Correct me if I’m wrong here, but aren’t we locked in a weird cycle where the US sells its debts to continue functioning, but then much of the system relies on the revenue generated from those debts being paid by the US.
If a sell off were to begin the price of bonds would plummet. The first countries to sell would be least impacted, but eventually the later countries are in bad shape. You can say sell at the “exact same time” but that’s not really how financial markets work.
I suppose the US is still more reliant on these bonds, but I’d imagine a crashed dollar would have pretty large ramifications globally.
Of course of of this will happen anyway if the US decides to invade Greenland.
I can see where countries no longer invest in US bonds, but may be forced to hold onto these to not take a budgetary hit.
That’s how it could create a runaway snowball effect. The first few countries to sell off their US bonds would be in the best position, after that the bonds’ value starts to dip. Other countries see that and decide to sell off now before it gets worse, and the value dips further, accelerating as more and more countries realize they need to dump their US bonds asap cause it’s only going to keep plummeting. The last ones to notice or act on it will be stuck with worthless bonds that will never recover their value.
That’s how it would result in total economic collapse for america, and knowing that the sooner you drop the hot potato the better is what will create the rush to sell them off as soon as possible. How many initial sell-offs it would take to precipitate this effect is the question.
And since the crashed dollar will lower the purchasing power of anyone whose wealth or income is primarily in US dollars, anyone who drops these assets ahead of the game will be in the best shape. That’s why a lot of US banks are currently buying gold; it’s very likely to hold its value and is a very stable asset.
Assuming countries drop their USD-based assets before the crash, the relative values of their currencies should remain similar. For instance, the EUR to GBP conversion rate wouldn’t change much. The more heavily invested in USD a nation’s economy, the more detrimental the impact would be on their currency.
Commodity prices measured in USD for example would skyrocket, because the relative value of the USD would be crashing, but any currency that untethers from the US economy in time should remain stable relative to commodity prices, or possibly see some advantage if it gains value as a result of the USD crashing.
This is all contingent on countries dropping their US bonds and other assets, of course. The more dependent their wealth is on the US economy, the more detrimental the USD crash-out will be to that country and its currency. All the more incentive to be among the first to drop their US assets.
Even if they decide collectively not to do this, the AI bubble is going to burst sooner or later, and the further they kick the can down the road the worse the crash is going to be. Along with other trends like the US reversal of green energy initiatives while the fossil fuel industry is beginning to show cracks, the impending collapse of oil prices, etc., investing in USD is just really bad fiscal policy. People are only still doing it because they believe they can hold the jenga tower up long enough to grow their portfolios just a little more. Their greed will kick them in the ass if they hedge their bets too far…
I believe this ignores the ripple effects of a crashed US dollar. Unfortunately world economies are intertwined in a way we’ve never seen before.
I don’t think either the Euro, USD, or Pound could collapse without dragging down the others indirectly. There’s a reason to 08 crash was felt worldwide.
Don’t get me wrong it would be the worst for the United States and any nation that fixes their currency to the dollar. But probably quite painful to downright disastrous for many other nations.
Of course all of that happens anyway if Trump does the worst of what he says.
In my view, that can only be mitigated by detangling other economies from the US. Selling off treasury bonds is one step. Increasing tech/data sovereignty is another, as well as shifting reliance to more local supply chains and manufacturing. And moving assets to the European market (in Europe’s case).
Any steps to boost sovereignty and independence help to reduce reliance on the US, and mitigate the impact of a US economic crash. The lesson learned from 08 should be not to depend too heavily on US bubble economies.
Besides, the US hardly manufactures anything. They export corn, soybeans, petroleum, and cloud-based software. And US treasury bonds, whose only value is that people agree that they hold value. What happens when people suddenly realize or decide that they don’t?
Grains and legumes can be ground elsewhere; arguably better. Countries already are and must continue to reduce their dependencies on fossil fuels; petroleum will not be a major commodity for much longer, no matter how the industry kicks and screams and colludes with the US government for corrupt advantage. Lastly, the shift to tech and data sovereignty must happen anyway, and is happening. The sooner other nations get their data off US-based cloud infrastructure, the better off they’ll be.
There’s no downside, other than reducing one’s dependency too slowly and being among the last to jump ship before it sinks.
Yeah… The really bad part is that it would be most harsh on countries with unstable currencies. The USD is basically the foreign currency reserve that backs most poorer nations currency.
Countries could slowly start exiting the US bond market, but they would have to find a replacement, and nothing has been as stable or financially open to scrutiny as the USD.
Even if more countries switched over the yuan it’d have to be a slow process. There would also be a lot more blind trust involved since there’s a lot of things done behind the curtain between the national bank and local government banks.
Maybe it’s pedantic, but the Treasury doesn’t really buy them back. A Treasury bond is basically “the Treasury will give the holder of this bond X dollars at Y date”.
Nothing forces the Treasury to buy bonds from the market, but they are bound to pay the specified amount on the specified date.
The problem is, in a bond market collapse, inflation is going to skyrocket, and the bond holder has no option other than to take that hit because the payout is fixed.
That’s what I meant by IOU. The treasury gives them the money, they return the bond, and it goes in the shredder. Of course it happens electronically these days, but before the internet there was a physical sheet of paper that was exchanged.
So instead of renewing/rolling over the bonds, countries can decide to collect the money owed and the US treasury can’t say no.
If they’re selling on the secondary market before the time is up, yes that’s different. But if everyone decides to sell then supply outpaces demand and the value drops. Then nobody buys new bonds from the US and they still can’t borrow, and have to default on their loans.
If the US refuses to honor its treasury bonds, then the promise to repay them means nothing and they lose their value. That would be a different way of crashing the US economy.
No one would let them borrow money anymore, meaning they would no longer be able to afford to pay the interest on the debt they’ve already accumulated.
Correct me if I’m wrong here, but aren’t we locked in a weird cycle where the US sells its debts to continue functioning, but then much of the system relies on the revenue generated from those debts being paid by the US.
If a sell off were to begin the price of bonds would plummet. The first countries to sell would be least impacted, but eventually the later countries are in bad shape. You can say sell at the “exact same time” but that’s not really how financial markets work.
I suppose the US is still more reliant on these bonds, but I’d imagine a crashed dollar would have pretty large ramifications globally.
Of course of of this will happen anyway if the US decides to invade Greenland.
I can see where countries no longer invest in US bonds, but may be forced to hold onto these to not take a budgetary hit.
That’s how it could create a runaway snowball effect. The first few countries to sell off their US bonds would be in the best position, after that the bonds’ value starts to dip. Other countries see that and decide to sell off now before it gets worse, and the value dips further, accelerating as more and more countries realize they need to dump their US bonds asap cause it’s only going to keep plummeting. The last ones to notice or act on it will be stuck with worthless bonds that will never recover their value.
That’s how it would result in total economic collapse for america, and knowing that the sooner you drop the hot potato the better is what will create the rush to sell them off as soon as possible. How many initial sell-offs it would take to precipitate this effect is the question.
And since the crashed dollar will lower the purchasing power of anyone whose wealth or income is primarily in US dollars, anyone who drops these assets ahead of the game will be in the best shape. That’s why a lot of US banks are currently buying gold; it’s very likely to hold its value and is a very stable asset.
Assuming countries drop their USD-based assets before the crash, the relative values of their currencies should remain similar. For instance, the EUR to GBP conversion rate wouldn’t change much. The more heavily invested in USD a nation’s economy, the more detrimental the impact would be on their currency.
Commodity prices measured in USD for example would skyrocket, because the relative value of the USD would be crashing, but any currency that untethers from the US economy in time should remain stable relative to commodity prices, or possibly see some advantage if it gains value as a result of the USD crashing.
This is all contingent on countries dropping their US bonds and other assets, of course. The more dependent their wealth is on the US economy, the more detrimental the USD crash-out will be to that country and its currency. All the more incentive to be among the first to drop their US assets.
Even if they decide collectively not to do this, the AI bubble is going to burst sooner or later, and the further they kick the can down the road the worse the crash is going to be. Along with other trends like the US reversal of green energy initiatives while the fossil fuel industry is beginning to show cracks, the impending collapse of oil prices, etc., investing in USD is just really bad fiscal policy. People are only still doing it because they believe they can hold the jenga tower up long enough to grow their portfolios just a little more. Their greed will kick them in the ass if they hedge their bets too far…
I believe this ignores the ripple effects of a crashed US dollar. Unfortunately world economies are intertwined in a way we’ve never seen before.
I don’t think either the Euro, USD, or Pound could collapse without dragging down the others indirectly. There’s a reason to 08 crash was felt worldwide.
Don’t get me wrong it would be the worst for the United States and any nation that fixes their currency to the dollar. But probably quite painful to downright disastrous for many other nations.
Of course all of that happens anyway if Trump does the worst of what he says.
In my view, that can only be mitigated by detangling other economies from the US. Selling off treasury bonds is one step. Increasing tech/data sovereignty is another, as well as shifting reliance to more local supply chains and manufacturing. And moving assets to the European market (in Europe’s case).
Any steps to boost sovereignty and independence help to reduce reliance on the US, and mitigate the impact of a US economic crash. The lesson learned from 08 should be not to depend too heavily on US bubble economies.
Besides, the US hardly manufactures anything. They export corn, soybeans, petroleum, and cloud-based software. And US treasury bonds, whose only value is that people agree that they hold value. What happens when people suddenly realize or decide that they don’t?
Grains and legumes can be ground elsewhere; arguably better. Countries already are and must continue to reduce their dependencies on fossil fuels; petroleum will not be a major commodity for much longer, no matter how the industry kicks and screams and colludes with the US government for corrupt advantage. Lastly, the shift to tech and data sovereignty must happen anyway, and is happening. The sooner other nations get their data off US-based cloud infrastructure, the better off they’ll be.
There’s no downside, other than reducing one’s dependency too slowly and being among the last to jump ship before it sinks.
Hardware they have a monopoly on hardware.
What hardware is manufactured in the US that can’t be sources elsewhere?
Yeah… The really bad part is that it would be most harsh on countries with unstable currencies. The USD is basically the foreign currency reserve that backs most poorer nations currency.
Countries could slowly start exiting the US bond market, but they would have to find a replacement, and nothing has been as stable or financially open to scrutiny as the USD.
Even if more countries switched over the yuan it’d have to be a slow process. There would also be a lot more blind trust involved since there’s a lot of things done behind the curtain between the national bank and local government banks.
If Trump gets his wish and co-ops the Fed, they might as well start dumping USD. It’s going to be on a wild ride after that.
I would be skeptical of them “dumping” anything, but they probably would start to slowly diversify their reserves.
Right now there isn’t exactly a replacement other than gold, but that’s really impractical as a replacement for the bond market.
If only there was another currency used by a number of different countries.
What does France and Germany use? Can England back their pounds on the franc?
Are you asking if the EU can use the euro as a reserve currency?
Every sale requires a buyer
A treasury bond is basically an IOU: the treasury is legally bound to buy it back.
Maybe it’s pedantic, but the Treasury doesn’t really buy them back. A Treasury bond is basically “the Treasury will give the holder of this bond X dollars at Y date”.
Nothing forces the Treasury to buy bonds from the market, but they are bound to pay the specified amount on the specified date.
The problem is, in a bond market collapse, inflation is going to skyrocket, and the bond holder has no option other than to take that hit because the payout is fixed.
That’s what I meant by IOU. The treasury gives them the money, they return the bond, and it goes in the shredder. Of course it happens electronically these days, but before the internet there was a physical sheet of paper that was exchanged.
So instead of renewing/rolling over the bonds, countries can decide to collect the money owed and the US treasury can’t say no.
If they’re selling on the secondary market before the time is up, yes that’s different. But if everyone decides to sell then supply outpaces demand and the value drops. Then nobody buys new bonds from the US and they still can’t borrow, and have to default on their loans.
Who enforces these laws on the international stage?
If the US refuses to honor its treasury bonds, then the promise to repay them means nothing and they lose their value. That would be a different way of crashing the US economy.
No one would let them borrow money anymore, meaning they would no longer be able to afford to pay the interest on the debt they’ve already accumulated.