The Dollar, A Summary

One topic that has come up a few times here, covered in The Dollar posts, is what the future impact of the government’s current monetary and fiscal policies will be.  The nexus of government debt, interest rates, and the relative value of the US dollar.   Specifically, how will this affect the Bretton Woods economic system?  Could the paradigm whereby creditor countries instinctively place their reserve funds in to US debt be changed?

The Washington Post takes  a look at the issue in an article today, US Could be Facing Debt ‘Time Bomb’ This Year.

In summary,

Some analysts also worry that foreign investors, the largest U.S. creditors, may prove unable to absorb the skyrocketing debt, undermining confidence in the United States as the bedrock of the global financial system.

The point and a counterpoint:

Even a $2 trillion increase would push the U.S. debt to about 53 percent of the overall economy, “only a few percentage points above where it was in the early 1990s,” [Scott Lilly, a senior fellow at the Center for American Progress] writes, noting that plummeting interest rates show that “much of the world seems not only willing but anxious to invest in U.S. Treasurys, which are seen as the safest security that an investor can own in a risky world economy.”

Still, some analysts are concerned that the deepening global recession will force some of the largest U.S. creditors to divert cash to domestic needs, such as investing in their own banks and economies. Even if demand for U.S. debt keeps pace with supply, investors are likely to demand higher interest rates, these analysts said, driving up debt-service payments, which last year stood at $250 billion.

While covered in the article, the possibility of the United States defaulting on its debt is still very remote (although, for the first time, you can now buy credit protection on US government debt).  The real question is what would changes in the economic system do to how American live their lives?  If you think the current troubles in the housing market are big news, imagine what would happen to home prices if China stops buying Fannie Mae and Freddie Mac packaged securities.  While it is in the country’s best interest to maximize the benefit it derives from the current economic system, abusing the system could have distinctly negative implications.

From previous posts:

The Dollar, December 29th

The Dollar, December 29th

The Dollar, December 29th

The Dollar, December 18th

The Dollar, December 31st

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10 Responses to The Dollar, A Summary

  1. crosspatch says:

    “Still, some analysts are concerned”

    That seems to be the crux of the article. It seems to want to dig out any possible doomsday scenario and bring it to the foreground. I believe the dollar will be in good shape because the price of the dollar is a relative thing. Our economy is still doing much better than many others. The value of the dollar will be maintained relative to other currencies and if the US defaults on any debt, I believe that will be long after other countries have defaulted on theirs. The US deficit is still a smaller portion of the economy than that of many other countries.

    The USD is still stronger against the Euro than it was in July 08 and has been strengthening against the JPY, the GBP, and the INR. I don’t see anything fundamental that would make me fear for the dollar relative to these currencies though I suppose I could generate enough fear to have an impact if that were the goal.

  2. David Govett says:

    Because China and other countries hold billions of dollars, they would be foolish to sell them and drive their value down. Better they should give it to me so that it will retain its value. I’ll see that it is well and expeditiously spent. Honest.

  3. lewy14 says:

    If you think the current troubles in the housing market are big news, imagine what would happen to home prices if China stops buying Fannie Mae and Freddie Mac packaged securities.

    According to Brad Setser, they already have. The spreads on Agency bonds reflect this. The good news is that the Chinese are continuing to buy Treasuries.

    The gist of Setser’s recent postings is that while China’s exports are falling, their imports are falling too – leaving a substantial current account surplus, which must be put somewhere.

    The US dollar may well continue to be the least bad place.

  4. Gene Hoffman says:

    In many ways I wish that people all over the globe were less interested in buying US government securities. Right now they’d rather own those over the obligations of General Electric or most anything else. Heck, the yield on the T-Bill went negative. For a couple of days in the week or two before Christmas, people were willing to pay principal for the right to loan money to the US Government.

    Interest rates increasing would be a very welcome sign that anyone anywhere was willing to invest in anything but US debt. Anyone getting reluctant to loan to the US would be an excellent sign that there were returns at acceptable risks available somewhere – anywhere else.

    -Gene

  5. dave says:

    “although, for the first time, you can now buy credit protection on US government debt.”

    How are you defining “the first time”, sovereign CDS have been traded for years. Of note, if you pull a chart on US CDS the spike is striking, though the “insurance” is still cheap. Insurance placed in quotes, as CDS credit worthiness is dictated by counterparty, and if the US is defaulting their are no credit worthy cp’s that come to mind.

  6. Friend OF The Environment says:

    It seems to me that no matter how bad the economic crisis is around the world–people are always willing to invest in freedom.

  7. […] one commenter noted on a previous post, The US dollar may well continue to be the least bad […]

  8. Bill Cash says:

    I just stopped by your blog and thought I would say hello. I like your site design. Looking forward to reading more down the road.

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