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Author: imdajunkman Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35272  
Subject: “The End of Dollar Hegemony” Date: 2/18/2006 4:49 PM
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A recent speech by Ron Paul before the House of Representatives is making its way around the Web that might be a harbinger of things to come. (Either of the two links should work.)

http://www.hawaiireporter.com/story.aspx?4f8da758-ca6f-47a3-9e7a-56e16b8a4116

http://www.lewrockwell.com/paul/paul303.html

As is the case with most observers of the US economy, he isn't saying that the dollar will necessarily collapse, or that it will do so immediately. He merely lays out a case against its continuance as the world's reserve currency.

Should that happen, and US dollars be replaced by Euros, as they are being done by increasing number of countries (Syria currently; Iran perhaps as soon as March, etc.) or backed away from (as is already being done by China and other exporting countries and can be tracked in the Net Foreign Security Purchase reports), then the long-standing ability of the US to extort real goods (chiefly oil) in exchange for worthless paper (backed only by the threat of invading that country if the dollars are refused) will come to its rightful end.

The implications for fixed-income investors seeem to be this: A return to the interest rates of the late '70's wouldn't be surprising.
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Author: desertdaveataol Big funky green star, 20000 posts 10+ Year Anniversary! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15453 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 2/18/2006 5:43 PM
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... then the long-standing ability of the US to extort real goods (chiefly oil) in exchange for worthless paper (backed only by the threat of invading that country if the dollars are refused) will come to its rightful end.

So... we invade?

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15455 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 2/19/2006 9:34 AM
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As we were half-watching the Opening Ceremonies of the Olympics (on CBC of course), we were joking that the Italians hadn't done anything of note since the Renaissance and the program should have stopped with Leonardo.

Spain dominated the 16th C, thanks to being the first to steal from the Indians, and finding the most lucrative places to conquer. In the 17th C., it was the French, with the fur trade, and the Dutch, with the spice trade. After the English and Iroquois defeated the French and Algonquians in the Seven Years War, England became imperialists in chief, despite the independence of some minor colonies in North America (India, China, and Africa were much more important) and that bit of a bother about Napolean. Then, after WWI, as the world's best history book, 1066 and All That, puts it, "America became top nation and history came to an end."

For all the claptrap about the collapse of the Soviet Union being the triumph of Laissez Fair over Communism (if anything it was the triumph of Keynes over bureaucratic, corrupt, inept state socialism) and the hype about being the only "Superpower," there is no good recent historical precedent for a "top nation" to stay that way, which is why the likes of Cheney and Rumsfeld idealize Imperial Rome (certainly my idea of a role model). America certainly won't stay top nation if it continues to reward privilege, corruption, and cronyism instead of achievement, if it continues to look at Donald Trump as a hero and great entrepreneur, if it continues to prefer profligacy to hard work and self-sacrifice (or uses that idiot version of the Protestant Ethic in which being rich must just desserts, so selling stock with insider knowledge is just God tipping you off), and if it continues to substitute faith for reason in science and economics.

I'd say if the next Congressional and following Presidential elections do not produce realists who are willing to face up to our problems and propose real solutions, which will involve sacrifices, an efficient national health-care system, a massive, multi-faceted, realistic government program to deal with energy independence using science not fantasy, and a balanced-budget, which will require major tax increases on those who have the money, since Laffer is a fraud, within 10 to 20 years, we will not be "top nation," and with global warming looking more and more like it is out of control, history may really come to an end.

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15465 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 2/20/2006 11:33 AM
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So why hasn't this been priced into the bond market already?

The guy is using the exact same arguments that the permabears and goldbugs use.

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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15469 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 2/20/2006 2:17 PM
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junkman,

I find it interesting that "US dollars be replaced by Euros" in that I read something every day that says that Europe is going to the dogs because they value "quality of live" more than growth in material goods.

Something sounds strange.

brucedoe

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Author: imdajunkman Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15474 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 2/20/2006 4:12 PM
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"So why hasn't this been priced into the bond market already? The guy is using the exact same arguments that the permabears and goldbugs use."

jrr7,

In what way has this not been priced into the financial markets? Or do you think that only the self-delusional beliefs of ever-bulls should be priced? ROTFL

If markets are discounting mechanisms that are generally useful tools for price discovery, why would the bullishness, or bearishness (or foolishness) matter? The discounting is going to happen, and over- and under--estimating mistakes are going to be made. However, the consequences of the forecast are magnitudes apart. In one case, an opportunity is missed. In the other, devastation ensues. By and large, people insure against potential damage, not against potential gain.

Heeding well-reasoned forewarnings and taking precautionary steps is "buying insurance".






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Author: imdajunkman Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15475 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 2/20/2006 4:21 PM
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Bruce,

If the answers to any of this stuff were obvious, then would we all be rich? Not hardly, because the information would have no market value.

Yes, you hear that the US is going to the dogs. Yes, you hear that Europe is going to the dogs. And I sure you can find people who say everything every where is bad, and others who say that everything everywhere is good.

What matters in this conflicts of opinions? Picking a profitable path where you can, and avoiding a disasterous path where you can. Not easy, but necessary, because if you don't do the choosing, you'll soon find that you have no choices. That's the reason for engaging conflicting opinions. So you can decide for yourself what makes sense and what you want to do about it.



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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15476 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 2/20/2006 6:33 PM
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For many that is the burning question. Big bond players are suppose to be the "smart money". The debt market is often described as the dog wagging the equity market tail.

One theory that is kicked around is that in many ways the USD is rooted deeply into the international economic system. It can't simply be plucked out and quickly replaced. How old is the Euro? How much trust does the interanational scene have in their central bank management, currency management, interest rate management. How much faith does the internatinal scene have in the economy of the EU? The EU being purely an economic confederation is far messier then even our situtation.

What is the replacement?

Throw in the resiliance of the current slow, crabbing economic situation and it imparts faith that the US can still back up its Dollar and its debt.

US debt more then the USD(although heavily related) is the much of the grease on the international wheels. The current lesser of evils.<shrug>

jack

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Author: imdajunkman Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15479 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 2/20/2006 9:17 PM
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Jack,

My guess is that the "invincibility" of the US dollar is about the same that that of the former Soviet Union. The current preception is that the dollar has strength, just as the USSR was once considered formidable.

But perceptions change, which is often a more important factor that the underlying fundamentals of a situation. And the tiny cracks that forming (as oil becomes priced in Euros) might be enough to topple the wall.

Time will tell. Meanwhile, it will be interesting to watch the skirmishing.



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Author: mhtyler Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15562 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 2/25/2006 12:57 PM
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"My guess is that the "invincibility" of the US dollar is about the same that that of the former Soviet Union. The current preception is that the dollar has strength, just as the USSR was once considered formidable."

Whoever considered the ruble formidable? As for Syria and Iran switching to Euros, that is more likely political than economic. They simply don't want their currency frozen when the s+++ hits the fan, which it will by and by. The Euros can be counted upon to treat anyone whether terrorist or not as a customer.

Personally, I'm sticking with the dynamic U.S. economy over the stagnant European one...warts and all.



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Author: imdajunkman Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15563 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 2/25/2006 1:11 PM
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My guess is that the "invincibility" of the US dollar is about the same that that of the former Soviet Union. The current preception is that the dollar has strength, just as the USSR was once considered formidable."

Whoever considered the ruble formidable? As for Syria and Iran switching to Euros, that is more likely political than economic.

mhtyler,

My apologies for the unclarity of the sentence you quoted. Yes the ruple is a joke, but the might of the Soviet Union as a nation was considered invincible by Western nations. Hence, the "Cold War". Currently the dollar is considered just as invincible, but I see cracks forming in the defence walls over two key questions: mounting SU debts and the pricing of oil in Euros.

Yes, I would concede that Syria's switch to the Euro is more "political" than economic. But that is not the case with Iran, nor is it the case with Norway, who is also talking about opening their own oil exchange this fall and conducting its business in Euros.

You want to root for the home team (the US of A) and you should, as we all should. But turning a blind eye to the rest of the world (which is a different matter than isolationism, which I do support) will only bite us in the butt.

Charlie

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15585 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 2/28/2006 11:04 AM
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I tried to post this early on this thread and my "New and improved" browser had some hiccups I had yet to figure out.

IMHO the prolification of the USD is tied more to our Treasury market and thus our national debt, economic strength and the taxing power supported by that strength. When I consider the situation carefully I agree that some nations move to the Euro is less a sign of the strength and stability of the the Euro and more a way to "stick it" to the the US. I truly poor reason to make a significant economic change. The characterstics of the EU and EU debt fortunatly don't make it a horrible choice.

The US treasury market has greater transperancy, greater liquidity, greater deapth and breadth then any other securities market. Much international trade is based on the USD in the form of treasuries, they act more as the currency then direct dollar for Xcurrency exchange then any other vehicle. Their value is known with great certainty and clarity.

The Euro, on the other hand, is a confederacy currency. As such the politics behind it our less clean and clear cut; as frightening as that may seem. The faith in the Euro central banks does not compare to the faith the international market has in our central banking system, complete with its warts.

Nations may try to shift some comodities, like oil, pricing to Euros but when the 800lbs gorilla doesn't want to move its very hard to make it; I expect dual pricing will reign for a long time. Even if they succeed in the shift what "real" harm does it do to the strength of the USD and more importantly the US treasury market? Currency exchanges between two predominatly stable currencies has little friction when conducted on a huge scale. And it doesn't change the shear utility of the US debt and the US treasury market for international commerce.

The shift may push Euro backed debt instruments prices up in a statistically noticeable fashion. If so then we can expect a statisticaly measurable shift down in the price of US treasuries. But the fundementals of the markets will continue to dominate how the securities are traded. IMHO neither move will dramaticly change international commerce as we know it. Nor will the changes "hurt" either currency or debt.

US debt = GB debt = Euro debt all are predominatly stable debt markets but the latter two do not compare in liquidiy, transperancy, depth and breadth.

China remains somewhat xenophobic in its international relations and manages its debt and currency issues accordingly. China and India may be the next nexi of international economic growth but they do not have stability nor do they have equal natural resources of the US. IMHO real long term threats would come from a stable and united: Africa, South America or the former Soviet blocks. They have the people and the resources to unseat US supremacy in the international markets.

In order for that to occur they would have to A)Unite in a long term politically stable fashion, B)unseat the 800lbs and 600lbs gorillas currently occupying those seats. The transition, if it occurs, will be slow.

The EU is currently the most viable competitor but it carries many of the same systemic issues of the US. The two, when economic power shifts, will shift together. The EU is an unlikely candidate to unseat the US in dominace of international market issues. It may grow to be a co-conspiritor but the two are too closely linked in methodology and by culture. It will take a significant paradigm shift to move away from current long held, deaply seated practices(habits may be a better word if we define it as many philosophers have).

This doesn't mean that the USD's international value isn't flexible or that there isn't potential for significant downside risk with the USD. That is a market driven issue. There are market forces lurking that if they come to fruition can devalue the USD within the international currency market. Historically the USD has moved around $1.20 = Euro(or a basket of european currencies)as a center point. Market forces may create a secular shift that moves that center against the USD but I doubt that the shift will be dramatic. The two western centers of economics are too much alike and too cloesly tied together.

I wonder if we aren't basing are USD expectations on a very short era of the modern US debt situation. Through the last 2/3 of the Clinton administration the US economic engine provided enough revenue for the US to start to buy down its debt. This had the effect of strengthening the dollar; there was less US debt and thus more competition for it and its underlying currency. There was also a policy within the Clinton administration for a strong USD which was acted on in concert with the slowing of defecit spending and for a few short years actual reduction in market exchanged debt. This relatively short era allowed us to buy oil and other international commodities and finished products cheaply based on USD terms.

The US has returned to defecit spending and the US Treasury market and thus the USD have been slowly repriced accordingly. Throw in mid-east stability concerns, refining concerns, international competition for a basic resource like unrefined crude and $50+ is reasonable price for this internationally followed commodity. The price of crude isn't based primarily in a dislike, lack of favor or an inherent weakness in the USD.

As a moderate contrarian I don't see epic shifts forthcoming in the USD. I respect the potential and act accordingly. But as long as their are international entities willing to price US debt favorably its a reasonable decision to finance our obligations using debt. If we viewed the US as a corporation we would applaud them for financing with cheap debt.

I'm not arguing that we are wisely applying that borrowed money. Nor am I arguing that, if viewed as corporation, we are managing our future prospects well. I'm only arguing that the current international market is favorable to US debt. There is a GM-ness to our governments fiscal situation that isn't being prudently managed with forsight. There are potential consequences for continuing down this path.

I continue to believe that the unwinding of those issues will be progressive and visible to those that continue to watch the issues with prudence. In short the perfect storm is unlkely to hit suddenly and viciously. By their very nature huge ships take a great deal of time to change vectors; the momentum that needs to be overcome is huge.

We need to be careful not to cry secular or paragdigm shifts when the shift(s) may very well be more cyclical in nature. This doesn't mean we shoud ignore the cryers or the potential for secular shifts. We need to be prudent,informed, calm and decisive. To do this we need to respect both potentialities. History may treat the cryers as sages but this will only occur if history unveils according to thier predictions. History will ignore them if they are wrong.

There is plenty of evidance to make a case but we have no DNA or fingerprint evidance nor do we have a smoking gun. The evidence is cicumstantial. This doesn't make conclusion drawn from it wrong but the evidance isn't definitive. We need to respect this and act accordingly.

jack

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Author: TheNajdorfDefens Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15613 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 3/1/2006 3:47 PM
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Jack, I liked your post, however, as a former FX pro I would take issue with some of your points:

IMHO the prolification of the USD is tied more to our Treasury market and thus our national debt, economic strength and the taxing power supported by that strength. ...
The US treasury market has greater transperancy, greater liquidity, greater deapth and breadth then any other securities market.


Agreed.

BMuch international trade is based on the USD in the form of treasuries, they act more as the currency then direct dollar for Xcurrency exchange then any other vehicle.

No, the FX market does about $2trillion a day in trades, dwarfing the UST market. Very few people buy UST bonds as a substitute for cash. Simply compare the size of the markets.

The Euro, on the other hand, is a confederacy currency. As such the politics behind it our less clean and clear cut; as frightening as that may seem. The faith in the Euro central banks does not compare to the faith the international market has in our central banking system, complete with its warts.

Absolutely.


China remains somewhat xenophobic in its international relations and manages its debt and currency issues accordingly. China and India may be the next nexi of international economic growth but they do not have stability nor do they have equal natural resources of the US. IMHO real long term threats would come from a stable and united: Africa, South America or the former Soviet blocks.

JMHO, I disagree, but that's jmho.

In order for that to occur they would have to A)Unite in a long term politically stable fashion, B)unseat the 800lbs and 600lbs gorillas currently occupying those seats. The transition, if it occurs, will be slow.


Bingo.


This doesn't mean that the USD's international value isn't flexible or that there isn't potential for significant downside risk with the USD. That is a market driven issue. ... Historically the USD has moved around $1.20 = Euro(or a basket of european currencies)as a center point.


Flexible = true. $1.20 per basket, way, way offbase, historically.


Through the last 2/3 of the Clinton administration the US economic engine provided enough revenue for the US to start to buy down its debt. This had the effect of strengthening the dollar; there was less US debt and thus more competition for it and its underlying currency.


The USDollar rose back then because we had the highest interest rates of any G-10 country, the short-term rise and fall of the accounting fiction known as the US Budget Deficit is totally and entirely irrelevant.


The US has returned to defecit spending and the US Treasury market and thus the USD have been slowly repriced accordingly.


Because we went from the highest yielding currency to the 2nd/3rd lowest among the G-10, trailing only Japan/Swiss.

As a moderate contrarian I don't see epic shifts forthcoming in the USD. I respect the potential and act accordingly. But as long as their are international entities willing to price US debt favorably its a reasonable decision to finance our obligations using debt. If we viewed the US as a corporation we would applaud them for financing with cheap debt.


Bingo. Couldn't agree more.

Naj

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15615 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 3/1/2006 5:06 PM
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Naj,

Thank you for your kind and thoughtful response.

Curious
Flexible = true. $1.20 per basket, way, way offbase, historically

What number would you choose?

The USDollar rose back then because we had the highest interest rates of any G-10 country, the short-term rise and fall of the accounting fiction known as the US Budget Deficit is totally and entirely irrelevant.


During the tail end of Clinton? True of H.Bush. I'm not convinced we had the highest of the G-8/G-10. I would appreciate a pointer to that data. My short at sweet google didn't cough up anything particularly useful.

No, the FX market does about $2trillion a day in trades, dwarfing the UST market. Very few people buy UST bonds as a substitute for cash. Simply compare the size of the markets.

I may not have been clear how I stated that, in fact re-reading it I wasn't. I don't mean to imply that people are settling accounts by actually exchanging the debt. The Treasuries are the underlying support, proof of abillity, or proof of liquidity to pay. They aren't truly colateral but by holding them some entity has proof they are capable of paying in USD terms. They are a cash and equivilent item. Their mere presence as a USD security is an enabler of the deal that most often manifests itself on the currency exchange. Their presence on the balance sheet greases the wheels for dollar denominated trade.

jack

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Author: Luwingo Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15617 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 3/1/2006 5:31 PM
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Hi Jack- great post, but a couple of points I'd like to pick up on:

The EU is currently the most viable competitor but it carries many of the same systemic issues of the US. The two, when economic power shifts, will shift together. The EU is an unlikely candidate to unseat the US in dominace of international market issues. It may grow to be a co-conspiritor but the two are too closely linked in methodology and by culture. It will take a significant paradigm shift to move away from current long held, deaply seated practices(habits may be a better word if we define it as many philosophers have).

With all due respect I must disagree. Europe and the US are separated by deep cultural and sociological differences. Put simply, Americans believe in free markets- as do I, mostly. Europeans do not. Europeans like their "cradle-to-the-grave" social security system, despite the mountain of empirical evidence that suggests that this is precisely what's holding them back. And Europe has to deal with far greater internal lobbying, because the EC is made up of 25 member states, and not all of them are created equal. When the French, Spanish, Italians, Brits or Germans decide to get pushy, one of the smaller states invariably loses.

Europe's got a long, long way to go before it becomes a truly viable candidate to unseat the US. While America has made progress, Europe has stagnated. In 2000, the EU came out with the Lisbon Agenda, that aimed to make the EU the world's largest and most competitive economy by 2010.

It's 2006... and the EU has a snowflake's chance in hell of reaching its target!

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Author: TheNajdorfDefens Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15642 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 3/2/2006 3:05 PM
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I'm not convinced we had the highest of the G-8/G-10. I would appreciate a pointer to that data.

Then you haven't really done your research yet. Keep at it.

Flexible = true. $1.20 per basket, way, way offbase, historically

What number would you choose?


Which currencies are you comparing and since when?

best,

Naj

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Author: zuni7 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15659 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 3/3/2006 7:19 AM
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jackcrow Do you know about TED spreads? Chris

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Author: zuni7 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15660 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 3/3/2006 7:50 AM
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Whoops! Meant to post this... http://www.cbot.com/cbot/pub/cont_detail/0,3206,1070+4666,00.html
Chris

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15686 of 35272
Subject: Re: “The End of Dollar Hegemony” Date: 3/6/2006 11:14 AM
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jack:

Through the last 2/3 of the Clinton administration the US economic engine provided enough revenue for the US to start to buy down its debt. This had the effect of strengthening the dollar; there was less US debt and thus more competition for it and its underlying currency.

Naj:
The USDollar rose back then because we had the highest interest rates of any G-10 country, the short-term rise and fall of the accounting fiction known as the US Budget Deficit is totally and entirely irrelevant.


Mean Avg of long bonds 1991 - 2002

Austria 6.19
Belgium 6.42
Denmark 6.70
Finland 7.36
France 6.25
Germany 5.82*
Italy 8.49
Japan 2.67*
Netherlands 6.29
Norway 6.97
Spain 7.95
Sweden 7.43
Switzerland 4.13*
U.K. 6.98
U.S.A 6.13

*Lower than the USA

jack

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