Realcent.org

The naive inflationist [such as Peter Schiff] fails to properly recognize that in a post bubble debt collapse, demand for currency to repay debt easily overwhelms a central bank's effort to inflate.

It doesn't matter if the fundamentals of that currency are awful. In fact, the more a currency has been eroded by a prolonged period of artificially low interest rates, and thus the more popular it has been for borrowings for purposes of speculation ("carry trades"), the more it will rise when lending is reined in as the bubble finally collapses, and as assets are sold in exchange for currency to repay loans.

Legal tender laws and the contractual agreements between lenders and borrowers ensure that a currency's ultimate toilet paper status is irrelevant during such snowballing debt liquidations.

The phenomena is not new. Here is what president Ulysses S. Grant had to say in the aftermath of the panic of 1873 (the U.S. was on fiat money then):

"The experience of the present panic has proven that the currency of the country, based, as it is, upon the credit of the country, is the best that has ever been devised. Usually in times of such trials currency has become worthless, or so much depreciated in value as to inflate the values of all the necessaries of life as compared with the currency. Everyone holding it has been anxious to dispose of it on any terms. Now we witness the reverse. Holders of currency hoard it as they did gold in former experiences of a like nature."

If Peter Schiff had properly accounted for the dollar's status as the world's supreme credit currency, he might have been able to see the 2008 dollar rally coming.

Today, I would only add that the situation hasn't changed much since the spring of 2008. There are still bubbles everywhere (real estate, commodities, corporate bonds, stocks, etc) that have been created by people borrowing dollars to buy speculative assets.

Trillions upon trillions of dollars will have to be repaid when these bubbles collapse, creating an enormous demand for the greenback. The Fed is absolutely powerless in that situation.

For every dollar the Fed adds to the system, it needs to take in collateral of enough quality such that it can sell it back for dollars when it wants to turn monetary policy in the other direction.

It is a myth that the Fed is a money printing machine without restraints. It is restrained by its balance sheet considerations, and ultimately restrained by its institutional make-up and (so far) independence from the Treasury.

Bernanke will be long gone and Barney Frank in charge before there is helicopter money.

The Fed or other monetary authorities are not going to backstop the world's equities, real estate, currencies, or commodities as long as they work within a credit based monetary system. They couldn't do it in 1873. They couldn't do it in 1929. They couldn't do it in 2000. They couldn't do it in 2008. And they will not be able to do it in 2011 or 2012 or whenever the current bubble-party is over.

(I believe that the current party begun to end around Oct-Dec 2010 as that's when important commodities stocks, and emerging market indexes peaked.)

brian0918 wrote:I had pointed out to him that the Fed can print as much as they want, and he said that isn't so. What do you think?

theo wrote: "For every dollar the Fed adds to the system, it needs to take in collateral of enough quality such that it can sell it back for dollars when it wants to turn monetary policy in the other direction."

theo wrote: They use complex language to add weight to their arguement, but a lot of what they are saying is baseless or wholly inaccurate.

brian0918 wrote:I have been debating someone who believes that as the world experiences future bubble bursts and collapses in debt, the US dollar and US treasuries will become the most sought-after asset, because tens of trillions of global debt is denominated in US dollars. I am just not sure how to respond to their arguments. See below:

The naive inflationist [such as Peter Schiff] fails to properly recognize that in a post bubble debt collapse, demand for currency to repay debt easily overwhelms a central bank's effort to inflate.

It doesn't matter if the fundamentals of that currency are awful. In fact, the more a currency has been eroded by a prolonged period of artificially low interest rates, and thus the more popular it has been for borrowings for purposes of speculation ("carry trades"), the more it will rise when lending is reined in as the bubble finally collapses, and as assets are sold in exchange for currency to repay loans.

Legal tender laws and the contractual agreements between lenders and borrowers ensure that a currency's ultimate toilet paper status is irrelevant during such snowballing debt liquidations.

The phenomena is not new. Here is what president Ulysses S. Grant had to say in the aftermath of the panic of 1873 (the U.S. was on fiat money then):

"The experience of the present panic has proven that the currency of the country, based, as it is, upon the credit of the country, is the best that has ever been devised. Usually in times of such trials currency has become worthless, or so much depreciated in value as to inflate the values of all the necessaries of life as compared with the currency. Everyone holding it has been anxious to dispose of it on any terms. Now we witness the reverse. Holders of currency hoard it as they did gold in former experiences of a like nature."

If Peter Schiff had properly accounted for the dollar's status as the world's supreme credit currency, he might have been able to see the 2008 dollar rally coming.

Today, I would only add that the situation hasn't changed much since the spring of 2008. There are still bubbles everywhere (real estate, commodities, corporate bonds, stocks, etc) that have been created by people borrowing dollars to buy speculative assets.

Trillions upon trillions of dollars will have to be repaid when these bubbles collapse, creating an enormous demand for the greenback. The Fed is absolutely powerless in that situation.

brian0918 wrote:I have been debating someone who believes that as the world experiences future bubble bursts and collapses in debt, the US dollar and US treasuries will become the most sought-after asset, because tens of trillions of global debt is denominated in US dollars. I am just not sure how to respond to their arguments. See below:

68Camaro wrote:Yes, there will come enormous demand for currency to satisfy existing debt, but which will become quickly, increasingly, unable to actually buy anything.

To use an example, at some point in that scenario I will be making 10 million of those "dollars" a year (though in reality it will be inflating so fast that cell phone apps will be written to allow people to account for hour-to-hour inflation) and I will also be paying 100 of those dollars for a gallon for milk. Like everyone else, I will be able to pay off my existing debt with just a few days worth of work. Assets based in dollars will become practically worthless. By the end of the second month I will not be making 10 million a year, but 10 billion a year. By the third month I will be making 10 trillion a year, and a gallon of milk will cost 10 million and the treasury will be printing new 10 million dollar bill notes. Etc.

This will, of itself, be a bubble. There will be demand for dollars; briefly. It will inflate at an incredible rate. The bubble will burst within a year. And a new form of currency will be found, not based on fiat.