Will US Treasuries replace Gold ?

[sishya]

In following the current Financial crisis - Will the US Treasuries replace Gold as a the store of wealth among the World Central bankers ? I am just echoing the comments made by "$#*" in this forum. I think it can happen and Paul Krugman has also blogged about this in NYTimes.

http://krugman.blogs.nytimes.com/200...low-the-money/

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"$#*" used the analogy of a concrete driller. The US issues US Treasuries to write of the bad loans and recapitalize the financial gambers. The Central bankers know the consequence of this. If they do not buy them, this will lead to monetize them and cause dollar devaluation, which in turn causes the foreign currencies to appreciate and cause enormous hardship for their local economies and will not be able to export to US. Japan,China,Europe...cannot allow this to happen and so they will fund this bailout and recapitalize the failed US fianancials. Voila - the problem is solved. This is really a US blackmail with a Gun to the US dollar. If we fail, you also fail.

Now one thing I don't understand is why should the Oil Exporters be also long US Treasuries. Arab nations(Saudi,Kuwait..), Russia, Venezuela should all be short US Treasuries. Why are they still supporting the US treasuries instead of being net sellers ?

I think if Paulson's plan does goes through, US Treasuries will replace Gold, the new paper will replace the store of wealth since ancient times. Something really ambitious for Paulson to embark upon and that is why is putting foreign creditors to be repaid before anyone. The carrots before the donkeys.

Is this theory of "$#*" plausible ?

[GRG55]

Re: Will US Treasuries replace Gold ?

...Now one thing I don't understand is why should the Oil Exporters be also long US Treasuries. Arab nations(Saudi,Kuwait..), Russia, Venezuela should all be short US Treasuries. Why are they still supporting the US treasuries instead of being net sellers ?...

Some possible answers for you here...

[Jay]

Re: Will US Treasuries replace Gold ?

Now one thing I don't understand is why should the Oil Exporters be also long US Treasuries. Arab nations(Saudi,Kuwait..), Russia, Venezuela should all be short US Treasuries. Why are they still supporting the US treasuries instead of being net sellers ?

I would imagine that the answer lies in the large US military force and its proxy in the gulf.

Edit: beaten to it by GRG55, I shouldn't be surprised.

[Jay]

Re: Will US Treasuries replace Gold ?

Some possible answers for you here...

The amazing thing is that you can find pretty much the entire world in that list. Wow.

[c1ue]

Re: Will US Treasuries replace Gold ?

Let me posit a different theory.

Total outstanding US debts to the rest of the world:

Tbonds and Treasuries:

$2.676T (July 2008)
$2.2T (July 2007)

Agency (GSE):

$1T (April 2008)

US currency account deficit:

$700B (approximately, 2007 deficit $708.5B, 2006 deficit 758.5B)

US government annual budget deficit:

$162B (2007)
$410B (2008, estimated pre-Paulson bailout)

So we're looking at $862B to $1.1T of additional debt needed each year, vs. $3.67T of government + GSE existing debts.

Every 1% of 'extra' dollar depreciation the US manages vs. creditors = $37B of 'cancellation' of foreign debt.

Extra can be defined several ways:

1) Dollar going down more than other currencies
2) Dollar going down vs. a reference such as gold or a basket of commodities

A 10% 'extra' depreciation means the rest of the world 'loses' $367B of their existing income.

But note from 2007 to 2008, net Treasury+Tbond gains by the rest of the world were $467B.

So you can see that somewhere between 15% and 20% of 'extra' depreciation - the rest of the world literally gains nothing from selling to the US as any income gains are offset by existing holdings losing value.

So what then is the point of having US treasuries as the 'gold standard' equivalent?

What is the value of said 'gold standard' when the denominator of the standard is being set by a depreciating issuance authority (dollar)?

Or put another way: Standards are set by strength. Not by weakness.

[j4f2h0]

Re: Will US Treasuries replace Gold ?

IMHO the US has been trying to accomplish replacing gold with US treasuries for the last 50 some odd years. There have been good times and bad in the process, obviously this one isn't going so well for the US treasury. So to answer your question briefly, no, US treasuries will not replace gold. They will try and try and try and at some points it may look like they are pulling it off, but there are not absolutes in fiat currency. I am for sure the least educated person on this site so take my words for what they are worth, a grain of salt!

[Jay]

Re: Will US Treasuries replace Gold ?

Let me posit a different theory.

Total outstanding US debts to the rest of the world:

Tbonds and Treasuries:

$2.676T (July 2008)
$2.2T (July 2007)

Agency (GSE):

$1T (April 2008)

US currency account deficit:

$700B (approximately, 2007 deficit $708.5B, 2006 deficit 758.5B)

US government annual budget deficit:

$162B (2007)
$410B (2008, estimated pre-Paulson bailout)

So we're looking at $862B to $1.1T of additional debt needed each year, vs. $3.67T of government + GSE existing debts.

Every 1% of 'extra' dollar depreciation the US manages vs. creditors = $37B of 'cancellation' of foreign debt.

Extra can be defined several ways:

1) Dollar going down more than other currencies
2) Dollar going down vs. a reference such as gold or a basket of commodities

A 10% 'extra' depreciation means the rest of the world 'loses' $367B of their existing income.

But note from 2007 to 2008, net Treasury+Tbond gains by the rest of the world were $467B.

So you can see that somewhere between 15% and 20% of 'extra' depreciation - the rest of the world literally gains nothing from selling to the US as any income gains are offset by existing holdings losing value.

So what then is the point of having US treasuries as the 'gold standard' equivalent?

What is the value of said 'gold standard' when the denominator of the standard is being set by a depreciating issuance authority (dollar)?

Or put another way: Standards are set by strength. Not by weakness.

Isn't this why the system is genius in the first place? We make the world pay and get a free ride on the depreciation of the dollar. They may not like it but have no alternatives, at least not up until this present moment. The alternatives are too unsavory. Look at GRG55's list, if you were those other countries, what would you do? They have been in a bind.

[buljong]

Re: Will US Treasuries replace Gold ?

Another Powergrab.
I wonder, is there anything left of the army powers in the US?
It needs an efficient economy to go to war no?
To me it looks like a fat dinosaur with fractured vertebrae and tetraparalysis.
Could these be just empty and grumpy last words of a dying fat beast?

Check out the rise in bps of treasury default, presently at 25.
US could go BK or they could force others to follow their line.

True high stakes poker....

[c1ue]

Re: Will US Treasuries replace Gold ?

The system is genius for the US - it is not genius for the rest of the world.

Again, why would anyone sell something and literally get nothing for it?

Any system can be sustained so long as all participants feel they are overall benefiting from said system.

What could the rest of the world do?

There are lots of things:


1) Set up alternate exchanges for oil denominated in other currencies
2) Start ratcheting up prices to compensate for dollar depreciation

Oh wait, they're already doing that...

3) More risky: Stop buying new Tbonds/Treasuries by stopping the sterilization of incoming dollars. Probably need to be combined with some form of currency(internal & dollar) control.

4) Very risky: Dump existing Tbonds/Treasuries. Eat capital loss now, but reduce pain later.

5) Most likely: Threaten to dump Tbonds/Treasuries if certain US actions are not done

a) do not drop interest rates any further
b) no more bailouts other than protecting foreign GSE debt
c) like get out of Taiwan

The trap the US is in is that even should existing actions be acceptable, all the foreign creditors have to do is wait another year.

The US continues to dig itself into a fiscal hole.

[Jay]

Re: Will US Treasuries replace Gold ?

The system is genius for the US - it is not genius for the rest of the world.

Again, why would anyone sell something and literally get nothing for it?

Any system can be sustained so long as all participants feel they are overall benefiting from said system.

What could the rest of the world do?

There are lots of things:


1) Set up alternate exchanges for oil denominated in other currencies
2) Start ratcheting up prices to compensate for dollar depreciation

Oh wait, they're already doing that...

3) More risky: Stop buying new Tbonds/Treasuries by stopping the sterilization of incoming dollars. Probably need to be combined with some form of currency(internal & dollar) control.

4) Very risky: Dump existing Tbonds/Treasuries. Eat capital loss now, but reduce pain later.

5) Most likely: Threaten to dump Tbonds/Treasuries if certain US actions are not done

a) do not drop interest rates any further
b) no more bailouts other than protecting foreign GSE debt
c) like get out of Taiwan

The trap the US is in is that even should existing actions be acceptable, all the foreign creditors have to do is wait another year.

The US continues to dig itself into a fiscal hole.

Setting up alternate exchanges for oil denominated in other currencies is what Saddam tried just before shock and awe. Also, if you let the dollar collapse by not buying Treasuries, your entire export industry gets killed. The implicit threat is that the US is willing to destroy all other economies before they go poof themselves and they can do it. Look what just happened to the Russian stock market when they wanted to play hardball.
A tough box isn't it?

[c1ue]

Re: Will US Treasuries replace Gold ?

There are several exchanges now operating:

Russia
Qatar
Iran
Oman
Dubai

No doubt Chavez has a wannabe one as well.

The point is: if the commodity is needed, the seller can ultimately dictate the denominating currency.

Only because the Saudis, UAE, and Oman are (still) accepting the dollar as the denominator is why the petrodollar remains.

So long as these producers are willing to suffer the frictional inflation losses, the petrodollar will continue, but then again those trading outside dollars will benefit disproportionately.

As for export industry - Russia doesn't have hardly any trade with the US. Furthermore the stock market is restricted to a very small part of the population - like the US stock market in the 60s, so it is very unclear how the falling stock market affects Russia's overall economy.

Its not like Russia needs to issue stock to sell oil, natural gas, nickel, aluminum, etc.

Ultimately though - Russia isn't the biggest issue - it is China.

China has had its stock market drop precipitously - and it has NOT been sparring with the US.

So how again does following the US' lead help? When cooperating yields much the same results as fighting?

As the poor peasant farmer in China in 1932 asked his compatriot: "What's the penalty for not making your farm quota?"

"Death"

The first farmer then asked: "What's the penalty for revolution?"

"Death"

"Well hell, might as well start the revolution"

[Jay]

Re: Will US Treasuries replace Gold ?

There are several exchanges now operating:

Russia
Qatar
Iran
Oman
Dubai

No doubt Chavez has a wannabe one as well.

The point is: if the commodity is needed, the seller can ultimately dictate the denominating currency.

Only because the Saudis, UAE, and Oman are (still) accepting the dollar as the denominator is why the petrodollar remains.

So long as these producers are willing to suffer the frictional inflation losses, the petrodollar will continue, but then again those trading outside dollars will benefit disproportionately.

As for export industry - Russia doesn't have hardly any trade with the US. Furthermore the stock market is restricted to a very small part of the population - like the US stock market in the 60s, so it is very unclear how the falling stock market affects Russia's overall economy.

Its not like Russia needs to issue stock to sell oil, natural gas, nickel, aluminum, etc.

Ultimately though - Russia isn't the biggest issue - it is China.

China has had its stock market drop precipitously - and it has NOT been sparring with the US.

So how again does following the US' lead help? When cooperating yields much the same results as fighting?

As the poor peasant farmer in China in 1932 asked his compatriot: "What's the penalty for not making your farm quota?"

"Death"

The first farmer then asked: "What's the penalty for revolution?"

"Death"

"Well hell, might as well start the revolution"

It strikes me that the penalty for propping up US Treasuries up to this point hasn't been death, but the slow deflation of the Treasuries worth. A pain yes, but not one to start a revolution over. One the other hand, rocking the boat far enough, say by dumping your Treasury holdings, would possibly end in revolution against those ruling classes. Why would the powers that be want to risk that?

[jimmygu3]

Re: Will US Treasuries replace Gold ?

I feel like this is a bit overblown. Just like a family going further into debt, maxing out credit cards and struggling to make the minimum payments, the first step is to stop the hemorrhaging. Obviously we can't balance the budget overnight, but we can get a hell of a lot closer.

We can do some unpopular but necessary belt tightening. Roll back the Bush tax cuts for the richest Americans. Raise the retirement age for Social Security. Transition back to being a nation of frugal savers rather than wasteful consumers. Invest in alt energy and infrastructure projects that create American jobs and stimulate the economy and raise GDP. Gradually continue the dollar depreciation to inflate away debt, but make it clear that the debasement and inflation will decelerate as the above steps are implemented.

Most who talk about the soaring debt do not mention that our GDP has grown right along with the debt, and it is the ratio of these two that matters more than the nominal value of the debt. As you can see below, the present Debt/GDP ratio is no worse than it was for most of the '90s. We need to get Debt/GDP ratio back below 60% and not let it rise further.

Jimmy

[c1ue]

Re: Will US Treasuries replace Gold ?

One the other hand, rocking the boat far enough, say by dumping your Treasury holdings, would possibly end in revolution against those ruling classes. Why would the powers that be want to risk that?

For one thing, the ones holding the Treasuries aren't the United States.

A repudiation and collapse of the dollar would hurt other nations from the standpoint of the loss of the largest trading partner (crap-sink), but would be nothing compared to what we as the American people would experience. Certainly not revolution over there.

On the other hand, what is to keep them in the game when there is nothing more to be gained?

Most who talk about the soaring debt do not mention that our GDP has grown right along with the debt, and it is the ratio of these two that matters more than the nominal value of the debt. As you can see below, the present Debt/GDP ratio is no worse than it was for most of the '90s. We need to get Debt/GDP ratio back below 60% and not let it rise further.

It is good to take the objective view, but my question is:

How much GDP was dependent on these banking/financial/insurance/real estate operations?

We're in a situation where both GDP is going down and debt is (dramatically) going up.

[nathanhulick]

Re: Will US Treasuries replace Gold ?

I feel like this is a bit overblown. Just like a family going further into debt, maxing out credit cards and struggling to make the minimum payments, the first step is to stop the hemorrhaging. Obviously we can't balance the budget overnight, but we can get a hell of a lot closer.

We can do some unpopular but necessary belt tightening. Roll back the Bush tax cuts for the richest Americans. Raise the retirement age for Social Security. Transition back to being a nation of frugal savers rather than wasteful consumers. Invest in alt energy and infrastructure projects that create American jobs and stimulate the economy and raise GDP. Gradually continue the dollar depreciation to inflate away debt, but make it clear that the debasement and inflation will decelerate as the above steps are implemented.

Most who talk about the soaring debt do not mention that our GDP has grown right along with the debt, and it is the ratio of these two that matters more than the nominal value of the debt. As you can see below, the present Debt/GDP ratio is no worse than it was for most of the '90s. We need to get Debt/GDP ratio back below 60% and not let it rise further.

Jimmy

You are missing the key fact that the government has changed how they report GDP, and how it is adjusted for inflation. If you revise the numbers to take out stuff like imputed rent, you get a clearer picture. Also, "one time charges" do not affect GDP, so that means that according to the government, financial sector profits are up ~25%!

I agree that the ratio is probably more important than the actual dollar amount of debt, but that chart is very misleading.