Per Request: Podcasts

Woo! I listen often while working. For me, it is much easier to strike a balance of focus with audio presentations.

(Yes, I could also just minimize the video…)

On the topic my quick take on why we haven’t seen a US sovereign debt crisis.

Traditionally a debt crisis occurs when borrowing rates rise such that interest carry exceeds what the government can feasibly extract in taxes minus spending. So a sovereign debt crisis is most commonly marked by rising rates.

The possible exception to this is when the government monetizes the debt by increasing the money supply, thus pushing down rates, but also decreasing the exchange rate and purchasing power. Since sovereign debt crises almost always tend to be accompanied by large trade deficit this is counterproductive. The country is stuck running even higher deficits as it pays more for its imported and gets less for its exports.

The US seems to be an exception because its vast increase in money supply has not been accompanied by any downward pressure on dollar exchange rates. Since the dollar’s the world’s reserve currency for a speculative attack on the dollar would require massive outflows of funds, and more importantly massive inflows in to new perspective reserve currencies.

The viable candidates I can think of for new reserve currencies are either small nation hard currencies (JPY, CHF, SEK) or precious metals. The Euro certainly isn’t a candidate since European finances are basically in the same state as American. Nor is the Pound for similar reasons. AUD and CAD are unsuitable because they’re too tied to resource prices.

No small nation wants the status of reserve currency. The runup in the exchange rate would decimate their exporters. Their central banks stand ready to intervene to keep prices suppressed. The Swiss demonstrated this quite clearly. In fact if you as a central banker had moved your reserves from dollars to franks over the pass 6 months you basically would have already lost as much (30%) as you feasibly would take as a haircut on a US bond default.

The only viable candidate I can see to knock-off king dollar are precious metals. Since they have no central bank to keep their exchange rate artificially depressed, and have basically zero supply elasticity. However psychologically it will take a while before central banks are willing to pay $2k/oz for gold.

The marginal seller of dollars, basically the central banks and sovereign wealth funds of Asia and the Middle East, are highly risk averse. They’ll stick with dollars until the potential haircut on default well exceeds 50%. I can see this circus keep going for at least another 10 years.