Now?

For the last few years, this old economist has been wondering when Cartoon Physics Law #1 would stop applying and the precarious American financial world would finally crash and burn -- when would debt and deficits would finally cause some foreign (to the US) creditors to start selling US$ and cause the dollar to crash. Billmon looks at the price of gold and does some wondering of his own...

I've been watching the price of gold shoot the moon these past few weeks with a growing sense of nostalgia.

[...]

Maybe it's just another speculative bubble -- proof that in an age of expandable currencies and deregulated markets, pushing one down sooner or later causes a new one to pop up somewhere else. But gold is no ordinary get-rich-quick scheme, like Google stock or beachfront condos. It's still a monetary asset, comprising a not insignificant share of total central bank reserves. For the price to be moving like this, it's highly likely (approaching near certainty) that some central bankers somewhere are trading their surplus dollars -- lots of them -- for gold bars. I can think of a few candidates, and they don't all wear turbans or live in Tehran.

If you're familiar with the fact that the United States is the world's largest debtor nation, and the only one privileged to borrow such huge sums in its own currency, you already understand the Enron-like implications. If not, here's some background reading -- here and here and here.

One way to put it is to say that the insiders in charge of the world's only superpower are going massively short their own stock -- have been for years. What's more, management is starting to talk about launching another hostile takeover, once again financed with junk bonds. Some of the non-voting shareholders have decided it's time to lighten up their portfolios.

In economic terms, though, what we're really looking at is a enormous pump (the U.S. current account deficit) connected to an equally huge pipe (the Federal Reserve) that has been flooding the world with dollar liquidity. This is lifting everything that can float -- oil, gold, real estate, even equities. Things that can't float -- like bonds and non-interest bearing dollar accounts -- are being submerged. And some of our creditors are, not unreasonably, swapping one for the other.

[...]

The dollar has indeed been sinking -- against the euro, [Can$ = $.91 US! --bill] the yen and the most of the leading emerging market currencies (although not the Chinese yuan, which is still pegged.) But the slope of the greenback's downward curve has been nothing compared to the upward trajectory of the price of gold. Somebody out there (there being the People's Bank of China) is still trying to soak up all that excess dollar liquidity -- counterflooding, as it were. Let's hope they keep it up.