as early as next month for making "changes" to the international monetary system, and whether or not this includes an international currency is anyone's guess. My guess is, "probably not," but I recognize I could be very horribly wrong.
In any case, I harbor no delusions that we're going to ever be handed a true free market or freely competing commodity-based currencies on a silver platter.
That said, the future of the dollar itself still looks quite bleak from where I sit.
