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16 Sep 2022  (847 Views) 

Why the USD did not collapse yet
The US Fed increased interest rate sharply from 0.25% at the start of 2022 to the current rate of 2.5%. It is expected to increase the rate by another 0.75% later this month.

The US government is in a large deficit. It reached a total of $31 trillion in August 2022. Many analysts calculated that the increase in interest rate will be costly to the US government. An increase of 3% will add $930 billion to the cost of servicing the $31 trillion debt. 

The US federal revenue is $4 trillion. The increase of $930 billion will take away 23% of the revenue. 

The analysts predicted disaster for the US dollar, as the holders of US debt will run away from US assets. 

So far, this has not happened. Instead, the US dollar strengthened. What happened?

There are two reasons. 

1) The increase in interest rate has not affected the US government finances yet. Most of the debts are long term. The US government has to pay the interest rate that was contracted at the time the debts were issued. The holders of these debts will suffer from a lower price of the debt caused by the increase in interest rate. The US government will have to face a higher borrowing cost on the new debts that are issued now. The higher interest rate will affect the government in the future.

2) Many large holders of the existing US govt debt could not sell their debts (even if they are willing to take a loss) because they are not able to find other assets to invest their money. They are now stuck with US govt debts and other US assets. 

Instead of collapse, the US dollar strengthened in recent months. 

However, I expect this to be a temporary phenomenon. The collapse of the US dollar will take a year or two to happen. But it will happen. 

This is my insignificant view. 

Tan Kin Lian

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