re: SHORT THE DOLLAR

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For one, if investors perceive that the US is not taking its debt problem seriously, they will stop purchasing US bonds, which will increase borrowing costs and our debt burden. In that case the Federal Reserve will need to step in and purchase more debt than it is already doing, which will lead to an increase in the monetary base/money supply, which will also lead to a further weakening of the US dollar in addition to the weakening resulting from a decreasing foreign demand for US debt. Central banks worldwide are already diversifying away from Treasuries because they lose money by holding our debt due to the combination of our zero-interest rate policy and the depreciation of the dollar.

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In theory increasing the monetary base would depreciate the currency, in practice it won't happen until the velocity of money picks up. You know that the value of the dollar has actually appreciated since the beginning of the QE programs? Even if velocity spiked the Fed can actually repo out as much of the money in the system as they want at any point in time. They won't suddenly do that because that would be a huge disruption to the economy but keep in mind the Fed has all the tools necessary to reign any threat of inflation they want. It's deflation that truly scares the shite out of them.

Also, where are you getting the idea that central banks are diversifying from treasuries? I see no data that supports that, there may be fluctuations of holdings from different time periods but that is usually due to internal reasons rather than our issues. The fact remains that there still is no better safe haven.

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One advantage we have over Europe is that individual nations in the Euro zone are unable to print money/devalue their currency, while we have complete freedom to do so. However if you do so too much, you risk losing credibility in the capital markets and investors will punish you by driving up borrowing costs and making it more expensive for you to finance deficit spending.

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This is true for the most part.