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US Currency

In response to talk about a pending economic apocolypse, I have recently come up with two questions I'm asking people who care and have some amount of knowledge:

1. What conditions need to be met for a run on the US dollar to happen?

2. What would the result of a run on the US dollar be?

It's important to think of these things instead of "will it happen" so that a better understanding can be gained before the larger question is addressed.

Any one got ideas?

Re: US Currency

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Originally posted by atbell In response to talk about a pending economic apocolypse, I have recently come up with two questions I'm asking people who care and have some amount of knowledge: 1. What conditions need to be met for a run on the US dollar to happen? 2. What would the result of a run on the US dollar be? It's important to think of these things instead of "will it happen" so that a better understanding can be gained before the larger question is addressed. Any one got ideas?

What do you mean by a run on the dollar per se? I think a slow bleed is probably the most likely course. There are many who think the dollar has now bottomed. Given that so many international bodies hold such vast quantities of dollars, it is not in their best interest to do something that would crash the currency (e.g. China dumping massive amounts of treasuries on the market). It would be akin to cutting off your nose to spite your face.

In any event, if it were to happen, I guess a hypothetical result might include a huge decline in the trade weighted value of the dollar which would cause a massive spike in inflation and commodity prices, particularly those that are priced in dollars. Britney Spears would probably squeeze out a few more babies, Hell would freeze over, you'd shit your pants and the world would end.

Is that kind of what you were after?

Re: Re: US Currency

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Originally posted by Shakka What do you mean by a run on the dollar per se? I think a slow bleed is probably the most likely course. There are many who think the dollar has now bottomed. Given that so many international bodies hold such vast quantities of dollars, it is not in their best interest to do something that would crash the currency (e.g. China dumping massive amounts of treasuries on the market). It would be akin to cutting off your nose to spite your face. In any event, if it were to happen, I guess a hypothetical result might include a huge decline in the trade weighted value of the dollar which would cause a massive spike in inflation and commodity prices, particularly those that are priced in dollars. Britney Spears would probably squeeze out a few more babies, Hell would freeze over, you'd shit your pants and the world would end. Is that kind of what you were after?

perfect answer. as shakka said, it can't happen over a short period because the entire world is vested in the dollar. the dollar is far too important to fail.

If the US were to default on its debt or lose its AAA credit rating, perhaps there might be a sell-off. Or a nuke right on top of New York City. But I don't see any shortage of creditors willing to lend the USA money. And I don't see anyone committing their own suicide by nuking New York City. But I also believe that debtors are slaves of their lenders, and so it is not in this nation's best interest to operate in the red.

The entire world is vested in the dollar TODAY, however many countries are moving away from the dollar and diversifying their holdings. There is actually a major push among arab nations to get oil priced in Euros instead of dollars. If the federal reserve continues to devalue the currency, fewer and fewer people will want to hold the greenback. It will just continue a slow decline into oblivion...where all paper currencies eventually go.

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Originally posted by Capitalizt If the federal reserve continues to devalue the currency

the fed is doing nothing of the sort

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Originally posted by Capitalizt where all paper currencies eventually go.

absolute horseshit.

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Originally posted by Capitalizt The entire world is vested in the dollar TODAY, however many countries are moving away from the dollar and diversifying their holdings. There is actually a major push among arab nations to get oil priced in Euros instead of dollars. If the federal reserve continues to devalue the currency, fewer and fewer people will want to hold the greenback. It will just continue a slow decline into oblivion...where all paper currencies eventually go.

This is kind of in line with what I've been thinking, except the paper currency bit (which sounds far fetched but I've no reason to argue either way).

Currency reserves and US dollar peged currencies seem to have a major effect on the supply / demand balence of the dollar. A small number of countries have almost all the power in these terms.

Goods and services priced in US$ definately have some effect.

Are these two things the best indicators that something might go off?

Good points on debt default and AAA ratings Krypton.

Shakka - By a run I mean something similar to what happened to Northern Rock. It's a mass movement away from something. Bank runs are when all of the depositors want to pull out at the same time. A run on the US$ would be a mass sale which would cause it's value to plummet. These things do happen and they happen quickly. The best documented case is the 2001 debt default of the Argentine government. The depression also happened over the course of a day (a run on the stock market).

quote:

Originally posted by atbell Good points on debt default and AAA ratings Krypton. Shakka - By a run I mean something similar to what happened to Northern Rock. It's a mass movement away from something. Bank runs are when all of the depositors want to pull out at the same time. A run on the US$ would be a mass sale which would cause it's value to plummet. These things do happen and they happen quickly. The best documented case is the 2001 debt default of the Argentine government. The depression also happened over the course of a day (a run on the stock market).

it is impossible for the US to default on its debt. All US debt is payable in dollars, and the US can simply print more dollar bills to meet the payoff requirements. while this would devalue the dollar, it would not change the fact that the debt is payable in a pre-deflated dollar amount. Thus, deflating the dollar actually makes the principal payment less than it was pre-deflation.

It is possible for other countries (such as argentina) to default on their national debt because the debt may not be denominated in that local currency, in which case printing new currency won't solve the problem because it would devalue the currency and decrease the purchasing power of the currency - thus not changing the country's ability to acquire the payoff currency.

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Originally posted by jerZ07002 it is impossible for the US to default on its debt. All US debt is payable in dollars, and the US can simply print more dollar bills to meet the payoff requirements. while this would devalue the dollar, it would not change the fact that the debt is payable in a pre-deflated dollar amount. Thus, deflating the dollar actually makes the principal payment less than it was pre-deflation. It is possible for other countries (such as argentina) to default on their national debt because the debt may not be denominated in that local currency, in which case printing new currency won't solve the problem because it would devalue the currency and decrease the purchasing power of the currency - thus not changing the country's ability to acquire the payoff currency.

You forgot one thing. The possibility that the debtors refuse to take US Dollars. If that happens, it can be very possible for the US to default on its debt.

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Originally posted by Krypton You forgot one thing. The possibility that the debtors refuse to take US Dollars. If that happens, it can be very possible for the US to default on its debt.

That is not a possiblity. US government debt is denominated in dollars. On a 100,000 t-bill, the US government has the obligation to provide 100,000 dollars at maturity. The debtor can refuse dollars all it wants, however, that does not change the legal obligations of the government. The US government can not default on its debt since all of its debt is payable in dollars. end of story!

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Originally posted by jerZ07002 That is not a possiblity. US government debt is denominated in dollars. On a 100,000 t-bill, the US government has the obligation to provide 100,000 dollars at maturity. The debtor can refuse dollars all it wants, however, that does not change the legal obligations of the government. The US government can not default on its debt since all of its debt is payable in dollars. end of story!

Makes sense. Still, the government shouldn't take that as an excuse to spend money like a crack habit..

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Originally posted by Krypton Makes sense. Still, the government shouldn't take that as an excuse to spend money like a crack habit..

i agree, although i think it will be a cold day in hell before this government corrects it borrowing habits. maybe a few math teachers in congress would do some good.

The best thing we can do to balance the budget is withdraw from Iraq and Afghanistan. Those damned no-bid contracts and war profiteers are ruining our country and its economy.

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Originally posted by Krypton The best thing we can do to balance the budget is withdraw from Iraq and Afghanistan. Those damned no-bid contracts and war profiteers are ruining our country and its economy.

You could be right.

I'm working on a comparison between the situation in Argentina in 1999-2001 and the current US situation to see how closely they match. The biggest difference is definately the currency in which the debt is denominated. ... More then that I can't really say just yet.

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