Timing is everything; just as our conversation got underway, aeldric's topic appeared on TOD Australia! "The Failure of Networked Systems: The Repercussions of Systematic Risk"

You are far from being dense, this is a very valid discussion. The currency issues have not been resolved by economists including the central bank chairmen as well as many other thinkers and traders I personally admire. It is part of the big 'Inflation vs. Deflation' argument. The inflationists suggest there is no danger to running large deficits denominated in dollars bacause the resulting overseas fraction of our debts can be paid for with printing press money; inflated out of existance. The deflationists suggest that the shrinkage of money generally available would make a default less and less likely, as the dollar would maintain inherent value. This would be true even with the large increases in money at the institutional level resulting from the various stimulus and rescue attempts by central banks. This is an ongoing mental puzzle for many thinkers, this includes you, me, and a lot of others here on TOD. I certainly don't have all the answers; the biggest issue to to figure a way out of this mess.

I personally don't think the inflation scenario is possible. In order for this to work, our creditors would have to accspt the printing press dollars knowing full well these dollars are being devalued by the process of their acceptance. In other words, the only way the dollar can maintain value in an inflationary context is for dollar buyers not to accept them. So far, our creditors are accepting dollars, and lending them back to us as well, so the level of inflation-of-the- moment is considered acceptably small.

Meanwhile, the credit swap and bond markets are reflecting concern about the worthiness of the US as a debtor; this is despite or because of the ongoing deflation.

We have a multi- polar situation with many contradictions.

Partly because of deflation the default scenario seems structurally unlikely to most economists that I follow. Unfortunately, in our ironic universe, the least- likely appearing event is what actually most likely to happen.

If paper remains and credit disappears, isn't this the very definition of deflation? In such a scenario money gains value and a hoarding mentality installs. This would be the opposite of a run on a currency.

This is of course true, but there are two things happening because of stratification of the money system. Goods are declining in value relative to currency to most of us in the real world - and credit is shrinking - which is deflation. Meanwhile, back at the ranch, there are trillions of loose fiat dollars floating around the banking system worldwide looking for something to destroy. The supply and demend situation at this level makes dollars tremendously cheap relative to goods, which is inflationary. For good or ill, all these dollars are held as if by gravity within the circle of high finance, taking the place of monies that have vanished into bad loan rat-holes.

In my opinion, what matters most to creditors is not so much the goods/dollar relationship of the moment, rather the absolute ability of the US to pay its debts. Relative value here is an indicator of ability to pay, or willingness. If inflation appeared to start leaking out of the tight circle of high finance it would instantly signal our creditors the US is trying to inflate its debts out of existance.

At that point, our creditors would refuse to accept our dollars, or would demand higher interest rates for loans. These rates would become onerous for the US to pay due to the size of our borrowings. Either would precipitate a race to unload the unwanted dollars or dollar- denominated securities for whatever else of value could be had; gold, commodities or polyester leisure suits from the 1970's.

I still don't get this idea of a run on all currencies at once.

This run would be by central banks or international finance companies. Unfortunately, the run would not likely be limited to one or two currencies, since international finance is a complex, interconnected and overloaded system. The end would be a general breakdown similar to the network malfunction described by aeldric. You can insert your own scenario, but a likely one would have the other fiat currencies considered as proxies for the now- unloved and unwanted dollar ... currencies bought and paid for in dollars for the sole purpose of being traded in its place. These currencies would soon enough be unmasked and dumped in their turn ...

Eventually, the US would run out of currencies to buy; since we borrow so much and consume so much overseas goods, any secondary currency - even yen - would have to be massively printed ... a 'run on all currencies'.

Ultimately ... the idea of fiat money itself could be judged along with floating exchange rates, computerized over the counter capital flows, hedging with swaps, having no centralized money disciple or treaty structure and having no 'lender of last resort' to answer demands for some, any or all currency in times of stress.

What would happen afterward, besides throat- cutting and window sill jumping is anyone's guess.

The credit markets are frozen to the degree that most transactions require a (much) higher rate of return. It is unlikely that more expensive money will remain confined to the banking and credit markets. Higher rates by themselves could precipitate a run on the dollar as higher rates could be interpreted as a pricing of increased repayment risk ... even if repayment was not an issue.