Doomsday scenario - can the dollar actually plunge?

[Thrashertm]

So lets assume that the doomsday scenario occurs, and large investors start dumping US dollars on the open market, the value of the dollar on these markets plunges dramatically.

Can the value plunge all that much when these dollars can still be used to buy US-based assets? For example, US real estate, or US-produced food, US based businesses etc.

[noxagol]

Yes. Yes they can.

[Thrashertm]

Yes. Yes they can.

Why?

[scooter]

The dollar can go down pretty severely over time, but the doomsday scenarios where they are "dumped" en masse are not possible. There is not a market big enough for places like China and Japan to dump the massive amount of dollar holdings they have. Also, these places don't want to dump them. The success of their economies depends on having the American consumer to sell to.

You will see a drop in the dollar over time because our government is losing its ability to export inflation. Dollar holders aren't dumping their current holdings, they just aren't buying more.

[noxagol]

The dollar can go down pretty severely over time, but the doomsday scenarios where they are "dumped" en masse are not possible. There is not a market big enough for places like China and Japan to dump the massive amount of dollar holdings they have. Also, these places don't want to dump them. The success of their economies depends on having the American consumer to sell to.

You will see a drop in the dollar over time because our government is losing its ability to export inflation. Dollar holders aren't dumping their current holdings, they just aren't buying more.

FALSE! The Chinese would be far better off if they STOPPED selling to us. I will ocne again bust out Peter Schiff's analogy.

Suppose six people wash up on an island together, five Asian, one American. They need to eat so they divy up tasks. One asian will hunt, another will forage, another will fish, another will find drinkable water, and the last will start and tend a fire. The American's job is to eat. So the Asians toil all day to prepare a meal for six people. It is quite obvious that they would be far better off if they kicked the free loading American off who provides nothing in return.

[scooter]

Your analogy assumes everyone came to the island and were equal to begin with. That is very far from the way things are between Chinese and Americans in the real world.

They have a growing middle class to support internal industry, but they have hundreds of millions out in the countryside who have hardly any wealth whatsoever.

Without western consumers, China's growing economy goes right back down to where it was before.

And besides all of this... again... thre IS NO MARKET BIG ENOUGH for countries like China to "dump" the massive amount of dollars they are holding.

[Acala]

The flood of foreign-held dollars will bid up prices for US assets so Americans will experience a dramatic drop in purchasing power. But the return of the inflation we have exported will not be enough to collapse the dollar by itself although it will be very painful. But all domestic policy roads (but one) lead to more new inflation on top of the old coming back to haunt us.

Our banking policy, based on privatizing the profits and socializing the losses, ultimately relies on inflation. As the the hyper-leveraged US economy slides into depression, banks will be bailed out with inflation.

Our social policy, based on taxing productive enterprise to bail out failures, will become dramatically larger and more expensive. It too will be paid for with inflation.

The fundamental hidden agenda of our government, to pillage the people and use the money to pay off special interests in exchange for political support, will be increasingly funded with inflation, necessitated by the loss of tax revenue.

The only road that leads away from hyper-inflation requires a heroic effort on the part of the government to slash the size and cost of government, allow the market to dole out its punishments and rewards unobstructed, and to kill the banking cartel. And the folks in DC just don't have it in them - not by a long shot.

[Thrashertm]

So it sounds like the consensus is that true hyper inflation Germany/Zimbabwe style is pretty unlikely. What is more likely is the gradual unwinding of the dollar.

[noxagol]

Your analogy assumes everyone came to the island and were equal to begin with. That is very far from the way things are between Chinese and Americans in the real world.

They have a growing middle class to support internal industry, but they have hundreds of millions out in the countryside who have hardly any wealth whatsoever.

Without western consumers, China's growing economy goes right back down to where it was before.

And besides all of this... again... thre IS NO MARKET BIG ENOUGH for countries like China to "dump" the massive amount of dollars they are holding.

They don't need a big market, they can just bid ridiculous amounts for things.

[krazy kaju]

That's the entire point. If a huge amount of money is dumped into the market, there are more dollars chasing about a fixed amount of commodities.

Let's use this static example:
There is a total of $100 in the economy.
Bread costs $10.
$100 more are created, totaling $200 in circulation.
Bread costs $20.

Essentially, the price rises as:
1. There are more dollars chasing a product.
2. Increased costs of production (due to inflation in other sectors), sends the "price floor" up.

[Acala]

The dollar can go down pretty severely over time, but the doomsday scenarios where they are "dumped" en masse are not possible. There is not a market big enough for places like China and Japan to dump the massive amount of dollar holdings they have. Also, these places don't want to dump them. The success of their economies depends on having the American consumer to sell to.

You will see a drop in the dollar over time because our government is losing its ability to export inflation. Dollar holders aren't dumping their current holdings, they just aren't buying more.

There certainly IS a place big enough for China and Japan to dump their dollars - it is called the US. And it is already happening. Those dollars we exported are coming back to buy US assets and goods. We will be competing with China, Japan, and the Arabs for our own stuff. And that will drive the prices of all of our goods and and assets through the roof. It is our exported inflation coming home.

Furthermore, they don't even have to buy stuff with those dollars. All they have to do is exchange them for other currency.

You are also incorrect about China depending on the US for its economy. The Chinese people are poised to become the world's biggest consumers. They have MASSIVE personal savings.