September 23, 2007
Are the central banks of some nation states starting to liquidate their dollar holdings? What is the possibility of a sharp fall in the dollar? We have a big picture here; one that needs to be placed in the context of liquidity crisis in the global financial system.

Steve Bell
The crisis needs to be put into the context of the the fault lines in American economy:—an overvalued housing market, high consumer debt and a huge trade deficit. Paul Krugman argues that the U.S. trade deficit is, fundamentally, not sustainable in the long run, which means that sooner or later the dollar has to decline a lot. But international investors have been buying U.S. bonds at real interest rates barely higher than those offered in euros or yen - in effect, they've been betting that the dollar won't ever decline.
Has the Federal Reserve's big interest rate cut sparked a flight from the US dollar and US assets generally that threatens to unravel the recycling of Asian and petrodollar surpluses that finance the gaping US budget and trade deficits? Are the Asian and Middle Eastern monetary authorities facing pressure to break their currency ties to the US dollar because of the greenback's weakness?
I don't know. I had always understood China to be the key because of the vastness of its dollar holdings arising from its trade surpluses.
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Gary,
no doubt the finance vultures are already circling the carcasses of those destroyed by the credit crunch.