Friday, December 18, 2009

Dollar Death By 1000 Paper Cuts (Or trillions, in this case)

Zhu Min, Deputy Governor of the Chinese Central Bank, issued comments at an economic forum in Beijing yesterday in which he stated that the U.S. dollar is set up to go lower and that foreign buyers will become a lot more reluctant to buy more U.S. Treasury bonds:
“When the U.S. has to fund its deficit through the combination of issuing more Treasuries and printing more dollars, it is inevitable that the dollar will continue to weaken.”
He also said that the U.S. can no longer assume that foreign countries will continue to fund its massive spending deficits.  Here's the Bloomberg news link:  Dollar Set To Weaken

Notwithstanding the current miniscule trading bounce in the dollar, it's probably worth paying attention to statements about the U.S. dollar and U.S. spending deficits which eminate from Chinese officials, as they are the largest holder of U.S. Treasury bonds.   Might also be worth paying attention to the recent disclosure from Pimco, which revealed that its Total Rate of Return Fund unloaded a massive amount of U.S. Treasury and agency debt, the latter clearly helped by the Fed's massive purchases.

Don't assume that a big spike in interest rates in the Treasury market - caused by funds like Pimco dumping and much higher yields required by foreign buyers - means a lower price of gold.  Au contraire, assume that higher interest rates in this context imply much higher inflation expectations from the market, as a result of the weakening of the dollar.

Higher interest rates will also destroy any lingering fantasies of a housing market recovery.  Will the Fed let the market takes it natural course and stop printing money?  Or will Bernanke, with reappointment confirmation safely in hand from the full Senate in January, re-up the Fed's money printing machine (Quantitative Easing) in order to purchase the 100's of billions in Treasuries necessary to keep interests down?  I am betting heavily on the latter and it sounds like the Chinese are as well.


  1. The dollar is king Dave, or did you not get that memo?

  2. LOL. I missed that one. Cleaning lady dumped out my in-box before I got it I guess.

  3. No worries, it will be included in all fortune cookies in 2010, per Senate Bill Resolution 2234521, which also allows for the use of public funds for lapdances by senators. "Cash for Grinding" is the name of the legislation.

  4. Sadly, you say that in jest, but I wouldn't be surprised if there's a measure buried in the bill that gave them a pay raise and enhanced medical bennies. I think all that was buried in the bill that extended unemployment insurance for another 6 months. That extension would allow a max 2 1/2 years of living off the Government. Even socialist Germany only allows that for 2 years.

  5. I will never forget the "Port Security" bill in which they stuck the dagger to online poker. I use to make a 60% return on my money in poker, but alas, no more.

  6. I didn't know you couldn't do online poker for money anymore. You can still be football online. Speaking of which, I need to look at the spreads this weekend.

  7. Yes. I think it's getting close to crunch time when the Chinese make an explicit, direct comment concerning something everyone already knows.

  8. I agree the day will come when the Chinese announce they will no longer buy Treasuries or accept the US dollar in trade, but my best guess is it won't happen until they've accumulated a lot more gold and have taken measures to hedge out their $800 billion in Treasury holdings as much as possible.

  9. Dave, I love your blob but the Woodrow Wilson "quote" you posted is fake for the most part. He never uttered the first two sentences. The rest does pertain to him, but that was said before the FED was created, during his presidential campaign. As a Democratic candidate running against Big Business folks (Taft and T. Roosevelt) he wanted to appear anti-corporate and anti-bank (while in reality he was a bankers puppet, or course.)

  10. Bill H. said it all when he stated this is a planned event. Just like when the British Empire handed off to to America.. We will hand off to the Chinese.

    TPTB hold no national boundaries, they only control money and move it into their best interests.

    As such, we are their fodder and we will go down over the course of 2010.

    They would like to maintain the USD as the world reserve currency but the realization has set in that it is a spent currency.

    We are at end game..USA

    Joe M.

  11. @Anonymous. Actually, just to verify everything, I have found the following. It is true that no one can find a exact source of the first two sentences. However, the rest is attributed to him after the Act was signed as per the following:

    This quote, at least most of it, can be found on page 185 of "The New Freedom" Woodrow Wilson (1913, Doubleday, Page & Co).
    In the preface, Wilson describes this book as "the result of the literary skill of Mr William Bayard Hale, who has put together here in their right sequences the more suggestive of my campaign speeches.......I have left the sentences in the form in which they were stenographically reported".
    It seems that the original quote may have been incompletely lifted from one of Wilson's campaign speeches- but, I have been unable to find a source for the full quote anywhere. Perhaps the Library of Congress has a complete text of the original speech? Please post if you find it!

  12. Dave,

    The Sudden Debt blog called those with a dim view of the USD as, "Dollar Cassandras" today.

    It seems to me there are a lot of people that think this particular fiat currency has acheived immortality.

    I think the masses of America are in for a huge shock and reality change very soon.

    Joe M.

  13. Joe, I was chatting with a colleague this weekend who is a local bullion trader. He remarked, quite presciently I might add, that "the majority of Americans have no clue just how close the U.S. dollar is to collapsing and they no clue what "fiat currency" means.

    I thought this comment from Friday's Midas says it all regarding the view that there are too many dollar bears:

    Interesting quote from Bloomberg this evening:

    -The Federal Reserve held the target rate for overnight lending between banks at zero to 0.25 percent this week, while saying that "economic activity has continued to pick up."

    Investors are paying record levels in the options market to protect against a sudden rebound in the dollar.

    The so-called one-year 25-delta risk-reversal rate, which was flat as recently as October, reached a record minus 2.03 percentage points yesterday, the highest since Bloomberg started compiling the data in 2003. A negative number indicates there’s more demand for dollar calls, which provide the right to buy the currency, than puts, which give the right to sell the greenback.-

    Goes a little against current perception that everyone's short the dollar,..