vincecate wrote:Ya, how long it takes before nobody will accept the dollar is a hard question. I think 24 hours is too fast and 10 years too slow. It is a big world and there is lots of inertia. But as you say, even 1% inflation per month is probably more than enough to get people to flee the dollar.
That would almost surely start the process. At the moment the dollars are all more or less interchangeable, or the Fed has made them so by quarantining the illiquid dollars. The machine has become well oiled again, contrary to my predictions. I was very wrong on that one. To say that the MBS that the Fed took onto its balance sheet are a form of dollars may be a stretch to some people, but the Fed treated them as such by exchanging them for electronic dollar reserves even though the market wouldn't. When the MBS market locked up, there were effectively no participants who would put out a bid and the Fed stepped in and prevented a default. My best guess is the following scenario would take place if inflation goes higher. I'm not saying inflation will go that high, though. I think in the case of US Treasuries out beyond 10 years, a 1% per month inflation rate would have the same effect that we saw in the MBS market. I'm making a very broad guess. But at some point, at some inflation rate, a certain swath of the US Treasury market will likely lock up. There will be no bids, just as we saw in the MBS market in 2008. Short term bills and notes will be fine at that point. In fact, the market will be clamoring for those. At that point, the Fed again has two choices, just as it did in 2008. It can either exchange cash for ALL the illiquid treasuries, etc., out there, or the US government can partially default.
vincecate wrote:I don't think the government can just replace the dollar with another currency and have solved the problem. If the budget is not balanced the new currency is still headed for hyperinflation. Balancing the budget is just not an easy thing.
I don't think so either. Once there is a partial bond market default, then the credit rating of the US is shot. So that's why I'm puzzled by what Armstrong is saying. What I think will happen at that point is the states will say, "Hey, if Washington wasn't pissing all the tax money away that we send them and we could get our hands on it, we could balance OUR state budget. In fact, we could issue OUR own currency and an honest one at that." And it's true. Now I don't know if that means the Federal government can somehow realize the danger and get its act together for a few years at that point, or whether a few states will go ahead with that, or whether there will be a civil war. That's too hard to predict, but I'm guessing that the ultimate outcome will be as I previously posted, that eventually the Feds will take a smaller role. Any new currency will have to be accompanied by political and structural change to make it acceptable.
vincecate wrote:And even if the dollar crashes in 1 week, that still counts as hyperinflation in my book. But my guess is it will be more like 6 months to 2 years timeframe before people can really believe that the dollar is going down for the count. People will keep expecting it to bounce back or that somehow the government can fix things.
The cascading process of default should take a number of years. If I had to guess, 4 or 5. The dollar has a great probability of strengthening during that process due to increasing severity of Lehman, Greece, and flash crash type events. The way it will weaken is if Bernanke actually does (and is allowed) to exchange treasuries and whatever else is out there for electronic cash, when he is allowed to do so and how much. So we have those 2 forces opposing each other. And to date the Fed has been much more effective in opposing the systemic effects than I would have thought possible. But we are early in the process and as things move along it becomes more difficult to oppose the systemic problems.
vincecate wrote:Yes. It seems somebody will be taking a big loss. It may be the pension funds, it may be the banks, or it may be the government. But almost whichever way it goes it will probably result in more money printing.
My guess is this is what QE2 is all about. They are trying to preempt this catastrophe.
vincecate wrote:I think Russia and China now understand that having countries near them peg to their currency and use their currency for central bank reserves would let them play the fun game the US has of printing money and getting real things. Assuming the dollar does crash, I don't think Russia and China will be able to pull off the trick. Everyone will understand how the trick works at that point. The US will be poor without the money printing trick so it will become obvious where their wealth came from.
I don't think so either. That's one reason I think the future monetary system outlined in the above post is ultimately what is most likely. Some version of, "If you don't work, you don't eat." "If you don't produce something of value to export, you don't import." And that could apply to very small units or zones within countries. Basically it means the end of the welfare state as we know it.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.
