by Jerome a Paris
Thu Oct 6th, 2005 at 01:50:44 PM EST
Chávez moves reserves out of US Treasuries
Venezuela has transferred a large portion of its $30.4bn of foreign reserves out of US Treasuries and into banks and other financial instruments in Europe, seemingly for political reasons.
(...)
Domingo Maza Zavala, a central bank director, said this week that during the past four months $20bn (£11.3bn), most of which was in US Treasuries, had been liquidated and the funds sent to Europe. Much of that, he added, had been deposited at the Bank for International Settlements in Basel, Switzerland.
(...)
Buoyed by high oil prices Venezuela, the world's fifth-largest oil exporter, has seen the level of its international reserves rise to $31bn in recent weeks, from $24bn at the beginning of the year and from about $15bn in 2003.
So Chavez has brutally moved two thirds of his country's reserves outside of the dollar, in what is explicitly called a "political gesture".
Why does this matter?
Quite simply because the USA needs all the support it can get from all foreign central bank:
HOW A US CURRENCY CRISIS COULD UNFOLD
There are many ways a currency crisis could unfold for the US. One main one would be selling of UST bonds. That effectively would be dollar flight, first out of TBonds into dollar cash, then out of dollar cash into say, Yen. Or Yuan, or Euros....
Now at the moment I don't see this happening but it definitely can.
In such a scenario, if other foreign central banks did not all join to support the USD, it would be very possible that the USD could collapse not in weeks, but possibly in a day or even if things got hot, in an hour. Electronic money is so fluid that markets could be flooded in only an hour. Then the US would have to halt trading here, but of course there are foreign markets. I doubt the US could get the international forex markets to close too... in which case, the collapse would continue.
One of the things that concerns me is that the world really has geared their finance on the US consumer, and the US housing boom. (...) The US housing boom is peaking. We still have statistics indicating that its going strong, but also clear indications that it is slowing. It is my view that should the US consumer slow decidedly, there will be little incentive for the Chinese, say, to keep supporting the USD. They may decide at some point to go ahead and try to focus on their Asian markets, as might Japan, figuring that the US is toast anyway for a decade. Should that happen, I am sure we will be looking at a very serious possibility of a real bonafide USD crisis. Basically they would be saying, the US consumer market is maxed out, and not worth saving.
So would Chavez be giving the nudge that collapses that pyramid scheme?
Or will it not matter anyway?
We can't pay it off
All these debts keep piling up. Who's buying it? Nations with assets, that's who. China, Japan and India are among the heaviest buyers of U.S. debt. Over 52% of U.S. debt is now held by foreigners. If they ever decide to sell their debt, the dollar would plunge, causing a massive inflation in the U.S. Besides, do we really want so many dollars held by communist nations such as China? Isn't that detrimental to our national security?
One foreigner who's willing to vote with his feet is Venezuelan President Hugo Chavez. He's selling his dollar reserves, pulling his country's money out the the U.S. and investing it in Europe. But, so far, other countries haven't followed his lead.
Suppose for a minute that foreign nations remain faithful to the dollar. Do we really believe that our government will have the financial wherewithal to repay its debts? We have explosive debts now: how can we repay those debts and future debts when the unprecedented burden of retiring baby-boomers hits the system? We can't. One of two things will happen: either the Federal Reserve will embark on a system of hyper-inflation, such as what Germany saw in the 1920s, or our own government will default on its uncontrollable debt. There's no magic number to tell us when either one of those will happen. But anyone who reads between the lines can figure it out, and neither scenario will be pretty - especially if both occur.
U.S. bonds are considered the safest investment around. They are given top ratings by all ratings firms and are considered the least likely to default. But the pressure on the almighty dollar is building at such a rapid pace - $1.8 billion a day in trade deficits and over $1 billion a day in budget deficits - that the bond will have to cry "Uncle" at some point. It may be a year from now or ten years from now, but it will happen. I predict that by the time President Bush leaves office, the U.S. Treasury bond will no longer be rated investment grade.
Imagine what it will be like when you get no Social Security check. Or when your military pension stops. Or you can't afford the medicine you need to stay alive. Or, if you do get a check, it will be virtually worthless due to hyperinflation. We are headed to a system where those who have money - real money, that is - live, and those without it die. We've seen it with the government's reaction to Hurricane Katrina. Expect it to be far worse when Hurricane Uncle Sam hits.
And the political lesson, from that last article:
Our national debt stands at nearly $8 trillion. Our federal deficit, which had been scheduled to decline this year, will be about the same as last year (over $450 billion) after the disastrous costs of the hurricanes are added in. President Bush continually declines to say how we'll pay for the costs. But one rule has become much more clear: when Democrats are in control, we pay for the costs of government and our ballooning debt. When Republicans are in control, our kids and grandchildren pay.
