Dollar Counterpoint

I have written and passed on quite a bit of dollar/ U.S. debt/ Asian lending news lately. Not to be a panic monger there is a still a good possibility for an anti-climactic resolution. There are probably many ways this could occur but General Glut lays out what I see as the most likely other alternative to a weakening dollar that pressures central bank UST holdings creating a downward spiral.

Second, it may be that the East Asians do not convert their dollars into local currency and suffer high capital losses. China in particular does not fully sterilize and thus is not issuing as much local currency debt to soak up inflowing dollars. Japan doesn't sterilize at all. Both countries could use central bank dollars to loan to private firms looking to make investments in/purchases of oil (still priced in dollars), US corporations, US mineral deposits, US agricultural land, US golf courses, whatever. We already know that all the East Asian banks have accumulated reserves far in excess of what they "need" to defend their currencies. So why not simply keep many of those dollars in dollar form and buy US real assets with them?

As always the entire post is worth reading but this paragraph is really the heart of things in my view. It is possible that Asian central banks simply shift out of bonds into other assets. The kicker here is that it is not a solution to interest rates heading up which may still lead to problems even with a strong dollar. But it would certainly play out differently for stocks and possibly real estate.