04/19/2009 05:12 am ET | Updated May 25, 2011

US Dollar Devaluation as Predicted

The Chinese are starting to switch from investing in U.S. T-bills to buying hard assets for stockpiling or acquiring corporations at bargain-basement prices.

Others are buying gold. Or oil.

This week, Washington surprised markets by mopping up 5% of its own Treasuries, a form of printing money to finance deficits that the rest of the world isn't interested in financing any longer. Or cannot.

(This looming devaluation of the U.S. dollar I blogged about on February 3 in the Huffington Post calling it the Big Bang or monetization of massive deficits.)

It's inflationary which is why the US dollar tumbled about 3.5% right away. But there are many more T-bill cannibalizations to come because deficits are going to reach the stratosphere until this bottoms.

Markets jumped, guessing it's the bottom or the reverse of deflation or both.

Whatever the reason, the Americans are becoming very worrisome and the new regime looks a lot like the old regime, only newer with the same old faces. Concern should be that America's system of government may have reached its best-before date in history because, like its financial sector, Washington appears paralyzed and unable to deal with this crisis.

The problem now is the problem solvers, both financial and political.

The world as we knew it ended because Wall Street, AIG and banks made bets to protect trillions in bond values -- bets they could not pay out if they were wrong. Massive fees blinded judgment and a regulatory vacuum in the global financial space permitted recklessness.

Lacking anyone to mind the proverbial financial store anymore, the board of directors is the executive and legislative branches in Washington.

It's a system of paralysis, through checks and balances and lobbyist corruption, that has been made worse by a two-year primary tangle for the presidency, partisan battles over the crisis and a succession of Treasury Secretaries and Federal Reserve officials, appointed by both parties, who don't get it or have conflicts of interest.

For instance, Republican appointee Alan Greenspan printed too much money for years. In 2007 the tipping point was reached and the response to the credit meltdown was when Republican Treasury Secretary Henry Paulson rescued his old Wall Street firm, Goldman Sachs, plus AIG and others but left some to go bust such as his former arch rival Lehman Bros.

Now we have Democratic Treasury Secretary Tim Geithner who has a conflict because he didn't see the trouble coming either when he was at the FedReserve with Greenspan, did nothing about it and helped cobble together the Paulson, Bernanke fiasco that hasn't worked.

Lots of opinions are out there, but here are a few of the more thoughtful ideas as to what the future holds:

-- Gold is the safety play as the US dollar slides. Some estimate may reach as high as US$1,500 an ounce in 2009.

-- AIG and the others should be, and will be, put into a de facto, strict bankruptcy workout. Outrage over the process thus far will lead to renegotiation of salaries and counterparty payments to stop the ad hoc and cronyist nature of this and indirect bailouts.

-- China is concerned about the fact it holds US$1 trillion of the U.S. debt and is diversifying its portfolio as well as not buying more U.S. Treasuries. Neither will the Saudis.

-- Obama will replace Geithner, preferably with a European or Canadian or Asian team, who get it and haven't got conflicts of interest with all the "boys" on Wall Street and banking.

-- The American, and most of the world's, banking system may eventually have to be nationalized in order to systemically and fairly recalibrate the financial economy. This will also allow the Americans to write off 25% of all mortgages, sub-prime and others, to kick start the real economy again.

Diane Francis blog