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Asia Times report: Dollar Crisis in the Making

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posted on Mar, 30 2009 @ 02:47 AM
Very interesting series of articles from Asia Times. They describe the Treasury bubble, and China's attempt to gracefully extract themselves from the dollar without collapsing the dollar.

PART 1: Before the stampede - Mar 14, 2009

Increasingly ominous clouds are gathering in what could soon be the perfect storm against the United States dollar and against the present dollar-centric global financial order.
Investors will begin to stampede out of financial assets such as Treasuries and into hard assets like precious metals and certain commodities whose price has been severely beaten down. These will offer comparatively much safer stores of wealth, ones with a real profit potential. China, via its resource buys, is already blazing the trail, going energetically into hard assets, rather than sustaining its 2008 rate of purchases of Treasuries and other financial assets.

Replay the recent histories of the chaotic housing and the commodities bubble bursts. Global investors, at the behest of enthusiastic governments, largely ignored the inevitable risks and piled into these assets on a grand scale, with the hottest interest coming just before the burst occurred. The environment of very low global interest rates and a massive global credit excess set the stage for enormous investor profits on these gigantic and mushrooming asset bubbles.
Though the present Treasuries bubble is more about safety than it is about profit, the fundamental risks associated with bubbles still apply to it. The bigger it gets, and the more reliant upon it as a safe store global investors become, the more unstable it turns out to be because it becomes more sensitive to various factors, both internal and external, both real and psychological.

The bigger and hotter any bubble gets, the more prepared its devotees become to speedily abandon it in favor of the next one. That explains why investors have mostly piled into very short term Treasuries - they know they may well have to sell out even faster than they bought in.

PART 2: The not-so-safe haven - Mar 17, 2009

Official and popular analysis of the predicament facing the US dollar has for the most part been distinctly unwilling to come fully to grips with the stark truth about the real nature of this deepening crisis and the escalating risks that are surfacing. Far too much optimism and wishful thinking, and scarce courageous realism, is a recipe for an even worse disaster than the one we're suffering at present.

We have seen in Part 1 the profound risks of a dollar crisis being triggered if global demand for US Treasuries remains high and that the debt bubble persistently and destructively sucks all the air out of the global credit markets. However, if global demand for Treasuries is not sustained at a very high level, there exists an entirely different, yet equally destructive set of impending and mounting risks that a dollar crisis might be triggered.
With regard to whether Chinese advisors and experts think the US government is creating a dangerous and unstable Treasuries bubble, note this statement:
"Buying US government bonds amid an economic downturn, (a purchase) that is not based on the sound performance of the US economy itself, indicates a huge bubble," said Zuo Xiaolei, chief economist of China Galaxy Securities.

PART 3: China inoculates itself against dollar collapse - Mar 18, 2009

There is mounting evidence that China's central bank is undertaking the process of divesting itself of longer-dated US Treasuries in favor of shorter-dated ones.

There is also mounting evidence that China's increasingly energetic new campaign of capitalizing on the global crisis by making resource buys across the globe may be (1) helping its central bank to decrease exposure to the dollar, while (2) simultaneously positioning China to make much greater profit on its investment of its reserves into hard assets whose prices are now greatly beaten down, while (3) also affording it greatly increased control of strategic resources and the geopolitical clout that goes with it. This is turning out to be a win-win-win situation for China as it capitalizes upon the important opportunities afforded it by the present global crisis.

The exact size and the precise composition of China's huge forex reserves, the exact degree of China's exposure to the dollar and its viable options, if any, in decreasing that exposure are matters of intense interest, because China's policies in this regard could have gargantuan implications for the US and the global financial systems and for the dollar.
Enter China's resource buys. Several Chinese experts have been saying that China needs to spend a significant portion of its dollar-denominated reserves on hard assets, thereby further reducing its exposure to the dollar. It certainly appears that China is embarking upon just such a strategy.
The bubble in US Treasuries is getting increasingly massive and unstable with each week that passes. Deepening global risk aversion is keeping investors lined up, so far, to buy Treasuries - especially short-dated ones. And the deepening economic crisis in the US is moving its own citizens to join in the buying spree.

If the Treasuries bubble persists for much longer, and especially if it continues to mount, the massive and dangerous distortions in the global financial system and the Treasuries-induced strangulation of its credit markets will only become more severe, likely leading to a meltdown somewhere in the emerging markets, one of whose effects will almost certainly spread to engulf the severely weakened Western European and US financial sectors and plunge particularly the US economy into a deep depression, with potent negative effects upon the dollar.

posted on Mar, 30 2009 @ 04:44 AM
I have wondered when this would start.

China has threatened to dump the dollar last summer.
Obama's 180 degree turn on campaign promises and his obese spending along with the FED loans, TARP, omnibus, Stimulus, and all the other crap that is piling on the huge fecal pile of debt will only exponentiate the timeline of pending collapse, lest the usurper and congress be impeached.

it makes me ill when a real constituant representative asks the hard questions to Treasury and the FED, but with time of recognition expired during one last hard question, no extension time is allowed for witness response, yet Barney Frank takes minutes to explain that time has expired befor a response was initiated, therefor allowing response is denied.

If he would just shut his corrupt man loving pie hole and let questions be answered, it would take less time than his redundant time consuming scolding and unproductive utterings that are as illogical as him as a Congressman.

Needless to say, no response was given to the hard question as he claimed time to bitch and moan instead.

You think only China has seen enough? Most nations have as well, not to mention the People of this failing Constitutional Republic...Consti..What?

The only change I see that isn't rhetoric is the few discarded pennies that will be trampled on as these theives walk out of Treasury with their last of the loot.

posted on Mar, 30 2009 @ 10:40 AM
I have been worried about this for a while now. It's not going to happen tomorrow but somewhere in the future there could be a point where China feels it needs to cut it's losses and dump it's USD investments. As long as there is hope of an economic recovery they aren't going to do this but as the debt builds this situation will become more and more likely.

posted on Mar, 30 2009 @ 11:00 AM
Very interesting set of articles, and very prescient, essentially saying that China is slipping out of the treasuries debt game under cover of the current unrealistic bubble of demand for treasuries as a safe haven.

Right now, China is easing itself out of the overheated treasuries market, but when the unwinding comes, China will not be the buyer they were before--instead they're buying real assets and commodities.

Very smart on their part, very worrying for the US.

posted on Mar, 30 2009 @ 11:08 AM
Yes is a bubble created by the Federal Reserve and the Treasury department and I believe the goal is to create a new currency.

So far since the year started we have added 6 trillion dollars to the debt on top of the 4 trillion created last year.

Before the year is over we have no clue how bigger the debt will grow and is bound to double for the years to come.

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