Experts see shrinking dollar, ballooning debt impacting U.S. living standard
By Craig R. Smith
Feb 22, 2007
Once upon a time... American economists used to arrogantly say, "The dollar is OUR currency, but it's YOUR problem!" Today the declining dollar is both a global problem and a domestic problem, as it spurs higher U.S. inflation based on The Domino Effect.
First it was Warren Buffet, then Bill Gates, then George Soros who began shedding dollars. Now China, Japan, Russia, OPEC and even central banks are chiming in, one by one, with plans to diversify out of U.S. dollars.
Who can blame them? Here are a few examples of recent headlines and quotes reported at swissamerica.com which will help explain why there's a growing exodus out of U.S. dollars and into foreign currencies and commodities like gold.
* Peoples Bank of China Governor Zhou Xiaochuan said at a recent Frankfurt conference that China has very clear plans to diversify its currency reserves, which now stand at more than $1 trillion. A wide range of instruments are under consideration, including gold and oil, reports Marketwatch (1).
* Hong Kong billionaire Lee Shau Kee says, "I am a bear on the U.S. dollar. The U.S. has a mountain of debt. I don't believe in debt. Ever since I was young, I have seen how paper money has suffered. If a country is encouraging a lot of debt, at the end of the day, they have to repay. If they don't, there will be big turmoil," reports Forbes (2).
* "The head of the United Arab Emirates central bank said it will convert 8% of its reserves of U.S. assets into the European currency," reported Bloomberg (3).
* The Islamic Consultative Assembly (Majlis) is agreeable to replacing the US dollar with the euro in Iranian foreign transactions, said a member of the Majlis Planning and Budget Commission, Morteza Tamaddon. In case the West pulls through with its planned economic sanctions on Iran, Tamaddon said the country would still have access to its monetary accounts based on the euro, reports IRNA (4).
* The dollar has suffered weakness because of concerns about global imbalances and the future course of the Federal Reserve�s interest rate policy, reports London Financial Times (5). Japanese life insurers, who manage the equivalent of $1.6 trillion in assets, will cut holdings of U.S. Treasuries, according to Calyon Securities.
* "The dollar lost nearly 12 percent against the euro in 2006, as investors became concerned that U.S. economic growth was slowing and that the interest rate differential with Europe may narrow. You should hold as few dollars as possible. The dollar's decline would go on for years to come," Commodity expert Jim Rogers told Reuters (6).
* "Two analysts who have reconstructed money supply data after the Fed stopped publishing it argue a coming dollar collapse will set the stage for creating the amero as a North American currency to replace the dollar," reports WND (7).
* "We are entering a critical new phase of the dollar's decline, which may:
- drive up the interest rates on bonds, commercial loans and all forms of mortgages ...
- crack open the U.S. housing market -- not only because of rising mortgage rates, but also because fewer foreigners are willing to speculate on American real estate ...
- force the Fed to start a whole new round of interest rate hikes to attract foreign money back to the U.S., and ...
- send contra-dollar investments -- gold, silver, oil and other commodities -- into a new, rip-roaring surge," writes Safe Haven's Martin Weiss (8).
Debt is strangling the dollar
If a dollar is viewed as a unit of measurement for the world's confidence in America's ability to manage and reduce our trillions in debt, it's likely due for another major decline in 2007. The Fed is finally cornered, unable to raise interest rates to halt inflation and unable to cut rates for fear of a dollar collapse.
Devaluing the dollar is the market�s way of correcting the U.S. trade deficit. Former Fed Chairman Alan Greenspan warned us repeatedly over the last few years that either the value of the U.S. dollar or the trade deficit has to decline. Both cannot continue rising.
The U.S. needs to borrow $2.5 billion a DAY to finance our budget and trade deficits. If countries sell dollars to buy other assets they will hold less dollars and stop financing our lifestyles. That will mean fiscal restraint and lifestyle changes in America that may not be so pleasant -- necessary and well-deserved perhaps, but not pleasant.
The U.S. dollar has lost over 40% of it's buying power since 2001 � and that was under a "strong dollar" policy from the White House! Can you image what's in store for our debt-burdened dollar under the new unspoken "weak dollar" policy? I can.
Hold on to your wallet, a surge in the cost of living is coming at us as "real world inflation" continues making news headlines.
Sure, it's true a lower dollar has some benefits, such as lowering the trade deficit and increasing U.S. manufacturing competitiveness abroad. "Provided the currency shift doesn't get out of hand, a sustained but managed weakening of the dollar is good news for the global economy and world financial markets," says Morgan Stanley economist, Stephen Roach.
But the price impact of a falling dollar is heaviest upon 'We the People' who become the ultimate victims of declining dollar-denominated assets.
What to expect� what to do!
As central banks and other major investors in global asset markets shift away from holding US dollars, severe implications for the U.S. may become reality:
* difficulty for the U.S. in financing its ballooning deficits,
* a possible collapse in the traded value of the dollar,
* higher interest rates in order to attract international lenders,
* compromising of the dollar's reserve currency status,
* slower growth in the US economy given our dependence on debt financing.
Smart investors are moving in droves out of U.S. dollars and into foreign currencies, commodities and gold. Gold is sometimes referred to as the 'anti-dollar' because it is a perfect hedge against a falling dollar. Gold has become a true international currency.
Gold prices have more than doubled from $265 in 2001 to $679 today. Higher gold prices may be viewed in two ways:
1) The commodity bull market is bringing gold prices back to a level that represents the true market price in terms of our falling dollar� OR
2) The falling dollar is but one of many factors helping to support higher commodities prices, restoring true value that's based on the supply-demand marketplace.
Either way, gold's price surge reflects a new movement toward quality assets that represent a safe haven and away from dollars which lack any long-term store of value.
The dollar is in big trouble today, but by diversifying as little as 5-15% of your assets into gold your can help put your family on a firm foundation, a personal gold standard. Now is the time to hedge the falling dollar -- before everyone else discovers that the today's paper dollars are really an "IOU nothings," as Fed economist John Exter correctly defined them twenty years ago.
FULL STORY: THE IN-CREDIBLE SHRINKING DOLLAR
U.S. Current-Account Deficit Deserves Some Noise -Bloomberg
2007: Year of the Golden Piggy Bank - By Craig Smith
"Chindia" Gold Rush on CNBC - Craig Smith on CNBC
DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. The opinions in the Commentary section do not necessarily reflect the opinions of Swiss America. Past performance of any investment is no guarantee of future performance. All investments have risk.