Willem Buiter warns of massive dollar collapse

[Cheetah786]

Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.

Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.

The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.

Writing on his blog, Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."

He said that the dollar had been kept elevated in recent years by what some called "dark matter" or "American alpha" - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.

"The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."

He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise.
Willem Buiter warns of massive dollar collapse - Telegraph

 

[idune]

And for those who are interested in economics and economic strategy read the folloing to understand how US is trying to play the last game of dominance.Will this bubble scheme be successful? At best US only can delay the Inevitable collapse
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Fed unleashes greatest bubble of all
– John Kemp is a Reuters columnist.

Like the sorcerer’s apprentice, Federal Reserve Chairman Ben Bernanke and his predecessor Alan Greenspan have unleashed a series of ever-larger asset bubbles they cannot control.

Now the Fed’s decision to cut interest rates to between zero and 0.25 percent, coupled with a promise to keep them there for an extended period, and the threat to conduct even more unconventional operations in the longer-dated Treasury market risks the biggest bubble of all, this time in U.S. government debt.

THE ASYMMETRIC EXPERIMENT

Bubble mania is no accident. It is the direct consequence of the Fed’s asymmetric response to shifts in asset prices. Pressed to “lean against the wind” and adopt counter-cyclical interest rate and credit policies in the asset market, senior Fed policymakers have repeatedly demurred.

Led by Bernanke and Greenspan, officials have argued it is too hard and subjective to identify bubbles until afterwards, and not the Fed’s job to second-guess asset allocation decisions of professional investors.

Even if bubbles could be identified, they argue, pricking them would require swingeing rate rises that would inflict widespread damage on the rest of the economy.

Far less damaging to allow asset markets to follow their natural cycle and stand by to cut interest rates sharply, supply liquidity and contain the fallout when the bubble bursts.

But the Fed’s asymmetric policy response to rising and falling asset prices (colloquially known as the “Greenspan/Bernanke put”) directly led to much of the excessive risk-taking which has humbled the financial system over the last eighteen months.

More importantly, the Fed’s decision to respond to the collapse of the technology and stock market bubble by lowering rates to 1 percent and holding them there for an extended period is now widely accepted as a mistake that contributed to the bond bubble and subsequent housing market boom in the middle of the decade.

If the low-rate strategy was a mistake, it was a conscious one. In testimony to the UK Parliament last year, former Bank of England Governor Eddie George admitted the bank had deliberately sought to stimulate the housing market and house prices to support consumption during the downturn.

Greenspan, Bernanke and Co seem to have adopted a similar approach in the United States.
The real mistake, however, was not creating one bubble to offset the collapse of another, but believing they could control what they had wrought.

When the Fed did eventually start to raise short-term interest rates in 2004, long rates remained stubbornly low for a year, and then rose much more slowly than anticipated, a development the puzzled Fed chairman and his able assistant Dr Bernanke described as “the Great Conundrum”.

Even as rates eventually rose, the alchemy of securitization ensured the real cost of credit remained far too low until the subprime bubble finally burst in late 2007.

The second mistake is a basic design flaw in the Fed’s “risk-management” approach to setting monetary policy. Risk management is a nice idea, but not terribly useful. As engineer will explain, risk management involves trade offs and is not cost-free.

The Fed has struggled to formulate a response to “low probability, high impact” events such as the threat of deflation in the early 2000s. Its response has been to cut rates aggressively to ward off the danger of extreme downside events, a strategy officials liken to taking out an insurance policy.

That’s fine, but when these low risk events have not in fact occurred, as was never statistically likely, the resulting policy settings have proved far too loose, and the central bank much too slow to change it.

Concentrating on theoretical but small risks such as deflation has too often blinded the Fed to much larger risks near at hand of bubbles and asset inflation.

INTO THE UNKNOWN

Even as officials recognize policy has played a role stimulating an endless series of bubbles, the Fed finds itself trapped with no way out. Following the collapse of much of the modern banking system, the risk of pernicious deflation is now very real–more so than in the early 2000s.

So like the sorcerer’s apprentice, the Fed has cranked up the Great Bubble Machine for what policymakers hope will be one final time.

The Fed’s “unconventional” monetary strategy comes in four parts:

(1) Cutting interest rates to near-zero to lower the cost of borrowing.

(2) Injecting short-term liquidity into the financial system in the form of bank reserves (quantitative easing).

(3) Trying to pull down yields on longer-dated Treasury bonds through a combination of the jawbone (promising to keep short rates low for an extended period) and the threat to intervene in the market directly by buying longer-dated paper.

(4) Trying to reduce credit spreads above the Treasury yield for other borrowers, and increase the quantity of credit available, by buying mortgage-backed agency bonds for its own account, and financing other market participants to buy securities backed by other consumer credits, auto loans and student loans.

Most attention has focused on the zero-rate policy and quantitative easing at the short end of the curve. But the real significance lies in the unconventional operations targeting Treasury yields and eventually credit spreads at the long end.

Operations at the short end are designed to bolster the banking system and restart lending. But the Fed knows the banking system is not large enough to replace the much more important sources of credit from securities markets.

Operations at the long end are designed to get bond finance and securitized credit flowing. Short-end interest rates and quantitative operations are significant because they help shape the whole term structure of interest rates embedded in the curve.

ONE LAST SUPER-BUBBLE

The strategy has already succeeded in halving yields from over 4 percent in mid October to just 2.25 percent now.

By convincing investors interest rates will remain ultra low for a long period, the Fed has made them willing to lend to the U.S. government for up to ten years for what is a paltry return.

There are two risks. First, the massive rise in bond prices and compression of yields has come in the secondary market. The U.S. Treasury has not yet succeeded in placing much of its massively expanded debt and new requirements for next year at such low levels. But given the panic-driven demand for default-free assets, officials should not have too much difficulty.

The bigger one is that the Fed is misleading investors into the biggest bubble of all time. Bernanke is making what learned economists call a “time-inconsistent” promise to hold interest rates at ultra low levels for an extended period.

The problem is that if the unconventional monetary policy works, and the economy picks up, the Fed will come under pressure to “normalize” rates and reduce excess liquidity to prevent a rise in inflation. The resulting rate rises will inflict massive losses on anyone who bought bonds at today 2.25 percent rate.

Bizarrely, Bernanke and Co are in fact inviting investors to bet the policy will fail, the economy will remain mired in slump for a long period, deflation will occur and interest rates will remain on the floor, as Japan’s have done since the 1990s.

Buyers of real estate and subprime securities have recently been lampooned for foolishly overpaying at the top of the market. Bernanke and Co are gambling memories will prove short and investors will prove just as eager to pay top prices for long-term government and private debt even though the downside is large.

Let us have one last bubble, and when it collapses, we promise not to do any more in future…honest.

The Great Debate Debate Archive Fed unleashes greatest bubble of all | The Great Debate |

 

[idune]

And here is another sign that China one of the largest holder of US asset moving away from dollar asset.
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China to let yuan be used in some export deals

BEIJING: China will launch a pilot project allowing its currency to be used in some international trade transactions, the government announced, a move aimed at shoring up the country's battered exporters.

The program would permit use of the yuan in trade between the self-governed Chinese territories of Hong Kong and Macau and the heart of the mainland export industry, Guangdong province and the Yangtze River delta, the central government Web site said in a statement late Wednesday.

The statement also said transactions would be allowed between the southwestern Chinese regions of Yunnan and Guangxi and the 10-member Association of Southeast Asian Nations.

Other details were not announced, and it was not known when the program would begin, how long it would last or what mechanisms would be put in place to allow the money flow back and forth.

The program was one of several economic stimulus measures announced by Premier Wen Jiabao, including an increase in the number of stores in rural areas and a rise in export tax rebates for high-tech products.

Today in Business with ReutersAutomakers fear new normal of lower sales in U.S.Apple's Jobs says he will continue as CEONew sense of frugality for young Chinese workersThe currency pilot project aims to "improve financial services for exports" and "help small and medium-sized companies," the government statement said.

The Chinese yuan is currently not internationally traded and mainland companies seeking to do export business mostly work with dollars and euros. The pilot program would simplify the process at a time when Chinese exporters have been hammered by a drop in foreign demand, leading to thousands of factory closures and layoffs.

The malaise is also spreading inland as domestic demand for steel, autos and other goods weakens. Communist leaders have warned that more job losses might fuel unrest and are pressing employers to minimize cutbacks.

In the longer term, the program could be a small first step toward allowing the yuan to be traded internationally, with increased demand for Chinese currency helping to boost its value.

The U.S. has long argued that the yuan is undervalued, giving China's exporters an unfair price advantage and adding to its trade surplus.

China to let yuan be used in some export deals - International Herald Tribune

 

[jamal18]

Type 'dollar collapse' in youtube.com ; there is so much info out there.

The current attempt to inject money into the US economy will assist this decline. All the trillions being spent bythe US government are either being borrowed or printed.

In the last two or so years the dollar has fell around 50% of its value. Foreign governments holding billions of dollar have seen the value of their funds halved.

Governments will lose patience and dump dollars Then the panic will set in and there will be panic dumping and the dollar will go off the cliff.

Any fall in the dollar will also see disinvestment from the Us, as all assets there are obviously in dollars. This will lead to a massive recession.

In the past there has been no currency widely available to fill the dollar's place. Now there is the Euro.

One affect on Pakistan will be that the part of the Pakistani foreign debt that is in dollars will become cheaper and far easier to pay back.

Gold will go through the ceiling.

And American arms will become cheaper......

 

[Cheetah786]

WASHINGTON -- President-elect Barack Obama plans to offer states $7 billion as incentive to permanently change their unemployment-insurance laws to cover part-time workers and prevent other laid-off workers from falling through cracks in the coverage.

The proposal, which is set to be included in the president-elect's two-year economic-stimulus plan, will seek to use short-term aid to cash-strapped states to force long-term changes that the Obama team believes are overdue, Obama aides said Tuesday.

But the proposal, along with others to subsidize health insurance for the laid-off and expand Medicaid to out-of-work Americans, are sparking bipartisan concern over the potential, long-term impact on a federal budget deficit that is expected to hit $1 trillion this year, even before the stimulus plan.

A new Congressional Budget Office forecast due out Wednesday is expected to put the fiscal 2009 deficit at about $1 trillion, more than double the $438 billion in red ink CBO foresaw in September.

Sen. Judd Gregg of New Hampshire, the ranking Republican on the Senate Budget Committee, said that would put this year's deficit at 7% of the gross domestic product, a level not seen since World War II.

On Wednesday, Mr. Obama is set to speak about deficit-control measures he plans to include in his first budget, due next month, an Obama aide said. The aide stressed that the president-elect is inheriting a fiscal disaster not of his making.

The goal of the stimulus package, which will include tax breaks for businesses and individuals and is estimated to cost $775 billion, is to generate jobs and spending to jump-start the country's ailing economy. But concerns are growing over the potential, long-term cost of some of the policy changes being considered. Republicans and even some Democrats said some of the items show too little concern for the long-term impact on the national deficit.

"Any additional tax cuts, where there will be pressure to make them permanent, or spending proposals that have a permanent nature to them, give me pause," said Senate Budget Committee Chairman Kent Conrad (D., N.D.).

Amid such criticism, the president-elect huddled with his economic team on Tuesday to discuss ways to contain the long-term deficit. Attendants included budget director-designate Peter Orszag, Treasury Secretary-nominee Timothy Geithner and National Economic Council director-designate Lawrence Summers.

"Potentially we've got trillion-dollar deficits for years to come, even with the economic recovery that we are working on at this point," Mr. Obama said. "We're going to have to stop talking about budget reform. We're going to have to totally embrace it. It's an absolute necessity."

Obama aides defended the proposals that have drawn the most fire. The unemployment insurance program would entice states to make changes recommended by a bipartisan commission in 1994. Fewer than half of the unemployed currently receive unemployment benefits, either because they work part time or because outdated regulations don't define them as having been working recently. Many states use older wage data to establish work histories and exclude the most recent three to five months of employment when determining eligibility.

The changes sought by Mr. Obama would ultimately be financed by employer contributions to the unemployment insurance system, not by federal taxpayers, Obama aides said.

Another Obama program would offer federal subsidies to laid-off workers trying to purchase continued health insurance through the COBRA system. Under the 22-year-old COBRA law, laid-off workers must be offered access to the insurance offerings of their former employers, but for many unemployed, such plans have been unaffordable.

For the first time, workers laid off from jobs that didn't include health insurance would be allowed to buy into Medicaid, the federal-state insurance program for the poor.

Aides said these programs would expire with the two-year stimulus program.

Robert Bixby, executive director of the budget watchdog Concord Coalition, said turning off such programs will be difficult. A program established in 2002 to subsidize health insurance for workers displaced by free-trade agreements is still in existence, despite that less than 15% of eligible workers have enrolled, said Stan Dorn, a researcher at the Urban Institute, who has studied the program.

"Those aren't stimulus," Rep. Paul Ryan of Wisconsin, the ranking Republican on the House Budget Committee, said of Mr. Obama's health and unemployment proposals. "Those are ideological accomplishments in the guise of economic stimulus."

Obama Pushes States to Cover More Unemployed - WSJ.com