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Why the USD did not collapse yet

The US Fed increased interest rate sharply from 0.25% at the start of 2022 to the current rate of 2.5%. It is expected to increase the rate by another 0.75% later this month.

The US government is in a large deficit. It reached a total of $31 trillion in August 2022. Many analysts calculated that the increase in interest rate will be costly to the US government. An increase of 3% will add $930 billion to the cost of servicing the $31 trillion debt.

The US federal revenue is $4 trillion. The increase of $930 billion will take away 23% of the revenue.

The analysts predicted disaster for the US dollar, as the holders of US debt will run away from US assets.

So far, this has not happened. Instead, the US dollar strengthened. What happened?

There are two reasons.

1) The increase in interest rate has not affected the US government finances yet. Most of the debts are long term. The US government has to pay the interest rate that was contracted at the time the debts were issued. The holders of these debts will suffer from a lower price of the debt caused by the increase in interest rate. The US government will have to face a higher borrowing cost on the new debts that are issued now. The higher interest rate will affect the government in the future.

2) Many large holders of the existing US govt debt could not sell their debts (even if they are willing to take a loss) because they are not able to find other assets to invest their money. They are now stuck with US govt debts and other US assets.

Instead of collapse, the US dollar strengthened in recent months.

However, I expect this to be a temporary phenomenon. The collapse of the US dollar will take a year or two to happen. But it will happen.

This is my insignificant view.

 

Tan Kin Lian

 

 

yyy
READER COMMENTS BELOW

17 Responses to “Why the USD did not collapse yet”

  • xoxp:

    This is not about traditional economics logic anymore.
    Its about *POWER*.
    POWER TO CONTROL N MANIPULATE TO ONE’S OWN INTERESTS.
    What about $tock indices skyrocketing during the Covid pandemic?

    Its all about AMERICANS LEADING THE world BY THE NO$E.
    Look at Te$la,Elon Mu$k,at Amazon,jeff bezos ?

    No money?
    PRINT SOME MORE.
    NOT BANANA money but APPLE $.
    BIGGEST WORLD DEBTOR,so what?!
    When Asian banks piled up debts,American biggy banks n IMF whacked us and created AFC.
    ONLY DR MAHATIR dared to stand up.
    And Hk’s Donald Tsang stabilised HK market.

    Now,America piles up debt,u$d still MIGHTY.
    WHITE SUPREMACY!

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  • Stupid Singaporeans Vote PAP:

    Same here. As long as there are stupid Sinkies, PAP will not collapse. But one day, they will.

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  • US is king now:

    Russia failure to win Ukraine war in a short time means Russia weapons are not match that of US weapons. US aid Ukraine in weapons, money and perhaps military training too. Ukraine war is in many ways is arm wrestling between US and Russia. So it means US is King of the world now. Its weapons like drone are very powerful. If nations don’t pay tribute to US by buying us treasury bond, they could be target of US and US may bomb the hell out of them like Iraq and Afghanistan. As long as US weapon is powerful, they have the say over money and rule. US is the safest nation with protection of its advance weapons and nations will have to bow to US and buy treasury bond. US has increase its interest rate to destroy many nations’ economies by sucking away money and these nations cannot do anything. It is not one or two nations, it is many nations in the world. See US power. All these nations’ economies are manipulate by US. US is King now.

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  • stupid skinkies vote pap:

    The collapse of the US dollar will take a year or two to happen. But it will happen.

    This is my insignificant view.

    Well said. But we think the collapse will be more like in 10 or 20 years.

    As someone here in TRE has said, and we agree, the Chinese RMB is the better store of value. We have been buying S$1,000 worth of RMB once every few months. We will sell our RMB as soon as US$1=RMB1, that is, we make about 6 times from our investment.

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  • PAP mandate strong:

    USD 1 to 7.0X RMB.

    Obviously you lost if you sell ; unless paper trade only.
    What if drop to 8 ?
    Cheaper than HK currency.

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  • Western Sheep:

    Yes. The angmo club forbid members from joining other clubs. Penalty is death. Even playing with other clubs’ members also cannot.

    - Turkey banks process Russian cards. CANNOT. SANCTIONED
    - Turkey wants to join Shanghai groups. THREATENED

    It operates like gangster groups.

    xoxp: This is not about traditional economics logic anymore.
    Its about *POWER*.

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  • PAP mandate strong:

    Mr Tan KL , i rather you share comment about China’s 地方政府隱形債務and城投債務.

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  • Singaporeans R Free Riders:

    US is king now:
    Russia failure to win Ukraine war in a short time means Russia weapons are not match that of US weapons. US aid Ukraine in weapons, money and perhaps military training too. Ukraine war is in many ways is arm wrestling between US and Russia.

    Very well observed. Unlike blind Ang Mo Tua Kee worshipper yellow banana.

    US is king now:
    So it means US is King of the world now. Its weapons like drone are very powerful. If nations don’t pay tribute to US by buying us treasury bond, they could be target of US and US may bomb the hell out of them like Iraq and Afghanistan.

    Very well observed. In God We Tru$t ? Really ?

    In politics, there are no free friendship except gains/interest.

    Americunt force ROC Taiwan to buy Boeing 787
    https://bit.ly/3RVeos3

    Americunt: We hope to strengthen the ties even more economically. We hope you buy the 787..

    Translator was stunned and skipped translating the 2nd part of the speech

    You buy 787 and I, Americunt help you push Taiwan Policy HALF HEARTEDLY …

    Anyone here got any doubt ?

    No free friendship in politics
    https://bit.ly/3QTnrbV

    US is king now:
    As long as US weapon is powerful, they have the say over money and rule. US is the safest nation with protection of its advance weapons and nations will have to bow to US and buy treasury bond. US has increase its interest rate to destroy many nations’ economies by sucking away money and these nations cannot do anything. It is not one or two nations, it is many nations in the world. See US power. All these nations’ economies are manipulate by US. US is King now.

    Well said… In God We Tru$t.. Really ?

    Thou Shall Not Steal, Thou Shall Not Kill really ?

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  • xoxo:

    It’s all about relativity.
    The generous monetary injection has helped to sustain economic growth even as US inflation picks up mainly due to supply chain issues,first from the pandemic and exacerbated by Ukraine war.
    Inflation will gradually be brought down with higher Fed Funds rate n loosening of supply issues especially if Ukraine ends.

    All in all,USD will stay firm for some time yet against major currencies like GBP N EURO.

    ASIA will be the place to watch.
    Dont underestimate China even as its growth rates rise in more modest manner.
    Asia will pull the global economy up of current doldrums as Covid ebbs away.

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  • numbers guy:

    stupid skinkies vote pap: Well said. But we think the collapse will be more like in 10 or 20 years.

    As someone here in TRE has said, and we agree, the Chinese RMB is the better store of value. We have been buying S$1,000 worth of RMB once every few months. We will sell our RMB as soon as US$1=RMB1, that is, we make about 6 times from our investment.

    With China going all cashless and digital you may want to get rid of those RMB sooner than later. A currency that can not be traded freely and instead depends on the whims of the Chinese oligarchs is not a good store of value.

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  • MarBowling:

    Americunts USD is on VERY $TRONG and POTENT $TEROID$ for DONKEY YEAR$. As it takes on MORE AND MORE $TEROID$ it will become MORE AND MORE LIMBEK. When it EVENTUALLY CANNOT SUSTAIN ANYMORE TO REMAIN UPRIGHT, IT WILL COLLAPSE LIKE A HEAP OF SHITS!

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  • BK:

    Alamak, TKL and GMS are selling koyok again.

    1. China will damage USA by selling their US Treasury Bonds.

    First of all, China owns just 4% of total US debts. All countries run certain debts, a mix of internal and external debts. In general, ppl dont buy your debts for fun, but so they can make a return or as a safe haven.

    China buys USA debts to keep their Renminbi cheap, so they can sell more to USA, so they can keep the factories running, so they can keep Chinese employed.

    2. USA can manipulate the FX markets.

    No country can do it in the longterm. The breakdown of Bretton Woods showed that an opened free enterprise market of FX exchange regulates trade better.

    Pegged currencies that failed: 1. USA -Gold, 1971, 2. Pound- Deutchsmark, 1992, Swiss- Euro, 2015.

    Malaysia did it for awhile after the Asian Currency Crisis, but opened up because a closed capital system discourages FDI, reduces “oxygenated blood”, which is what capital flow is in a modern economy.

    Very few Central banks can sustain intervening against trend, the FX markets expose the true economic situations in a more transparent and drastic manner.

    Now, watch carefully the USD-HKD peg.

    3. USA wants a strong dollar.

    This is not true. In fact, most Presidents want a weak dollar to drive exports, no different from China.

    Look at the Plaza Accord (mainly against Japan and West Germany then) look at the number of Presidents blaming China for manipulating the Renminbi.

    Why is USD dollar strong?

    Firstly, the FED has mainly remain independent. U can see how Presidents get angry with the FED. This gives confidence to investors. U cannot see that in China yet.

    US is a very liquid and open system. Most of the developed world are connected to the US, the FED in many situations act as Central Bank for the world by providing liquidity.

    The US is never designated as the world reserve currency. In fact, quite a number of prominent US economists think is bad because the FED cannot just act as a US “Central Bank” but in some ways as the World Central Bank.

    EU is setup to take some of the burden off the USD dollar. It succeeded partly but it never replaced USD.

    USD is where it is because of market forces. At the present moment both global uncertainty and interest rates are pushing USD higher.

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  • NotMyProblem:

    Stupid Singaporeans Vote PAP:
    Same here. As long as there are stupid Sinkies, PAP will not collapse. But one day, they will.

    As long as the population of Singapore consists of more than 40% new citizens and all is of voting ago, PAP has no worry of being voted out.

    That’s the reason why they are so sure the next PM will be from the PAP.

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  • SINGAROAR:

    It is not that the US$ is strong. It is because countries want to keep their own currency level low for export reasons. Singapore is one of them. It is the reason why our food costs keeps rising.The imports become more expensive.

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  • SS:

    Folks, I’ve always been skeptical that raising interest rates is the answer, especially for inflation that is, in large part, driven by supply failures. Per the Federal Reserve, the US household sector’s net worth as of 1Q was $149 trillion. It looks like 2Q19 was the previous high point of interest income in the BEA chart. Since then, US household net worth increased by $37 trillion, so the increase in interest income (~$60bn) accounted for 0.16% of the wealth increase. Even if we ignored all other variables, the assertion that this amount of interest income variability can influence the forecast is bizarrely uninformed of critical context. https://www.federalreserve.gov/releases/z1/dataviz/z1/balance_sheet/chart/

    If the USD appreciates, the foreign US assets (denominated in foreign currency) would decrease in value. And the assets of foreign countries denominated in USD would increase in value. Therefore, this will worsen the US net international position. Stock market differentials are not the only explanation. Currency exchange rate differentials could be equally important. For instance, when the Euro depreciates towards USD American assets in Europe lose value (in USD) and adds to the net debt. This can explain a lot of the debt deterioration from 2013 to 2014.

    The total national debt increased from $19.947 trillion when Trump and crew started, and $27.68 trillion when Trump left, an increase of $7.733 trillion.

    The global stock and bond markets are driven first and foremost by central bank liquidity, currency relationships, relative sovereign bond yields, and short term changes in direction of capital flows due to shifting forecasts of all of the above.

    US stocks down 4 days straight. British pound plunges, bonds sink after government announces tax cuts. UK abolish the cap on bankers’ bonuses in a program to boost the competitiveness of London as a financial center https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/bonus-cap-removal-what-it-would-mean-for-uk-banks-72152880

    In my opinion, as usual, the Fed is up to its old tricks. The inflation caused by Bernake’s QE and ZIRP increased the Fed’s balance sheet to $9 trillion. This effectively taxed depositors, so Congress would not have to fund the FDIC as banks failed in 2008. Instead, bankers were made wealthy by the Fed. Whatever path is chosen. The question is, will it come from damaging inflation, recession, financial crises in developing countries, or some combination of all of the above?

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  • Koyok Seller:

    ”BK:
    September 23, 2022 at 8:09 am (Quote)
    Alamak, TKL and GMS are selling koyok again.”
    Thanks BK—enjoy reading your comments.
    The view of a knowledgeable person vs the ignoramus —stands out like night vs day.
    Why the ignoramus chooses to comment upon every topic under the Sun when their knowledge of the subject is so flimsy…..pride?…vanity?
    Koyak sellers appear everywhere on social media…it will be better if they start reading up on the subject matter from authoritative sources before posting.

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  • old man:

    @xoxo
    You were right.
    British Pound fallen to the pits already.
    Thanks for sharing.

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