That's why we an inverted yield and pray to keep it inverted Dollar or Peso?? http://www.nowandfutures.com/download/dollar_USD_Purchasing_Power.gif
it sounds to me like there are a lot of very smart people that are worried about the us dollar and the spending habits of americans. obviously it is not the end of the world right now but there are some serious concerns, imo.
Who needs experts (when clear thinking, like yours, is available) Two things (A&B below) I might add: (A )China's demand for raw materials, especially oil, is increasing rapidly the fraction of its production that must be exported to pay for these supplies. They could sell to US and use the dollars to pay for these basic imports, but the value of the dollar is dropping (Hit only 2.06 Brazilian Real to buy a dollar yesterday - five years ago, it took 4, but that was in large part a spike due to local election uncertainty). Now takes four $US to buy three Euros etc. Thus China not only wants to reduce it hoard of dollars in the reserves, but export products directly to its supplies of essential raw materials and food stocks (Brazil / China trade, for example is rapidly growing.) More important than all this is the fact that the middle class in China is rapidly growing in total purchasing power. In a decade or so, that purchasing power will exceed the TOTAL of the US's, even before considering: (1) value of dollar dropping more AND (2) western banks now introducing the concept of credit cards in China (only 3% of the population even knows what they are!)* Even if the US were a willing and able buyer of Chinese goods a decade or so from now, China may need to export to its suppliers and satisfy greatly increased domestic demand. I expect that US/ China trade will be a positive BoT for US then, as the only thing US will have to sell (that China does not produce, or buy cheaper elsewhere) is agricultural products. US has a different climate than Brazil etc so can produce some crops, (e.g. wheat) cheaper than Brazil et. al. (B) You are correct, long term rates must go up to persuade foreigners to continue financing US's foolishness. (Compensate for the ever growing loss of value of dollar. - net total return on US paper is already negative for last few months - even bankers are not dumb enough to keep investing in a negative return investment!) This is a self-acceleration problem: Higher cost of borrowing to modernize factories (US has some of the oldest - pre WWII steel plants etc) will make the US capabilities grow more slowly and add to the cost of goods made in the US etc., causing BoP problems to accelerate. Normally that would not be true as falling dollar would reduce imports, but there has been a increase of wealth for those already wealth and a decrease for the middle class's purchasing power under current administration. (tax cut for rich not "trickling down" etc.) So those with money will still be buying BMWs and French wine, perhaps more rapidly than ever as the wine bottles in the basement appreciate in real value in contrast to the dollar which is dropping. ----------------------------- *Karl Marx, in Das Kapital, put it well more than 100 years ago, with one sentence description of a "Capitalist": "A Capitalist will sell you the rope with which to hang him."
IMO they will quietly print more money and credit (that's why M3 is no longer reported), at the same time as saying they are focused on fighting inflation. As long as these other nations keep accepting and holding the IOU's its the path of minimum pain. The question is what happens when the number and sizes of nations trying to "diversify" their reserves turns into EVERYBODY? Paul Volcker, former Fed Chair said: "I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change." http://www.newsmax.com/archives/articles/2005/4/14/212850.shtml In a recent speech, former Federal Reserve Chairman Paul Volcker voiced his concerns for the future the American economy and that of the rest of the world. Among other things, Volcker warns of a possibly dramatic shift in the relationship between U.S. consumerism and foreign investment â and the dire consequences that would have on Americans. Some focal points of his speech: * In regard to the U.S. economy, Volcker sees "disturbing trends: huge imbalances, disequilibria, risks..." * He says these are the most dangerous economic conditions he has ever seen â and, he notes, he has seen "quite a lot." * Though businesses are rebuilding their financial reserves, in only a few years, the federal deficit has offset all that savings. * Home ownership has become a vehicle for borrowing rather than a means of financial security. * In the U.S., we consume and invest about 6% more than we produce. * The U.S. economy is held together by a foreign capital influx of over $2 billion each day. * Foreign competition has kept interest rates relatively low despite vanishing savings and rapid growth. * He says: "The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6% more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars. * Volcker's says that to solve the economic crisis: "China and other continental Asian economies should permit and encourage a substantial exchange rate appreciation against the dollar. Japan and Europe should work promptly and aggressively toward domestic stimulus and deal more effectively and speedily with structural obstacles to growth. And the United States, by some combination of measures, should forcibly increase its rate of internal saving, thereby reducing its import demand." But Volcker says he doesn't see the necessary changes coming anytime soon. And he says the flow of funds that supports the U.S. could easily fade. He says: "I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change."