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Author: splotto Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35392  
Subject: Re: TLT at 6-month high! Date: 1/16/2004 7:24 PM
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It is somewhat amazing that a lot of foreign money is still coming into
treasuries at such low rates. Especially when all of the interest income
could easily be offset by the the losses on the $ dropping. In other words
they might get less of their own currency back, even counting the interest
earned.


Norm:

You have just touched on the problem with the post-gold standard world.

When we had a currency backed by gold, if a country ran a trade deficit (call them D), gold would flow from that country to the countries with which it had trade surpluses (call them S).

As D's gold reserves shrank, banks had less capital to lend and credit would contract. This would cause deflation, the prices of D's goods dropped, and trade (and gold) began to reverse its flow). As S's gold reserves increased, credit expanded, inflation rose, the prices of goods rose, exports dropped and trade and gold reversed flow.

It was a self correcting system.

However, now there is no such check on our trade deficits. Therefore, reserve assets (no longer gold, but paper money printed at will by a government) simply continue to build up in countries with surpluses.

These countries have no choice but to do something with these waves of US$'s washing up on their shores. You certainly can buy real assets with them, as Japan did in the 80's (remember when we feared they would own our whole country?). You can buy aircraft carriers. You can build stratigic oil reserves (as China is now doing). But you still have too many US$'s. The only option right now is to buy US treasuries.

The fear is that one day the US$'s is falling too fast or that the US government, becaue it owes so much more then it can service, is no longer credit worthy. That is the day of true reckoning.

Splotto
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