The Dollar’s Debt Trap
The comments below are an edited and abridged synopsis of an article by Alasdair Macleod
“On the fiftieth anniversary of the Nixon Shock, this article explains why fiat currencies have become joined at the hip to financial asset values. And why with increasing inevitability they are about to descend into the next financial crisis together.”
“I start by defining the currencies we use as money and how they originate. I show why they are no more than the counterpart of assets on central bank and commercial bank balance sheets. Including bonds and other financial issues emanating from the US government, the individual states, with the private sector and with broad money supply, dollar debt totals roughly $100 trillion, to which we can add shadow banking liabilities realistically estimated at a further $30 trillion.”
“This gives us an idea of the scale of the threat to asset values and banking posed by higher interest rates, which are now all but certain. The prospect of contracting financial asset values is potentially far worse than in any post-war financial crisis because the valuation base for them starts at zero and even negative interest rates in the case of Europe and Japan.”
“I focus on the dollar because it is everyone’s reserve currency and I show why a significant bear market in financial asset values is likely to take down the dollar with it, and therefore, in that event, threatens the survival of all other fiat currencies.”
Up for discussion: Introduction; the origin of debt; the history of credit expansion; shadow banking; the inevitability of rising interest rates; tapering QE will not be possible; and the fates of financial assets and fiat currencies are joined at the hip.
