US Dollar Vulnerable to Interest Rate Cut, China Dumping US Bonds
As the dollar falls, so does the wealth of dollar holders - particularly Americans. We checked this morning and found the dollar had dropped to over US$1.38 per euro. Last week, we paid US$5 for a cup of coffee in London. And the price keeps going up.
Why is the dollar falling?
Speculators, investors, and central bankers have figured out that the US government and the Bernanke Fed will not protect the dollar - not when millions of Americans are having trouble making their mortgage payments. The US money supply is increasing - nearly five times faster than GDP growth. And now, fearing a Japan-style deflation, the Fed is likely to cut rates later this month.
The Chinese have one of the largest dollar piles in the world.
"Is China quietly dumping US Treasuries?" asks Ambrose Evans-Pritchard in the English press.
"A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable."
The report continues:
"Data released by the New York Federal Reserve shows that foreign central banks have cut their stash of US Treasuries by $48bn since late July, with falls of $32bn in the last two weeks alone.
"'This comes as a big surprise and it is definitely worrying,' said Hans Redeker, currency chief at BNP Paribas. 'We won't know if China is behind this until the Treasury releases its TIC data in November, but what it does show is that world central banks are in a hurry to get out of the US. They don't seem to be switching into other currencies, so it is possible they are moving into gold instead. Gold is now gaining momentum across all currencies and has broken through resistance at 500 euros,' he said.
"Two top advisers to the Chinese government gave strong hints in August that Beijing should use its estimated $900bn holdings of US Treasuries and agency bonds as a 'bargaining chip', words taken as an implicit threat to trigger as US bond crash if provoked."
The Chinese have denied it, of course. But betting against the U.S. dollar has been one of the surest gambles you could make over the last 35 years. Now, it is probably still a good bet.
Bill Bonner
The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- None Found
About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Pete on 26 April 2008:
Don't you think that the Federal Reserve in the US creating all this new money out of this air, diluting the money supply by funding this 1,000,000,000,000.00 (One Trillion) empire they've got going plus the 100's of billions of dollars they spend on war in iraq and afghanistan has anything to do with their slumping dollar? Where do you think inflation comes from in war time? Look at the charts, inflation is created out of a devalued dollar and always happens in wartime.
And why wouldn't they dump there US treasury bills? Who in their right mind would want to invest in paper that is backed by absolutely nothing but a promise that it is actually worth something and not something tangible like gold or silver which puts limits on how much money can be injected into the system..what a joke.
Comment by Pete on 26 April 2008:
hey 'Pete', please use a nickname other than mine. Cheers!
(or don't, its not like i care about some form of reputation)
Comment by Pete on 26 April 2008:
Oh, and 'Pete' in response to your comments, there are many reasons China cannot 'dump' their bonds so simply. Firstly, they are not the only country that has them and this would affect political relations, secondly they would risk screwing up their own economy by doing it. If you think it is simple, it is not. These countries (I believe China, Japan, Russia and others) know their predicament. They have their reasons for not selling up quickly...perhaps they want the USD to survive.
Comment by Pete on 27 April 2008:
Huh?...I use the name Pete cos that's my name..I figured I was the first to comment on here and had no idea you even existed but aside from that I agree with you..Why would China wish economic collapse of the country that buys most of China's production and crap that comes out of their sweatshops ie; Nike.
If the US was to fall I gather this would have a major impact on their economy also. But the question is why do we continue to allow central banks to have the authorisation to devalue a dollar? Their main job is to control price stability and how can they possibly do that when they create new money and inject it into the system essentially forcing the market to drive up prices. If you had a currency that was based off something tangible as previously mentioned, we wouldn't have this problem in the first place.
Gold continues to prove that it increases in value when the dollar falls, proving that goods do relatively remain at stable prices, but as the dollar falls you lose your purchasing power. That's why we pay $5.00 for a cup of coffee in britain when we are bringing australian dollars the reason equals a weaker dollar value. It isn't of course all that simple but it could be alot simpler if we followed responsible monetary policies. Another concern of mine is most of the money that is floating around is based off credit. The banks due to certain laws are allowed to lend 10x as much money as they have in the vault. Then they keep you in a mortgage for the next half of your life, making you pay them for money they never had in the first place. If I was to do the same, I'd probably be labelled a con artist or a counterfeiter and that's exactly what the federal reserve does and soon the credit bubble over there will bust..
Comment by OtherPete on 27 April 2008:
Pete, you said: "But the question is why do we continue to allow central banks to have the authorisation to devalue a dollar?"
I think this is because we think we have a choice, but in fact do not (not without education and organisation). Australia and the US essentially have two party politics, which is a choice between two evils. I once heard someone say on TV that they would vote for Howard, because "better the devil you know". I know a lot of people that think there are virtually no differences between Australian political parties...
It is sad but true what you say about the population having to absorb the monetary mistakes(?) of the central banks. Unfortunately, it is politically safer to tax people sneakily(?) using inflation than it is to allow necessary hardship on an economy. The population cannot stop the actions of these central banks... (not without some serious rioting, surely).
So as a member of the general population, I will just have to sit back and let it happen, and hope that I can put myself in the best position to go into and come out of any hardship as best possible.
Comment by Zaphod on 27 April 2008:
Ok who is the real Pete?
Comment by Pete on 28 April 2008:
I am Spartacus!
Comment by Pete on 29 April 2008:
So you are aware that we have a corrupt money system designed to allow necessary hardship on the people? If so, when is someone gonna stand up and demand this lunacy to end..I know this goes really deep and stems back to people that truely benefit from this form of slavery..
The only way to truely protect yourself is to learn to live off the land, get out of debt and protect your home, cos I sense that things are going to get extremely bad. How bad I'm not sure but enough pressure to make a majority of the population to get a little crazy. I'm certainly concerned about the current state of affairs and all the media outlets can do is talk about scapegoats in the ecomomy, but never talk about the real cause of all our problems (The private central bank - RBA). Actually, I'd like to draw your attention to the following and please take special note of number 5.
10 Planks of the Communist Manifesto
1.Abolition of property in land and application of all rents of land to public purposes.
2.A heavy progressive or graduated income tax.
3.Abolition of all right of inheritance.
4.Confiscation of the property of all emigrants and rebels.
5.Centralization of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.
6.Centralization of the means of communication and transport in the hands of the State.
7.Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan.
8.Equal liability of all to labour.
Establishment of industrial armies, especially for agriculture.
9.Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equable distribution of the population over the country.
10.Free education for all children in public schools. Abolition of children's factory labour in its present form. Combination of education with industrial production.
Interesting to say the least..