Dollar going to skyrocket? How to respond to this argument?

[brian0918]

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.

[68Camaro]

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.

[theo]

"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."

How, exactly, would the FED be powerless when it can print money with a few keystrokes? Think about what this guy is arguing. All tangible assets are; one, limited and two, take effort to either mine and/or manufacture. But fiat currency, which can be created out of thin air, will appreciate against all these tangible (and useful) assets.

"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."

Ask the GM bond holders how their contractual agreements worked for them when the government intervened in 09. The legal tender laws state that FRNs must be accepted for all debts (public and private), however, vendors are not legally obligated to accept them for goods and services. When store owners are no longer willing to accept your paper money for essentials, it will be relevant to you.

[brian0918]

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?

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.)

[68Camaro]

You know - having been in a number of discussions with various people on different topics over the years, I can read the tone when someone believes they are aces and know it all, while not wanting to be confused with either the facts or the truth. You've hooked one of these. You can talk until you're blue in the face and have all the facts any reasonable person could want, and it wouldn't make a whit of difference. Wish them well and and a nice weekend and walk away from it... Find something truly rewarding or productive to spend your time on - this isn't it...

[whatsnext]

You should read the wiki of panic of 1873.

It starts with the death of silver as money spreading through western civilization. He/she is trying to make an arguement that silver is not money and has been and will be forsaken.
And should never be used between individuals.
-No gobermint will revive a silver standard, but you can with willing participants.

I do not think in 1873 they had they ability to print like we do or the debts/creditors like we do.
The gobermint will need dumptruck after dumptruck of "liquidity" to pay our debt.

I havent finished reading it, but counter the coinage act of 1873 and you have a start.

I second that your arguement is with someone who was told what to think with little reflection into details.
It does sound good at first, but he/she is looking right through current events citing history like it is unchangeable. Which is not true.

I'm trying to figure out what Grant was saying about people holding money like gold and why that was so important/how it happened.

[dpwozney]

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?

If too many “Federal” Reserve notes are printed, the value of a “Federal” Reserve note could decline quite a bit with respect to the value of copper and nickel.

If the stated value, of “Federal” Reserve notes, declines enough with respect to the value of copper and nickel, the 1946-2011 U.S. Mint nickels, composed of cupronickel alloy, could become somewhat rare in mass circulation.

The May 6th metal value of these nickels is $0.0630834” or 126.16% of face value, according to the “United States Circulating Coinage Intrinsic Value Table” at Coinflation.com.

[theo]

"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."

Technically he might be right. Every time money is created a double accounting entry is made. A debit is made for the increase in assets and credit for the increase in debt. I believe that this is what the media means when refers to the FED "expanding its balance sheet." However the question you must ask is, what this "collateral" is. In reality it is probably the wealth created by the U.S. economy, hence our inflation concerns.

Occasionally I will engage these types of people just to stay on top of what the counter-arguements are and to organize my own thoughts. Of course, I have no illusions about changing their minds. They use complex language to add weight to their arguement, but a lot of what they are saying is baseless or wholly inaccurate. A good way to break them down is to pepper them with questions on any weak points or vaque statements. This usually puts them on the defensive, by exposing a lack of knowlegde or an irrational line of thought.

However, as Camaro says at some point it becomes a waste of time where you just have to agree to disagree.

[Mossy]

"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."

Yeah, the collateral is Treasury Bonds. Fat lot of good that does.

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

They talk so much that they lose track of what they were trying to think through.

[aristobolus]

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.

I have one word said two ways: Yuan or Renminbi

[whatsnext]

The connection to the holding of the paper dollar Grant speaks of was pretty simple.

Silver was money in 1870 and record inflation was the situation(some of the worst in our history), so to combat inflation they simply cut silver out with the coin act of 1873, thus removing money from the supply. Which caused silver to drop and the spendable paper to be held, resulting in deflation.

[Mossy]

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:

Is he arguing that we will see some serious deflation in the economy? Or that all currencies but the dollar are going to collapse and we will retain the current inflated prices for everything?

[John_doe]

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.

It will be commodity based for a while, but you don't think some person that thinks they own the world will set up another fiat ponzi?