*** begin quote *** My bet is this. One fine day the bottom is going to drop out of the dollar. There will be a swift and sharp order of magnitude change. The recognition of the problems will reach a point at which it starts to go exponential, not just in terms of people being vaguely conscious that things are not right, but in terms of actually taking action to protect themselves. Foreign central banks may be reluctant to dump their dollar securities and think it better to liquidate them slowly so as not to drive prices down and break the market, but when they observe that others are running for the exits, they will run too.*** end quote ***
I agree that there will be a “run”. But it will look differently.
The Chinese are leading it NOW. The recent swap of Chinese held dollars for IMF gold, their “strategic reserve” acquisition program, and their stated “strategic rebalancing of their portfolio” is happening now.
Since there is nothing backing the US dollar, there is no “bank” to “run” on. So by definition, it will look differently than the Great Depression.
IMHO, (and I’m an injineer by education and know it all blogger by avocation), the “run” is happening now.
US borrowing is in trouble. I think we are seeing the FED quietly, carefully, and with malice aforethought manipulating with the assistance of the bailed out Wall Street firms manipulating the Treasury bond sales. They are selling debt at what appears to be record low levels. But by using shills, they are quietly buying it back from their accomplices on the street after the auction.
That’s why the FED coudn’t stand an audit as Ron Paul and others have asked for. It’s a Ponzi scheme.
So, what will the run look like?
Foreigners will exit the Treasury market. (Didn’t the Chinese students laugh at Geithner?) The dollar will tank against foreign currencies. Commodities rise in dollar terms, but not as much in other currencies. The world “readjusts” to a trading pattern that excludes or minimizes the US since everything will be much more expensive in dollars that no one wants.
Here at home, the fixed income people are screwed — the old, the retired, the elderly, the “savers”. The elite political class continues to spend other people’s money which is fast drying up. (Without access to foreign credit, all they can do is run the printing press.) Hyperinflation will destroy the dollar. As the welfare spending drops, there has to be riots in the inner cities. As the crisis expands, warfare spending has to drop. Eventually the government has to default on its debt. Unfunded liabilities like social security are defaulted on as well.
I hope that commodity money reemerges from the “return to barter” and the chaos of the “American default” like Zimbabwe. And, we can begin the long climb back up.
It’s going to be messy.fjohn
MONEY: When the shoe drops