Admit it, you're a little bit "libertarian curious", aren't you? 😉

It would seem disadvantageous for any economy to hold large cash reserves. Money is being created to pay off speculators who just look for the next bubble. The value of money should be falling sharply.

Having said that, I'm a bit surprised that the oil price hasn't risen more as it would seem an ideal way to use up risky dollars on something tangible. Maybe there is some unholy equilibrium between the QE money coming into the financial system and the amount of worthless debt falling due for repayment.

On the political side, it's difficult to speculate with any confidence on the imperatives driving the various currency blocs. Are secret alliances being created or is it simply 'every man for himself'?

I'm just hoping that the resolution doesn't involve bombs.

Yes, that's what I'm arguing. The banks have debts they need to pay and without cash flow of their own they need ours. That is, in part, what QE is about.

And I think the USA is playing too big to fail with its own debt and currency.

And yes I do think the central banks have been buying each other's debt. Which does mean they are all holding dollar debt. This would indeed get crushed if the dollar were to take a dive. And this is worrying them. But up till now I don't think they had much choice. They all needed to sell debt and needed a ready buyer. I think they provided that for each other which also meant no actual money changed hands. They all colluded in an accounting trick. I hold your debt as capital and you hold mine. We all sold our debt and are all richer to boot.

Now however they may not be feeling so clever.

None of them can afford to start selling and be seen to sell dollar debt. If they did, and caused a dolar debt sell off, they would all be the losers because what they had not sold would then be worth a lot less.

The trick is how to get rid of dollar debt without being obvious about it. The best way is to sell long dated debt and buy short term debt in its place. Total change in your dollar holdings – nil. But you can now start to quietly buy less going forward. Which means as the shorter term debt matures you simply don't replace it. You're not selling any debt. But you will end up holding less and less.

I think you'll find the Fed buying up more and more long dated debt to mop up excess on the market.

They are buying dollar debt because what else is there until a new stronger currency comes along? Today, if they don't buy dollar debt they have to buy euro or swiss or ???

And euro and swiss debt is being bought.

I think what you are noticing is that their actions seem to suggest a change in strategy. And I think this is what has happened. They were all persuing one strategy with the idea that it would all work and fairly quickly as per the 'it's all under control and will be over by christmas.' I think they believed it might be and acted accordingly. Now it is opbvious they were wrong and they are having to change course. Sadly for them, they now have different needs and agendas and are finding they are cutting across each other. So the change is accrimonious and disorderly. And may end in serious confrontations.

Hence I keep saying it is now political and nasty.

They are caught between, on the one hand, what they must do given the way the world still is – America powerful and a large though collapsing market, and on the other, the way it might evolve and the way they might like to push it – America and the dollar now a player among equals.

A large part of QE is America trying to keep its place as the pre-eminent strong economy going by the goverment trying to replace private American spending. If you closed your eyes you might still think America was a strong economy. It is spending, dollars are flowing and the value of its big companies and stock markets are rising.

As long as everyone keeps accepting the dollars then America is still a strong economy – THE strong economy. If the dollars stop moving – because of no government stimulus – or people stop accepting them – either one, and its game over for America as a global power.

As I see it, the initial thrust of your article is that QE dollars are effectively being used to pay offshore investors the interest (or principal) on their dollar-denominated assets. Those investors are therefore holding dollar bills.

Maybe this is the intention of QE?

The more that the USA can tie in the rest of the world to its currency, the more likely it is that the USA can renegotiate the terms of that debt. ("We're a country that's too big to fail")

You speculated previously that central banks are buying each others debt which suggests to me that any sudden decimation of the dollar will leave the other major economies looking shaky also.

Shouldn't we be looking for evidence that central banks are off-loading American debt holdings as evidence that the dollar's days are numbered? Why are they still buying if they're planning a new reserve currency? Why are their economies still selling to the USA if they're being paid with worthless paper?

DopeAddict you want a finite reserve because when you inflate the paper bills that represent the reserve, inflation becomes immediately apparent and people can trade the paper bills for the reserve if there is a loss of confidence.

Add in the feature of the bills being exchangeable into the finite reserve (as was the case in the U.S. for individuals in the 1900s and for Countries post WW2 as part of the Brettan Woods agreement) and you have a check on the system’s ability to QE or inflate its currency. Which is a good thing as this is a necessary precursor for war (America fully came off the gold standard in 1971 to turn on the printing presses to finance the Vietnam war). In fact steps towards a local alternate precious metal based currency have been taken in Idaho [3], Michigan [4] and Kelantan, Malaysia [5] as well as online [6].

But you are right there isn’t enough gold, at the current price, to supplant fiat but it is suggested that a dual gold/silver reserve would be sufficient if these metals were priced taking inflation into account. Especially if you cut all the fictitious derivative crud out of the system 1st.

The gold bars in Fort Knox is an interesting one. Fort Knox has never been independently audited there is real concern that it’s not all there. However the flood of gold that could be unleashed is a trickle compared to the tidal wave of paper/digital money/stocks that could come the other way. In an interesting twist it’s recently been suggested that the US could go back onto the gold standard by appropriating the major gold holdings on US soil, including the German central bank stock [sorry can’t source the link right for this right now], and this is a backstop to the collapse of their fiat world reserve currency.

But ultimately Dope Addict you are right it doesn’t have to be backed by gold. The State owned Bank of North Dakota [7] demonstrates with its States’ relative solvency, compared to other US states, that all you really need is localised control of money. Beyond that as Golum said it is a matter of confidence.

[1] http://www.chinadaily.com.cn/china/2010-09/28/content_11355858.htm
[2] http://www.bloggingstocks.com/2009/09/08/russia-beats-saudia-arabia-to-become-the-worlds-biggest-oil-exp/
[3] http://www.youtube.com/watch?v=1sI01CwhLEk
[4] http://globaleconomicanalysis.blogspot.com/2010/07/ron-paul-silver-ounces-accepted-at.html
[5] http://blogs.ft.com/beyond-brics/2010/08/13/malaysia-looks-to-ancient-alternative-currency-gold/
[6] http://goldmoney.com
[7] http://www.banknd.nd.gov/

As I alluded to, there is an argument to say that the Iraq war was in part prosecuted because Iraq was going to switch to selling its oil in euros. That fact was certainly why France in particular and Germany to a slightly lesser extent were so keen on diplomatic dialogue with Iraq and why they would not back the various UN resolutions the U.S. kept coming up with.

It is also certainly part of the acidic nature of the Bush Administration's response to France. National pride, the status fo the dollar as reserve currency and the personal enmity of Cheney at Halliburton.

Europe wants the euro to take away the dollar's pre-eminence. Others have their own agendas. The US has been playing too big to fail with its sovereign debt for a decade and more. They invented the idea before Wall Street.

The politics of this are getting serious. And after the Fed announces QEII, Wall Street rockets and the money starts to move off-shore to emerging markets it will get even more serious and urgent.

Fun times.

… a delicious prospect, but I just can't see the US taking it lying down. I do know that Legarde has been in discussions with the Chinese, behind closed doors, about an alternative reserve currency.

Thanks for the quick response. Hope I did not hit a raw nerve, it was not my intention to cause any offence. I hope whatever you are going through at the moment resolves itself and wish you all the best for the future

How I wish. Sadly I am not making a documentary on the book. Perhaps if the book became at all popular…

No, the documentary is about waves – ordinary waves on the sea, which I have tried to expand to also be about seeing the world in terms of process rather than objects, about ourselves as process and finally about mortality. It is the last link in that argument which became personally difficult for me this last year.

I am glad you like some of my films. Turns out I am giving a lecture on film making in Bradford at the museum December 8th. If you can make it we could say hello.

Otherwise thank you for reading and for commenting.