The Dollar is not a fiat currency; it is debt based.

[Originally posted on iTulip.com, in response to a post from Lukester referring to the dollar as 'fiat'.]

You've noted, more than once I believe, Lukester, that the dollar is fiat.

I would disagree. Dollars can always be converted to Treasuries,either way, in one of the most liquid markets in the world. Treasuries have inherent value, as their dividends are a reliable claim on the income stream collected as federal taxes from Americans. This income stream has been "as good as gold" for the better part of a century now.

Rather, I would agree with those here who have described the events in the financial markets of the last few months as a short covering rally, on the dollar. One way or another, in increasing amounts (explosively exponentially increasing, in the case of mortgage backed securities and related derivatives and swaps) the world has been flooded with dollar denominated paper.

Every dollar denominated asset that could be purchased in sizable quantity from a computer station has had its price run up over the last few years. Even a few such asset classes that required "hands on" extraction, such as mortgages in California, Florida and a few other states were run up, in that case using a newly hired army of mortgage brokers.

Dollars came in one door, and were spent on anything for sale out the other door.

For another example, the big runup in gold and gold mining was between 2001 and 2007.

Everyone sold dollars short and bought other dollar denominated assets long.

Well, everyone except perhaps the Japanese, who sold the Yen short and bought Treasuries long.

This is unraveling, dramatically, to the great delight or pain of participants, depending on which side of this crash they got caught on.

I'm fairly optimistic, in that the worst of this house of paper that is burning down around us was built in the last few years. So I trust that there is the financial base for a solid economy, underneath that burning paper, which we have a decent chance of partially rediscovering, without causing the End of Western Civilization.

Sometime in the next one to six months, I expect to see the Dollar reverse, and start back down again, in the Foreign Exchange market. I sold my California real estate and all my stock last year, and have been sitting almost entirely in Treasuries, Dollars and cash equivalents this year. I've downsized my life style from the high flying, debt burdened, Silicon Valley style that I've enjoyed the last two decades to one that has zero debt, cash in the bank, and costs less than one-tenth per month than before, for ordinary living expenses, in North Texas.

When I see the dollar solidly reverse (no big hurry, don't need to jump the gun) I will look for asset classes which are getting some wind in their sales ... perhaps energy related stuff, and stuff that does well in inflationary times. We'll see.

No ... the dollar is not a fiat currency. However, if we increase the national debt sufficiently, perhaps while our economy weakens in a serious recession, the incredible lowering of Treasury rates from 18% to 2% in the last 25 years will reverse. Obviously that 25 year trend must reverse, sometime in the next year or two, if not sooner. It cannot go below zero.

As the rates we must pay for Treasuries starts to rise, higher and higher, this will start to make the burden of these interest payments increasingly onerous on the American tax payer. An increase from 3% to 6% would double our burden paying these dividends. The pain in a long term reversal of these rate trends will be serious.

Given that, along with the unfunded liabilities of Medicare and Social Security, and along with the near certainty that our politicians will continue to be corrupt Socialist fools, we have the makings, over the next five to twenty years, of some very interesting headlines in the news.