Steve Sjuggerud from Daily Wealth explains that the risk of the dollar value crashing is prevented by Asian countries who artificially prop up the dollar by buying US Treasuries. China's holdings of US Treasury bonds have increased by nearly ten-fold in the past decade and China must continue buying US Treasury bonds in order to maintain jobs creating cheap exports. See the following post from Daily Wealth.
Nine politicians in China control the fate of the United States of America.
I'm not kidding. The implications are scary. Let me explain...
These nine men are the Standing Committee of the Communist Party of China. They control the value of China's currency.
Fortunately, it's easy to forecast what a politician will do... He will do whatever it takes to keep his job.
The story is remarkably simple...
In China, the goal of these nine politicians is to keep the Communist Party in power. The way to accomplish that goal is for the masses to stay employed. Right now, China keeps the people working by exporting cheap goods. In order to make sure those Chinese goods stay cheap, the Standing Committee sets the currency exchange rate artificially low. And that is the crucial part of the story...
How do these nine politicians keep the exchange rate low? They buy U.S. dollars. Importantly, these nine men don't just sit on stacks of dollar bills... They invest those dollars in U.S. Treasury bonds.
It's gotten out of hand. China owns nearly $1 trillion worth of U.S. debt. China's holdings have increased dramatically every year... They've grown nearly tenfold since the end of 2000:
China Treasury Bond Holdings
2000 - $99 billion
2001 - $127 billion
2002 - $166 billion
2003 - $209 billion
2004 - $267 billion
2005 - $350 billion
2006 - $451 billion
2007 - $529 billion
2008 - $804 billion
2009 - $941 billion
*includes Hong Kong
And China's soon-to-be trillion dollars of U.S. government debt is not the end of the story. It's the beginning...
In order for other Asian countries to compete with China, they have to artificially keep their own exchange rates low. And that's exactly what they're doing. They're doing it the same way China does... They're buying mountains of U.S. Treasury bonds, too.
At this point, foreigners now own half of the U.S. Treasuries outstanding (of the ones that are not held by the U.S. government). And they're buying more... Most importantly, there's enough demand for U.S. debt from foreigners that the U.S. government can finance its deficits for years to come... all by simply selling Treasury bonds to foreigners.
Would you lend money to the U.S. government at 3.5% interest for 10 years? I sure wouldn't. I really can't name anyone who thinks 3.5% in government bonds is a good deal. The foreigners aren't buying to earn 3.5% interest. They're buying to keep the value of their currencies down.
India is an interesting example... Earlier this year, when India spent $6.7 billion buying gold from the IMF, it was all over the news. What WASN'T reported was that India bought far more U.S. Treasury bonds than gold. India has increased its stake in Treasuries by over $22 billion since last summer – increasing its Treasury bond holdings more than 200%.
So, yes, there's a mountain of demand for U.S. dollars – Treasury bonds – from all over the developing world. The important thing is demand will last. It will last as long as the nine men on China's Standing Committee don't change their minds.
So what does all this mean?
It means the U.S. dollar will not crash right now.
Most investors believe the U.S. dollar is about to crash. But the facts are clear... The dollar has ready buyers of hundreds of billions of dollars worth of Treasuries. While the dollar might lose ground against gold, the reality is, no other paper currency has a tailwind of hundreds of billions of dollars of buying waiting in the wings like the U.S. dollar does.
Eventually, the dollar bears will be right. The U.S. will have to face all its debt one day. But that story is not in my True Wealth Script for 2010.
This post has been republished from Steve Sjuggerud's blog, Daily Wealth.