Who’s Afraid for the Dollar? Part III- Can the Dollar Weaken Anyway?

The first two parts of this series dealt with the reasons the dollar is not about to collapse, but could the dollar weaken anyway? The short answer is a resounding ‘yes’. The dollar’s value will fluctuate and it may even decline fairly significantly in value as a result of all the recent monetary policy. However, hyperinflation is not in the cards, nor is an outright dollar crisis.

Who’s afraid for the dollar? Part II- the Chinese and Reserve Currency Status

So what happens if the Chinese stop buying our debt? Let's start with a some perspective: China currently owns about 11% of all the outstanding U.S. Treasury notes and agency debt (Fannie, Freddie, etc). While this is a large, significant and growing proportion, it is hardly enough to consider the Chinese our economic masters. Consider that the UK, Cayman Islands, Luxembourg, Belgium and Canada collectively own twice as much as the Chinese. Indeed, Japan alone is still our largest creditor holding a little more than the Chinese.

Who’s afraid for the dollar? Part I

We hear many prognosticators talk negatively about the dollar (I call them “dollar bears”). Some predict the dollar will get so weak it will crush the economy, cease to be the world’s reserve currency, and drive interest rates to double-digits. Some even talk about Zimbabwe or Weimar Republic style hyperinflation due to the all the money the Federal Reserve is “printing”.  These fears are overblown and unrealistic in my opinion and I’d like to take a moment to explain why this is not something we should fear. Since this is an extensive topic, I will break it into several parts.

Still Worried About All Those Reserves?

Many commentators still seem to be screaming that hyper-inflation is around the corner. The crux of their argument is that the Fed has pumped hundreds of billions into bank reserves. There is a chart circulating, which you may have seen, illustrating this explosion of credit. After all, reserves normally translate directly into fresh lending. I have reproduced the chart for you here:

"Cadbury shareholders stand to lose out massively"

"Cadbury shareholders stand to lose out massively" is the language a shareholder has used in suing Cadbury to reconsider the Kraft offer. More specifically, according to a Reuters story today: