A reader writes: “The American people and the people of the world stand behind the dollar. So do not say the dollar has no backing.”
Americans are not all sinners; but neither are they all saints. Like every other race, they will support their paper money as it suits them to do so.
One of the most remarkable trends of the past 10 or 20 years has been the build up of dollar credits overseas. That is, people who live in foreign countries and who speak foreign languages and who often worship foreign gods, control trillions worth of dollar assets. These dollars – whether dollar bills or US Treasuries – are essentially claims against US wealth.
For the last 30 years – more or less – foreigners have been eager collectors of these claims. They pile them up in central bank vaults and stuff them into mattresses. Drug dealers use them.
The oil industry uses them. People selling houses in South America quote prices in them. Year after year, foreigners have taken in more dollars than they’ve spent.
But imagine that the foreigners should become net sellers of their dollar positions. Or, to put it another way…suppose they want to cash in all those dollar I.O.U.s they’ve collected.
From memory, net foreign claims against US assets now total something like US$3 trillion – equal to about a third of US GDP. What will Americans do? Give the foreigners a quarter of their entire national output? Will the yanks and yahoos stand firmly behind their currency…cutting back on their own standards of living so they can pay off the foreigners? Or will they simply react in the time-honoured tradition of scoundrels – by creating more dollars out of thin air?
What do you think, dear reader?
The Daily Reckoning Australia