Tuesday, July 14, 2009

Critical Thinking

One of my favorite courses in college was a Critical Thinking course, as it applies in my analysis work to this day. Not only did we apply Boolean algebra, which I was already well-versed as a digital electrical and computer engineering major, but we also used subject criteria like credibility of information sources. So let's apply it here:


The title of the article is: Currency Expert: Dollar not in Jeopardy

The article discloses said currency expert is Michael Woolfolk, senior currency strategist at Bank of New York Mellon. After further reading, we realize he actually acknowledges the reasons why the reserve currency status of the USDollar is in question among the BRIC countries.

Worry has arisen in financial markets that the United States will let the dollar slide to pay off its exploding debt.

“That’s certainly one of the risks, if you’re from China, Russia, the others that hold very large U.S. reserves,” Woolfolk said.

“They’re concerned about the risk of inflation in the future, … that we might take a benign neglect toward the strong dollar policy.”

But he took these countries, known as the BRIC, to task for their own currency policies.

“They now view their reserves as national wealth,” he said. “The traditional role of reserve currencies has been to support their own currencies in times of crisis.”

The BRIC nations “are concerned about what currencies to hold (reserves) in,” Woolfolk said. “They should be concerned about how they spend this money.”

While he gives reasons for the opposing view, we have to realize the source of his condescending tone, as if he is lecturing foreign sovereign holders of US Treasury debt. Bank of New York Mellon also happens to be one of the largest US government bond dealers. Robust US Treasury bond auctions are beneficial to BONY, and they have close ties to Tim Geithner, who was President of the Federal Reserve Bank of New York before being appointed as US Treasury Secretary. We all know how he was roundly ridiculed by the Chinese when he insisted the US Dollar and Treasury Bonds were "safe" assets.

Despite the title of this article, if I'm a holder of the dollar or US Treasury bonds, I'd head for the exits.

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