Total Outstanding US debt is around 11.3 Trillion Dollars: Is Dollar Making it Worse?

Forex trading has observed the movement of money into the safer currencies with this latest US stock market movement upwards. The Japanese yen/US dollar relationship is key. We can judge how the world markets view this US stock market rally. They don’t like it and are moving out into the yen for safety. But there are other reasons for the ratio of yen/dollar to change. In the past, the stronger dollar fetched 105-106 yen; now with the dollar at lows against world currencies matching January, it may get 96. The Japanese government does not want it to go lower and will need to defend it around this level, even though they say publically that they won’t. Honda etc may have a say in that. However other things need to be considered.

The dollar is weak and getting weaker. Total outstanding US debt is around 11.3 trillion dollars. People are bailing out. US triple A rating on its debt may garner a similar warning of a downgrade like the UK debt just received. China wants a new international currency as a reserve to the dollar and it may strengthen its argument if US debt faces a downgrade. Their premier has recently said he was a “little bit worried” about the safety of the US dollar and all the bonds China owns which totals around 767 billion. Who will want to hold dollars? Investments in US dollar will not be deemed safe. What if China and other foreign bond holders sell some of this debt they hold?

We see almost 2.1 trillion dollars in debt issues for 2009 budget approved, we see inflation coming and no way it can be avoided and mortgage interest rates kept low so housing value does not drop more. The ten year bond rate has gone from 2 to 3.3 % recently. The Fed will accommodate more and more and buy up agency, and treasury debt in huge amounts. This is all they can do to support interest rates.

The dollar cannot improve its position in these circumstances. It will continue to be weak and/or fall. Debt piled onto debt weakens it. There is no end to this picture because it will take decades to pay it off. Moreover, the economy will also take decades to recover. The tax base to support this debt does not exist now nor will it in the near future. We will face slow to no growth scenario for years. In face of this, no one wants dollars. Inflation daily will erode its value so many move to other currencies or inflation hedges like gold and other hard assets.