What the markets are telling us...

With the US Dollar in a free fall, along with US Treasury bonds, and hard assets soaring in price, the markets are giving us a clear message: no central bank can support the world's reserve currency when that country is also the world's largest debtor. Despite US Treasury Secretary Geithner's protestations that the US economy is "resilient and dynamic", the Chinese are curiously publicly silent on the subject during his visit to China. Perhaps they are being polite.

But they are connecting the dots: trillion-dollar deficits, coupled with profligate money supply creation can only create inflation and currency devaluation. In other words, they have every reason to be concerned about their US Treasury holdings. While they may publicly declare US Treasuries are the "only game in town" for their reserves, it seems a bit disingenuous when you consider they have been secretly doubling up their gold holdings in response to the dollar's devaluation.