By Mike Whitney
“Credit booms do not end in inflation as most people believe. Credit booms ARE inflation that end in deflation. This credit boom is not any different.” Mike Shedlock, “Mish’s Global Economic Trend Analysis”
09/11/07 “ICH” — — The days of the dollar as the world’s “reserve currency” may be drawing to a close. In August, foreign central banks and governments dumped a whopping 3.8% of their holdings of US debt. Rising unemployment and the ongoing housing slump have triggered fears of a recession sending wary foreign investors running for the exits. China, Japan and Taiwan have been leading the sell off which has caused the steepest decline since 1992.
To some extent, the losses have been concealed by the up-tick in Treasuries sales to US investors who’ve been fleeing the money markets in droves. Investors have been trying to avoid the fallout from money funds that have been contaminated by mortgage-backed assets. Naturally, they bought US government bonds which are considered a safe bet. But that doesn’t change the fact that the dollar’s foundation is steadily eroding and that foreign support for the dollar is vanishing. US bonds are no longer regarded as a “safe haven”.
The dollar slumped to a 15 year low against 6 of its most actively traded peers and set the stage for an early morning market rout on Wall Street.
Foreign investment and currency deregulation has been a real boon for the stock market which thrives of a steady flow of cheap capital. It’s also been good for ravenous consumers who like to borrow boatloads of low interest cash for their toys, SUVs and McMansions.