On The USD's Demise

Tyler Durden's picture

Last week the BEA published it preliminary take on the international investment position (IIP) of the country. As Citi's FX team note, the IIP measures foreign investment assets minus native assets owned by foreigners. In the US, the IIP has been negative (meaning the US is a debtor nation) since 1985. The US’s IIP deficit reached USD 4.03trn in 2012, up sharply from 2.47trn in 2011. As a share of nominal GDP, the IIP deficit reached a record (for the US) of -27%.


US-based investors hold 41% of their foreign assets in equities and direct investment (property, plant and equipment for foreign subsidiaries). Foreigners have only 26% of their US assets in those two categories. The result of this distinction is that a global equity market downturn will hurt US-based investors more, which means the US IIP deteriorates when equities fall.

Citgroup G-10 FX: Implications for the dollar

Commonly accepted wisdom based on a combination of models and experience is that an IIP bigger than +30% of GDP or smaller than -30% is a problem.

  • On the IIP surplus side, having too big of a net creditor position leads to a perennially strengthening currency that chokes out industry and stokes deflation (think JPY).
  • On the IIP deficit side, having too big of a net debtor position leads to a debt spiral. High debt leads to reluctant external creditors charging ever high interest rates, which leads to economic stagnation and ultimately crisis. This blueprint has played out a number of times in emerging market economies.


The US dollar is not an emerging market currency, of course. It is not like any other G10 currency, either. As the global numéraire, it is has been able to remain the undisputed principal reserve currency despite the US being a net debtor nation since 1985. With that in mind, it seems likely that the IIP deficit threshold that would put the US in a debt spiral is higher than for other countries. At present, with the US bond market still able to attract foreign investors at 10Y yields below 2%, a crisis appears a long ways away. The US may not be able to run another dozen years of 3-6% current account deficits without starting to look like a ponzi scheme, but it can probably run another few years without problems, particularly if there is no other reasonable alternative as a reserve currency. At this stage, EUR is not credible and CNY is not ready in terms of FX liquidity or capital market depth and transparency.


If/when the US finally gets close to the critical IIP deficit threshold that makes foreign investors nervous, two things should happen. First, the USD should cease to appreciate during bouts of global risk aversion and begin to depreciate. Perhaps at an early phase the ‘beta’ of the USD relative to global equities will start to evolve from distinctly negative towards positive. There are no signs of this happening. The second thing that should happen as the US approaches an external debt spiral is that US rates should rise rather than decline during risk aversion episodes. At this stage, there is no evidence of even a moderation in the ‘beta’ of US bond yields relative to global yields.

While risk aversion flows (and rates) suggest there is little to worry about, we have noted again and again the moves behind the scenes in global trade flows to shift away from the world's current numeraire.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
veyron's picture

"Rumors of USD death have been greatly exaggerated" -- Ben Shalom Bernanke


"Wake the fuck up Bernanke" -- Rest of the world

Bob Sponge's picture

Difficult to live through this shit.

Colombian Gringo's picture

The ponzi will keep working until one day when the markets lose confidence and then it stops. We do not know what day that will be, but it will happen.

strannick's picture

If/when the US finally gets close to the critical IIP deficit threshold that makes foreign investors nervous, two things should happen.

1.First, the USD should cease to appreciate during bouts of global risk aversion and begin to depreciate. There are no signs of this happening.

-Q.U.easy Money bond buying and Twisting are what keep this USD deppreciating from occuring.

2. The second thing that should happen as the US approaches an external debt spiral is that US rates should rise rather than decline during risk aversion episodes.

-100s of trillions in HFT Interest Rate Swaps keep this from happening.

So these two indicators that should be waving red flags and sounding alarms that we have reached this critical deficet threshold are fraudlently managed to keep a lid on the pot boiling over. Likewise gold's canary in the gold mine is suppressed for the same reason

fiftybagger's picture


Like speeding speeding 120 MPH towards a cliff with the brakes disabled, radio at full blast,  and the check engine light covered with duct tape.

tarsubil's picture

I agree with everything but the cliff. I think this is going to be more like driving into a brick wall.

Golden Balls's picture

"It is the market"...what the crooks suddenly reliase they wrong??????

world_debt_slave's picture

Already did Sept. 15th, 2008. The dead finanacial system is being kept alive by massive printing.

Shizzmoney's picture

Especially once you are losing grip on your society. 

Was at a BBQ with a bunch of baby boomers this weekend (family), man....totally fucking brainwashed by the MSM nonsense.  Romney this.  Obama that.  None of these motherfuckers control anything, nor do they give two shits about the fate of the hard working people.  My dad says he voting for Romney - I asked him why?  Just because your on the Red team as him; considering the fact he raised taxes as MA Governor?  That he won't even win the "Blue" state anyways, and goign to the pools is a waste of time?

It's a bankers world now.  They run the shit.  That's why everyone is so fucking miserable. 

holdbuysell's picture

To boot, ZH's tweet on the $3B swap between Japan and China further seals the trend.


What's mind-boggling is the quote from Japan's finance minister for international affairs:

“The dollar is expected to remain a reserve currency and we maintain our trust in U.S. treasuries, which we consider an attractive asset.”

Watch what they do, not what they say.

What they are doing is gradually removing the dollar from their needs for trade with the 2nd largest country by GDP. That’s the fact, as the article describes. What he says might make everyone feel better, but it doesn’t change the reality that the dollar is losing its world reserve status.


Thunder_Downunder's picture

I think the Weight Watchers (?) slogan is appropriate..


"It won't happen overnight, but it will happen!" 


These side deals are the first cracks in the facade...

TalkToLind's picture

Time is running out, get your hands on something with real intrinsic value while you still can.  Puck faper.

Skateboarder's picture

If they print enough paper, maybe I can build a paper ladder to the moon.

cbxer55's picture

Better go on a diet now. Paper ladders can't handle much weight.

zorba THE GREEK's picture

The U.S. Dollar is king." It's good to be the king."(Mel Brooks)


Cursive's picture

@zorba THE GREEK

In the land of the blind, the one-eyed man is king.  Yes, the FRN's have been abused by the FED paymaster, but it is still the top dog.  Reserve currency has it's privileges.  The Euro will be dead soon and global FX accounts will be buying the USD in size.

kito's picture

Euro won't die, and when it gets leaner and meaner the world will cast its wary eye upon the dollar.....

francis_sawyer's picture

In the land of the one eyed monster, the guy with the biggest swinger gets to be king (until someone cuts it off)...

Dasa Slooofoot's picture

particularly if there is no other reasonable alternative as a reserve currency.


But there is always another reasonable alternative, a shiny, yellow alternative....

otto skorzeny's picture

hate to break it to you guys but as long as the US stays top dog militarily the US dollar will be the medium of choice for world currencies. if these tin pot oil/poppy field dictators respect anything it is power-and that is what the dollar -vis-a-vis the US military- projects. try to buy a few kilos in s. america with a brick of Euros and see how fast you get some 7.62x39 chasing you down the road. plus-how is the CIA gonna support their black ops/swiss bank account retirement nest eggs with anything other than greenbacks-for-H operations in Afghan? they don't take debit cards in the poppy fields.

kito's picture

I suppose the u.s. military will have enough drones for all the worlds traders and investors that dump u.s. assets/debt en masse?

otto skorzeny's picture

the article was about the US dollar-there can be a US bankruptcy but the dollar will remain intact. I don't see the guy at 7-11 taking pesos for a slurpee. Massive losses on a computer does not devalue the physical US dollar-which is a small % of what is circulated through the system.The Chinese would be pissed because they're holding the bag-but who cares.

kito's picture

ahh yes another citifed tool telling us there is little to worry about because of the way things appear to be.....why was this waste of a bank, lifeblood sucking, zombie "bank" saved???

Gunga's picture

If the Fed has to buy 61% of the Treasury bonds auctionned , it seems the rest of the world has already figured the ponzi scheme out.

economics9698's picture

Someone did their homework

reader2010's picture

USD won't die unless the military meets its Waterloo first. 

Stuck on Zero's picture

The massive Soviet Military rusted into hulks so fast everyone was amazed. Soldiers and sailors of the USSR who were stationed overseas had to buy their own tickets to get home when the system collapsed.  Generals with chests full of medals, private limousines, and dachas were suddenly standing on street corners selling pencils.  It all happens very, very fast when it goes. 

economics9698's picture

And when it does support succession movements to split the US up into at least 5 countries.  Fuck Washington and Fuck the Fed.

Bicycle Repairman's picture

Wasn't Afghanistan the USSR's Waterloo?  If so, then the USSR military met their Waterloo.

theTribster's picture

Tuff to see the losing its status anytime soon, though the status means less and less as countries setup bilateral trade agreements that avoid the dollar entirely - China, Russia and others are keen to setup these arrangements, so much so that they (China more so) are willing to funds projects, make loans, etc.

Over the short term the dollar will see strengthening as investors continue to move away from the Euro and into dollar based assets. Clearly the Eurozone is destined for way more turmoil and even some chaos by the end of the summer. The half life of Friday's euphoria looks to be less than a day, wow. If this move doesn't hold off the markets for a couple months what can they do? The ECB is likely to lower rates a little more and maybe some additional moves as well, they will look to surprise the markets to the upside I think.

Anyway, the dollar has a ways to go before it actually losses its reserve status. It doesn't seem as if there is a currency strong enough to act in the role of reserve currency, China at some point but certainly not yet. The Euro? right. The Yen? Let's face it there isn't a currency that could fill the role right now.

kito's picture

Its sdrs or bust my friend....the sdrs are in the works....

otto skorzeny's picture

because all of the countries you have mentioned are so stable? wait until the russians get really pissed(more so than they are now) about the Chinese encroaching on their lightly defended eastern border. you cannot ignore the territorial pissings that go back for centuries and expect things to change overnight(look at Europe-that's why Thatcher said 30 years ago the Eurozone was doomed)

chump666's picture

Hmm, you see if we the West send more inflation to Asia i.e recent crazy European jawboning sent oil bid last Friday.  The Asian's will buy USDs to offset their crap currencies (re: india's INR crashed, Yuan is junk etc).

Can you blame them? Sure we have manipulation (we question it as does most of the market...it just sells off), but they have ABSOLUTE  manipulation of their economies (commies).  Private companies cannot put faith in government fiscal policy.  So they dump their assets. China and India and half of Asia have been doing that for months.

Temporalist's picture
Jim Rogers Explains Why We Are Going to Have 'Financial Armageddon'


caerus's picture

there is one end...there are few who see it and less than should

gorillaonyourback's picture

when the bond auctions are rigged and the fed is the buyer and sell keeping rates low, how can you see your hypothesis?

Gringo Viejo's picture

STARTING? to look like a ponzi scheme?

Paul Thomason's picture

Guess what, over the past 20 years the USD has triggered only 3 previous multi-year monthly bullish trend signals according to our analytics models - and a fourth and brand new bull signal in June 2012!!! .  All of the previous 3 signals in the past 20 years lead to 30%+ rallies that lasted several to many years.

The real question is will USD owners hold their nerve, or will they be 'goosed' out of their positions by short term noise and let this rare opportunity pass them by? Well, I guess that's up to them - but the USD Index is heading toward 100 or more and it won't be a flash in the pan - try a rally lasting several years.

Taking this drivel as investment advice the height of stupidity.

If you want to see how well these analytics models work look at a complete list of closed 2011 trades here using them...

Either this Citigroup guy is a novice or incompetent or criminal.

IronShield's picture

"All of the previous 3 signals in the past 20 years lead to 30%+ rallies that lasted several to many years." And what years were those?

IronShield's picture

And, it better hold 81.6 or say buh-bye.

HoofHearted's picture

Well, my analytics ave always been right, 110% of the time. I have never lost a single dollar in the markets- in a million years. And I say it is time to buy the shiny stuff. You CANNOT go wrong. All the signals are there. My buying meter is at 11 on a scale of 1 to 10. If you'll just send me three ounces of gold, I'll be glad to make some shit up to send to you that shows just how right I am.

How's that for some nice analysis???

orangegeek's picture

The value of the US dollar is inversely weighted against the Euro.  When the Euro goes down, the USD goes up and vice versa of course.


The Euro is likely to continue to slide - ergo....


In spite of the drop on Friday, we should see the USD continue to rise.



IronShield's picture

Sure, because a rising dollar really helps the economy.

George Orwell's picture

I have to keep reminding people that the USD is NOT a fiat currency.  It is a currency backed by plutonium and uranium in the form of roughly 5000 nuclear weapons.

There will never be hyperinflation in the US.  Hyperinflation is a loss of confidence in the dollar and it is a political event, not a market event.  When things get so bad that confidence get lost, we will create confidence in the US dollar by launching a preemptive nuclear strike against China, India, Pakistan, Bangladesh, Nigeria, Indonesia, etc.  The most populous countries in the world who are using up OUR oil.

How do you spell CONFIDENCE?  N-U-C-L-E-A-R W-E-A-P-O-N-S.  That's how.  There will be a point in the future when oil cost $200 a barrel and uemployment is at 25%.  A restless population want answers.  They want politicians to lower oil prices.  Newt Gingrich promised you $2.50 a gallon.  Somebody else more electable will do the same.  How will he achieve that?

By nuking China and India of course.  Eliminate competition for our oil.  Repudiate the debt so that we do not have to pay it back.  Solve most of the world's problems with a few hundred nukes.  Sure, roughly 3 billion people will die.  But that's a small price to pay so that we can haul our fat American asses around town in a Hummer.


George Orwell

Tijuana Donkey Show's picture

Nope, can't take their stuff if it's glowing, like Japan. That's when they release the virus, and bird/pig/something flu sweeps through Asia and the world. Oh, we have a vaccine, but you can only buy it in USD my man. Think like the military, you want to disable people, not kill them. When you disable them, it takes other people to care for them, tieing up even more resources. Imagine a virus leased in Mecca during the Ha'aj, and think about where that would track back....

IronShield's picture

Maybe it's all that bold lettering, but I'm still searching for that /sarc tag; it's gotta be in there somewhere...

denny69's picture

Now that's, indeed, a high price for oil.

yogibear's picture

The US will end up like the former Soviet Union. Buried under the weight of Bernanke and the Fed's dollar printing.

Bernanke studied the Great Depression but not the Weimar Republic. Of course the real unemployment will never be reported.


Companies throughout Germany - though primarily in the industrial zones such as the Ruhr - went bankrupt and workers were laid off in their millions. Unemployment affected nearly every German family just 6 years after the last major economic disaster -hyperinflation - had hit Weimar.

September 1928

650,000 unemployed

September 1929

1,320,000 unemployed

September 1930

3,000,000 unemployed

September 1931

4,350,000 unemployed

September 1932

5,102,000 unemployed

January 1933

6,100,000 unemployed