China is not presently experiencing capital flight. I don’t see it on any significant scale at all. If the Chinese government cracked down on individual Chinese banks or other companies the same way the Western governments are doing to their own companies, you might get some capital flight out of China. But the China-based writer above (Cadassus) is correct about China having more than enough reserve currency to manage the yuan just fine, thank you. Cadassus’s examples of individual cities are pretty convincing. Besides, you don’t hear about anyone making a run on the yuan either way, do you? The quadrillion-dollar question is, does the United States have the “currency” (by that I mean the real capital, and the capital-creating power) to manage the U.S. dollar? In my view, no.

It is critical that we Americans understand that the debt the Treasury (and possibly the Federal Reserve) issues needs to be bought by people outside of the United States in addition to people here. Not enough people here can afford to buy all the debt. Once the foreign incentive to buy American debt lessens (as a consequence of deteriorating fundamentals in the American economy relative to less-leveraged, less-indebted potential places to invest), long term rates will rise. No entity in America, not even the government itself by printing money out of thin air, will be able buy enough long-term Treasury debt to offset the inevitable rise in interest rates. I suppose the Federal Reserve could buy quite a bit of the long-term Treasury debt (print money to buy debt), but at a hit to the value of the dollar–a weird snake trying to eat its own tail. Now those foreigners who already hold a lot of Treasuries might try to bolster the value of their own holdings by defending prior purchases with additional purchases, but all it takes is a persistent marginal seller(s) to drive up interest rates (Japan? The UAE?) who simply believes there is a better risk/reward elsewhere.

I do not understand the euro bashing or the yuan bashing in the above comments. The reasoning makes no sense to me. I would appreciate it if some of you would reply and explain yourselves more thoroughly, particularly in terms of the sovereign debt associated with each currency. Here is my reasoning about why I think the dollar will decline: the amount of debt the United States is issuing and about to issue will be more per capita than the amount of debt issued by any other country or group of countries in any other currency. Granted the United States has more capital-creating power per capita than many other countries, which offsets the debt somewhat (sort of like how you look at debt-to-equity ratios when evaluating corporate debt or equity investability). But let’s be honest and bring onto the U.S. balance sheet all the off-balance-sheet stuff like Social Security, Iraq, Medicare, etc. for the purposes of this paragraph–because the foreign investors surely do so, or will do so, when deciding where to invest their money–and all this excess debt will eventually overwhelm the capital-creating power the U.S. possesses. I understand that the United States has, as Kevin Phillips likes to point out, the luxury of issuing debt denominated in its own currency, and that declines in the dollar will effectively lower the amount America owes, but after some point, sooner rather than later, the tectonic plates must shift, i.e., the dollar’s dominant relationship will scoot about the earth suddenly, differently, not favorably to those of us living here. The foreign investors will not enjoy getting back, when their holdings of U.S. debt mature, less purchasing power as a result of dollar decline. Jim Rogers didn’t just move to Singapore because he likes the food there–I suspect he moved there at least partially because Singapore has a true AAA-rated currency that is less likely to dent him and his family.

Sales taxes instead of income taxes? No. Sales tax is the most regressive tax possible. You take away money from the individuals who spend nearly all, or all, or more than all of their income (the poor and the lower middle class) and who thereby stimulate the essential economy–and you give money to the individuals who hoard it and who, far too often, make lousy discretionary leveraged investments (the upper middle class and the rich). Absolutely not. Sales tax is anti-capitalism, anti-stimulus, and socialism to benefit the rich, period.

I wonder how those of you reading will respond to my assertion about the dollar. I am not the first to be dubious about the dollar. Please, if you disagree, explain yourself clearly to me–please pretend I am very, very young–because I am not an economist, just a fairly skeptical investor who has been prescient enough the last few years to sidestep the crashes in real estate (sold my house in 2004, been renting since) and other equities and who has placed himself higher in the capital structure, buying high-quality bonds so far, buying yen and Swiss francs so far, and very nervous now as to when to 180 the bulk of my deflationary-linked investments into inflationary-linked ones. I have been correct so far, so please grant me that tiny bit of credibility. I don’t doubt there are many holes in my arguments, but I want to learn. Thank you.

Instead, the reserve currency status makes it politically convenient — almost irresistible — to issue ever-more debt. It’s our greed and lack of discipline or political will.