Despite trying stay on top of the dollar issue, there is something I cannot get a handle on. At what point will China, for example, give it up? That is, at what point will China start reducing its portfolio of dollars and/or let its currency float against the dollar. Thus far, they seem adamant at staying the course, hoping for some sort of miracle I suppose, like George Bush becoming a fiscal conservative or/and giving up his rediculous schemes to privatize social security.

The irony is that now that we are starting to seriously discuss how stupid this privatization scheme is, the dollar seems to be gaining a bit of ground against the Euro and Yen and probably other currencies. If this scheme doesn't convince the rest of the world that Bush is completely off his rocker, I don't know what will.

Tom, I basically agree with you, but the dollar flunctuation is only temporary. Its on a longterm downward trend and the rest of the world knows it. Bush and the rest of his crowd might monkey around with it so it doesn't fall apart next week, or even in the next year or two, but eventually the chickens will come home to roost....and we're the one's sitting at the bottom of the chicken coop.

You might want to go grab some Krugerands.

I certainly don’t claim to understand the whole picture here. My ideas pretty much come from analyses by William Greider, who as Jerry said a couple of years ago is “America’s most useful journalist.”

http://badattitudes.com/MT/archives/000079.html

As Tom points out, China pulling out of the dollar would be a disaster. Even more so for Japan; I recently read an estimate that the US foreign debt is about three and a half trillion bucks, of which Japan alone holds nearly a quarter.

One result of this is that neither China nor Japan wants the price of dollars to drop, because if it does they’ll be left with a lot of dollars that are worth less than they used to be. They might be happy to convert most of their reserves of dollars into euros right now, but if they start selling dollars the price of dollars will drop like a rock. So they might be thinking of something like reducing their holdings gradually, so that it doesn’t attract much attention. But beware, amateur talking. Any pros around?

I agree with Buck that the long-term trend for the dollar is down, and the world knows it. So where do you put your money, if you have some? If you like James Surowiecki, and I do, you might be interested in his take on gold:

http://newyorker.com/talk/content/?041129ta_talk_surowiecki

...kind of reminds me of my grandfather, whose father immigrated from Germany. All of his relatives had lost everything back in Germany after WWI. When the US got rid of silver in the currency in the 1960's, he became convinced that everything was going to hell in a handbasket, and soon, so he stashed thousands of dollars in coin in a big safe in his house. Everything would have gone well for him, at least until 1980, but one day in the 70's while we were taking a family vacation a thief broke in his house and stole it all. They eventually caught the guy drinking it up in a bar, but it took several years before that happened, but in the meantime, the thief had spent all the money.
The folks selling us on Euro's right now might be up to similar tactics; the Chinese peasants mentioned in the article below might eventually get the shaft too.

The problem is, nobody knows what's going to happen...but we do know the thieves are out there, right?

For another contrarian view, see:

http://moneycentral.msn.com/content/P93626.asp

My gut feeling is that the coming dollar crisis is completely predictable. It will start as soon as it becomes clear that Bush is actually going to forward the SS privatization act to Congress. It will accelerate as soon as it looks good that Congress will pass it.

But the real plunge will come within minutes of Bush signing the bill. Currency traders around the globe will start shorting the dollar, and there will be nothing the U.S. can do to stop it.

China, Japan, and the rest of the T-bill buyers may try to shore up the greenback for a little while. But they will quickly be forced to decide whether they want to devalue their assets (and thus take a HUGE hit that knocks their own budgets into the toilet), or opt for the lesser damage that selling with the crowd will bring.

As I can other observers have noted, the plunging dollar won't do a damn thing for U.S. exports. What it will do is make all the Chinese crap at Wal*Mart cost a hell of a lot more. Meanwhile, the U.S. economy might well collapse under the weight of galloping inflation coupled with stagnant wages.

Bush's response, of course, will be to completely eliminate taxes on the wealthy and corporations.

Buck,

FWIW, Euros,( if you have them in the right financial institution, not under your bed) are insured by the FDIC just like dollars. So, I don't think the silver analogy applies. You can also, by holding several accounts (single, joint, etc.) pump it considerably above $100,000. Now of course, I can't guarantee the solvency of the FDIC, especially under Bush.

I've bought some Euros, but not enough to really make a great deal of difference if the deluge comes. Just wanted to get my feet wet as I sort through some of these issues. Now, as for Soros, I believe he has been way ahead of the curve as usual and has made a ton. More money for Dems and progressive causes.

There was a rumor recently that China has begun to dump dollars. Rumor denied. But you never know.

Moe, the guy at the link I posted pretty much agrees with you. He's a self described "contrarian". He did remark that if the dollar falls, it pretty much will takes the rest of the world's currency down with it. I think that pretty much is what happened during the great depression.

I agree with your assessment, but I'm not so sure Bush can get the SS bill through. What you are stating would happen Grover Norquist's dream come true, but I'm not sure there are enough Republicans on board for them to get it through. I suspect the fiscal conservatives might win on this one.
As for my comment on Krugerrands, I'm not going to put something under the mattress-there are all kinds of ways one could play the scenario. Oil stocks will probably do well. (My wife and I have different theories about the wisdom of "socially responsible investing"; my theory is that its best not to let the Bushies get it-- but you may disagree and I respect that).

The dollar may decline or stand still for a while yet, I wouldn't recommend sudden moves based on fear though. There seems to be a common wisdom to bet against the dollar right now and I suspect the market movers will keep it unpredictable and shake out a lot of dollars through fear.

The long term outlook is not good though, no matter what.

...and on a side note, there are some weird reports coming out of Russia about gold.

http://www.rbcnews.com/free/20041111123832.shtml

but see:

http://www.interfax.ru/e/B/0/28.html?id_issue=10729756

I suspect Putin is playing the gold issue for some reason, but I'm not informed or educated enough to understand it.

Gold is fool's investment. Only the brokers make money--everyone else loses no matter what the economy does. If I remember right, if you bought an ounce of gold back in 1978 or so, you'd still be out about $400 on your investment today. Not exactly a good return.

Russia is, of course, a big question mark here. However, I suspect that Putin is reading the writing on the wall, and realizing that his two biggest markets are Europe and China. This is especially true as more and more Russian oil comes on line and the only readily accessible market is Europe (still no pipeline to the Persian Gulf). So I wouldn't be at all surprised if Russia starting converting its state assets into Euro-denominated bonds and such.

Then, too, given Russia's status as an oil producer, if it shoud shift to Euros that would put pressure on the rest of OPEC to follow suit. At that point, U.S. energy prices would go through the roof. Ten-dollar-a-gallon gas would be a distinct possibility. Just think of the impact that's going to have on the economy.

Given the fairly reasonable assumption that oil could take a big spike and stay that way, I still think we should start heavily taxing carbon. At least that way, we could skim something off the top for our treasury and keep some of thsoe dollars here.

There are reports that Russia is indeed taking that step.
http://www.atimes.com/atimes/Global_Economy/FK25Dj03.html

...for more general musings on this subject and others, I recommend this video, (but you'll need a high speed connection, otherwise, forget it).

http://easylink.playstream.com/virtualquest/dec04/120104.rm

..and more here.
http://www.deanlebaron.com/realmedia/index.html

from an American in zurich.

As far as gold goes, its strictly a short term contrarian speculative bet.
The same can be said for fooling around with currency speculation, although I agree that the latter is probably a much better bet than the former.

..and Tom might appreciate "Simple solutions for complex problems" here, at least the first solution he proposes:
http://easylink.playstream.com/virtualquest/dec04/120604.rm

Again, you'll need a high speed connection.
These video's are interesting and I post them not only for their content, but also because I think they represent the next step forward in blogging.