“The Impossible” Continues to Unfold

China Treasury Dump

Long-time readers of the LMR know that we have long warned that the U.S. dollar’s hegemony in world currency markets was a revocable privilege, and that irresponsible Fed policy was sowing the seeds of a future blowback.

Specifically, so long as investors, governments, and central banks around the world were willing to tie their own currencies to the USD and/or absorb dollar-denominated assets as if they were akin to gold, the U.S. could run a balance-of-trade “deficit without tears” (the memorable phrase coined by French economist Jacques Rueff in the postwar era).

However, once the spell had been broken (for whatever reason) and foreigners were not willing to indefinitely pile up more and more claims on future dollars, there would be an effective margin call on the U.S. standard of living. In this respect, we were not pioneers, but instead were echoing a long line of caution coming from the opponents of unbacked government fiat money

For years, critics pooh-poohed warnings such as these, saying (for example) that the world had no alternative but the USD. Well, as we explained in the December 2015 issue, the IMF recently added the Chinese currency to its basket of “reserve currencies.” Meanwhile, in a Jan. 10 Bloomberg article by Andrea Wong, we see the above chart regarding Chinese selling of Treasuries last year: The funny thing is, rather than sounding the alarm, the Bloomberg article dutifully quoted all sorts of analysts to assure its readers that things were fine.

After all, with the world possibly tilting into recession, investors will be flocking into “safe” Treasuries. Notice the irony here: The narrative is admitting that something really disturbing is happening, but that its normal impact will be masked by the slumping of the global economy. Are you reassured?