Monday, September 12, 2011

Is this the beginning of the end for the dollar?

The US runs a trade deficit and normally the rest of the world increases their Treasury holdings every month. However, last month the Foreign treasury holdings went down $17 billion.

Part of the usual hyperinflation situation is that people stop rolling over bonds and get their cash as the bonds come due, and the central bank ramps up cash production. So I have been expecting this.  Some people like Pettis and Mish have claimed that mathematically the world has to keep buying Treasuries, but I don't think that is true at all. If the world stops buying, then the Fed will buy more Treasuries with newly made money. The more the Fed makes money the less people will want to hold US debt. The less people want to hold US debt, the more the Fed will have to buy with newly made money so that the US government can continue to cover their expenses. This is the kind of positive feedback loop that drives hyperinflation till the currency is destroyed.

So I will be watching the Treasury report this week with great interest.  A new report comes out on the 15th or 16th. If Foreign holdings drop again, I think it will be very significant news. I think they will drop.