26 Nov 2010

“The Day the Dollar Died”

Economics, Federal Reserve, Financial Economics, Gold 24 Comments

This is the coolest commercial for a non-profit organization I have ever seen. Their doomsday scenario is very plausible, in my view. (HT2 Jeff Tucker)

24 Responses to ““The Day the Dollar Died””

  1. AP Lerner says:

    Haha…right. If you believe this scenario is possible, then I have some Lehman stock to sell you 🙂

    I’m curious, if China is going to one day just stop holding treasuries, then what are they going to do with all those dollars they accumulate when they sell the US a lot of cheap stuff? I mean, are they going to stop exporting to the US as well?

    • bobmurphy says:

      AP, you’re saying that this scenario is not even *possible*?

      • Bob Roddis says:

        MOSLER’S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

        Herr Doktor Hut Tax is a lot smarter than we are so only he gets to ask questions.

      • AP Lerner says:

        China selling US treasuries and causing a global meltdown? No. Not possible.

        First, why would China sell? It’s against their self-interest. Their currency would rise and/or the dollar/Euro would fall, decreasing there competitiveness. China needs to accumulate US treasuries more than the US needs China to buy them.

        China needs to accumulate dollars in order for its economy to grow and to meet its high savings demands. The only way China stops accumulating dollars/Euros is if China stops exporting to the US/Europe. If China stops exporting, their economy collapses. Instantly. You don’t cut off two $15T economies and expect your export industries to not get destroyed.

        And a run on treasuries? No, not possible. Never. Treasury issuance is a monetary operation, not a fiscal operation, and is not required for the government to spend.

        So explain how China can stop accumulating dollars and still grow their economy? I mean China holding all those dollars is a byproduct of the trade deficit, a mutually beneficial and voluntary agreement between China and the US, right? Isn’t it more accurate to say that the US funds China’s savings demands, not the other way around?

        Again, QE represents a horrible policy, and is dangerous, but, in my opinion for none of the reasons you cite.

        • ListenEllipse says:

          China could sell their exports to themselves. Currently they’re loaning money to the US so we can buy their exports. Why don’t they just cut out the middle man and consume their own manufactured goods?

          • AP Lerner says:

            A $5t economy where consumer spending is 30% of the economy with a 30% savings rate can not replace the purchasing power of two $15T economies. Maybe in several decades. But not today. Not tomorrow. Not by 2012. The math does not work.

        • John says:

          China would sell because it’s FOR there self interest, even if popular opinion doesn’t say as such. Devaluing a currency in order to boost exports only works in the intermediary period before the economy adjusts to the influxes of new currency, after that more devaluation is required to keep the illusion going, therefore while it may seem like a good practice it will inevitably be impossible to keep up. It’s also curious that you assert that China needs dollars to meet it’s high savings demands when currency devaluation is single most effective way of undermining saving and causing less of it. Thus they need a ton of exports to meet high savings and the method of gaining those exports produces less saving? That seems self defeating.

          The overall thing to remember is that just because China exports most of it’s goods doesn’t mean that it is necessarily beneficial because they’re exporting their goods at a loss. Had they not done the devaluation in the first place, they could have gained more dollars. They devalue their currency in order to stimulate exports, but what they have effectively done is reduce the number of foreign dollars that may have entered their market while likewise impoverishing the Chinese citizen (and exporter), so either way China is not more rich but less rich and should China (or any other country for that matter) wake up to this reality, then it isn’t at all impossible for China to stop buying US treasuries and even sell them to value their currency. When saying they’re valuing their currency we should be saying they’re making themselves richer, they are going to be able to buy more stuff for less yuan.

          When looked at by the absolute number of goods leaving China it may seem like all of this exporting is good for china, especially when looking at things through the arbitrary “trade deficit” or through GDP growth, but in real terms, for the Chinese citizen, devaluing the currency is a lose-lose situation.

          And finally, even if China sold treasuries, their export industry wouldn’t be destroyed, they would simply be getting rid of US debt and the valuation that occurs, as I said, wouldn’t be a bad thing.

        • bobmurphy says:

          It’s “not possible” that there could be a run on Treasuries? Does this have to do with the dollar being the world’s reserve currency? Do you also think it’s impossible that Great Britain could default on its sovereign debt? (I’m just trying to understand your argument at this point.)

          What if the world stops using dollars as the reserve currency? Does it then become possible?

          • AP Lerner says:

            Default through inflation? Sure. Is Britain or the US a solvency risk like Spain or Portugal? No. Never as long as they operate in their current monetary systems. Inflation is the only constrained to US and UK deficits, not some fictitiuos solvency concern. Reserve currency status is irrelevant

          • AP Lerner says:

            I’m curious. Maybe you could explain why china would suddenly sell USD after breaking their backs in slave like manufacturing conditions for decades to accumulate USD? Shouldn’t they just stop exporting to the US if they are so worried about the USD? And who exactly would buy those treasuries? Wouldn’t that push the renmimbi higher? Defeating the purpose of the peg?

        • Christopher says:

          So what are the reasons why QE is horrible?

      • Bob Roddis says:

        The government DOES NOT need your money in order to spend money.

        By taking taxes away from us, they help to balance the economy and prevent inflation.


        And, don’t forget, government deficits are necessary for private savings!

        [I’m just repeating the brilliant insights of the Mr. Mosler and the MMT gang. I’m still hunting for that Martian translator machine from “Mars Attacks” to translate this stuff into real world language. Ack ack!]

      • Bob Roddis says:

        Mosler explains government securities:

        “The US is often labeled ‘the world’s largest debtor.’ But what does it actually ‘owe?’

        For example, assume the US government bought a foreign vehicle for $50,000. The government has the car, and a non resident has a bank account with $50,000 in it, mirroring the $50,000 his bank has in its account at the Fed that it received for the sale of the car. The non resident now decides that instead of the non interest bearing demand deposit, he’d rather have a $50,000 Treasury security, which he buys from the government.
        Bottom line- the US government gets the car, the non resident holds the government security. Now what exactly does the government owe? When the $50,000 security matures, all the government has ‘promised’ is to replace the security held at the Fed with a $50,000 (plus interest) credit to a member bank reserve account at the Fed. One financial asset is exchanged for another. The Fed exchanges an interest bearing financial asset (the security) with a non interest bearing asset. That is the ENTIRE obligation of the government regarding its securities. That’s why debt outstanding in a government’s currency of issue is never a solvency issue.”


        I believe this is the basis for the Chartalist claim that the government is never “revenue constrained”. We don’t care if foreigners don’t like our dollars. The government does not care that US citizens don’t like our dollars because the citizens must find some dollars so they can pay their taxes in US dollars.

        • Christopher says:

          Well, he is making a strange distinction between the state and the economy. If it was that easy every government in the world could buy whatever they want no matter how weak their economy is.

          What the US really owes if a foreigner has $50000 on his foreign bank account is $50000 worth of goods. The only reason you accept dollar as a foreigner is because you figure that one day you can go shopping with them. No foreigner has dollar because he thinks they are well designed. No foreigner holds US treasuries for that reason. They have them because they represent goods that one can buy in/from the US.
          And if they start to actually do that one day, i.e. take their dollars and go on a shopping tour in America, it will become very apparent that America hasn’t produced any goods to meet the demand created by all those dollar bills. The result would be inflation and nobody in his right mind would agree to buy US Treasuries at 0.x% when inflation is 5%, 10% or more. And that wouldn’t cause a souverign debt crisis?

          I don’t see why this scenario should be impossible. (which doesn’t mean I think it’s likely to happen soon, but impossible?)

  2. Matt Flipago says:

    Assuming the unlikely ability to unwind the massive amount of US treasuries, then some bad stuff could happen if China stopped buying, and yes the stock market would plummet, but why would people stock up on things like bottle water and any grocery item they could find. A severe recession means rice and beans, not dehydrated meals meant for the Apocalypse. Civil unrest because they cut back entitlement programs, possible, but a grinding halt of society, no. Plus even that did happen, hyper inflation is still pretty unrealistic. At least from what I would think. This would imply an extremely overvalued currency, and I think Europe would have problems first.

  3. John Connolly says:

    Many people did not fare well in the great depression. Some said that was impossible yet there it is in the history books.

    What is the problem with being prepared? Contrast that with the problem of not being prepared. Which problem is more preferable?.

  4. Daniel Kuehn says:

    New Deal by executive order… how does that one work exactly?

  5. ListenEllipse says:

    Why is there a run on stores? The 2008 stock/dollar collapse didn’t cause any consumer panic. Historically have similar collapses driven consumers to stores? Also wouldn’t stores raise their prices rather than let the shelves empty?

    It seems China wants to avoid a collapse of the dollar as much as the US. With China’s trade surplus and current dollar and treasury holdings I think hyperinflation such as this is unlikely. Some sort of intonational monetary agreement (Bretton Woods) seems like the likely solution to a collapse in the dollar.

    I do like the point about commodities. It does seem reasonable that there could be a decline in dollars/stocks while everyone runs to gold, silver, and commodities. This rush to commodities is what fundamentally causes (hyper)inflation and a significant raise in prices.

    • bobmurphy says:

      The dollar rallied in 2008.

    • Bob Roddis says:

      I suspect that those “helpful” laws against “price gouging in an emergency” would come into effect (if not outright price controls) with the media screaming for blood.

  6. Ben says:

    Interesting video from a bunch of scam artists.

  7. Medarian says:

    The best part was the end when pump and dump stock scammer Gerard Adams sent the email message to all his cultists err followers. Then the horror movie music in the end. Altogether a amusing video, but the scenario is highly improbable and the video is designed to get you to visit their website and buy some greg penny stocks so they can profit. Austroans should understand motive and he has no motive unless hes trying to sell you something

  8. Perry Mason says:

    AP Lerner,

    I have several disagreements with your claims, but one I want to point out is that you are equating the Chinese government with a rational economic actor only interested in short term results.

    There is no “Chinese” that singularly decides to do something; there is the government, and the private sector. The problem is that the government controls so much of the “private” sector and could cause them to drop treasuries/dollars.

    If the Chinese government decided that it was worth the interim pain to drop treasuries and dollars (or at least cut huge holdings), because of political reasons and economic reasons (such as to undermine US power), two things are likely (1) this would have been planned and prepared for in advance, with stealth increases in gold holdings (occuring now) and (2) such a plan would encompass the huge state owned and controlled industries.

    The only reason why this is unlikely, at least now, is because Chinese political culture is far less confrontational. It is a cliche, but Sun Tzu’s ideas nonetheless explain much of the party thinking.

    • AP Lerner says:

      “I want to point out is that you are equating the Chinese government with a rational economic actor only interested in short term results.”

      Actually, what I am pointing is double entry accounting.