There have been a number of diaries discussing the possible collapse in the US dollar.
We see:
- Significant inflation
- Increasing interest rates to attract foreign capital.
- Falling home values from the high interest rates.
- Reduced consumer spending as home equity evaporate.
- Unemployment when the economy is deflates.
- Increased energy costs as OPEC switches to Euros.
- The elimination of the $USD as a reserve currency.
- A collapse in stock prices as foreign investors go the EU for safe haven.
The massive US government and balance of payments deficits requires billions of dollars a day, and one day that will stop.
With sanity in the US and world markets Taxes should be raised, and our currency would fall.
But we won't see tax hikes from this scurvy lot, and a number of nations, particularly China and Japan have a vested interest in keeping the dollar strong for their exports.
The problem is most severe with China. If they Yuan rises significantly it would destroy their economy too.
This is because their entire banking system is insolvent by western standards.
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The vast bulk of the loans are non-performing loans, but the banks, for reasons of Chinese policy, and more generally corrupt connections between the banks and its largest customers, continue to extend credit.
Additionally, many of these customers are simply too big to fail: If you own the bank ten thousand dollars, the bank owns you. If you own the bank one hundred million dollars, you own the bank.
The low value of the Chinese currency is keeping them from collapse because t he cheap Yuan makes foreign assets too expensive.
It does not make sense for the average Chinese Yuppie to invest overseas right now.
In order to foster exports, the Yuan has been pegged at $0.1208. In an open currency market, it's much more than that, probably at least $0.1800.
When that happens though, billions of Yuan leave the Chinese banking system and purchase inexpensive foreign investments.
The banks collapse, and exports to the US fall through the floor.
If anything, the situation gets worse than in the US.
We end up with two countries with large nuclear arsenals in economic collapse, and possibly civil disorder that would be far worse than anything that the former USSR went through.
I don't see how we can avoid two nuclear armed Argentinas.