09/22/09 Baltimore, Maryland
Watch out, the greenback is going into the toaster oven…here’s what Nouriel Roubini had to say in The New York Times:
“We may now be entering the Asian century, dominated by a rising China and its currency. This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable.”
Yes, it could take more than a decade. But investors could take a big loss any day. All it would take would be a sudden move by China…or a shocking inflation figure in the United States…or a Treasury bond auction that doesn’t go as planned. Everyone is watching the United States…carefully. And foreigners hold trillions’ worth of dollar-based assets outside the United States. These are dollars that people hold, not to pay their bills or buy gasoline, but as a speculation. They’re speculating the greenback will hold its value as well or better than the other things they might do with their money.
Europeans hedge their bets against the euro – with dollars. Asians hedge their bets against falling stock prices. Russians hedge their bets against the ruble. Latin Americans hedge their bets against their own pesos, bolivars, and cordobas. Everybody likes dollars because they are the most trusted money in the world. For the last 50 years, nothing could compete with the dollar. (Even though the dollar lost value against a number of other currencies over long periods of time.)
These foreign holders are already nervous. They’ve seen the mess the United States has gotten itself into. They read the headlines. They watch the news. They know that the United States is running a budget deficit this year equal to four times the biggest budget deficit ever – a record set just last year. It is as if a runner broke the record in the 100-yard dash…and then ran the course four times faster a year later. This is not progress. This is spooky.
The Chinese already let the United States know they are worried.
“We trust you to protect the value of our assets,” they in essence said to the US Treasury Secretary.
And in the middle of May 2009, from the Financial Times comes news that Brazil and China are working toward using their own currencies in trade transactions rather than the US dollar.
This comes on the heels of the news that China’s central bank governor Zhou Xiaochuan proposed to create a reserve currency “that is disconnected from individual nations. “
What Mr. Zhou would like is to replace the US dollar as the world’s leading currency with a new international reserve currency, possibly in the form of special drawing rights (SDRs), a unit of account used by the International Monetary Fund.
Then in June, Russian President Dmitry Medvedev questioned the US dollar’s future as a global reserve currency and said using a mix of regional currencies would make the world economy more stable. Russia may consider ruble-yuan swaps.
The dollar “is not in a spectacular position, let’s be frank, and its prospects cause various questions as do the prospects for the global currency system, “ Medvedev said in an interview published by the Moscow-based Kommersant newspaper. Regarding the global financial system, “therefore our task is to make it more mobile and at the same time more balanced.”
But for now, as long as these countries trust the United States to keep its promises and protect its money, they continue to hold US dollar investments – notably, US Treasury bonds. But just wait until the United States loses their trust. In a matter of minutes, China could dump enough US dollars to set off alarms all over the world. All of a sudden, dollar holders would rush for the exits – each one trying to get out before the others. In minutes, the dollar market could collapse…taking down US Treasury bonds with it.
Regards,
Bill Bonner and Addison Wiggin
for The Daily Reckoning
Addison Wiggin
Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He’s the creator and editorial director of Agora Financial’s daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar… and Why it’s Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.
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As to “what it would take”, I don’t think so. 1)China won’t move ‘quickly’ because to do so would set off the USD time bomb ‘they’ are now holding, patience is what they have and need. 2) Huge inflation in the US requires all the other Central Banks to STOP inflating their own currencies, won’t happen. 3) Treasury Bond sales are now so twisted and tortured in their reporting that you will never know if the ‘foreigners’ are not buying (they likely have already stopped).
and when has any government acted rationally in recent history Jeff?
At this stage of the game, the dollar is no longer a fiat money issue to be manipulated by central banks.
It is now a geo-political issue with giant military, international trade and economic implications. The dollar has become pawn in a most serious game, that of how each major country will come out ahead once the winds smell just right to dump the dollar. The US will come up a loser no matter what. This is price to pay for 15 years of unfettered irresponsibility.
Why don’t China just raise the value of their currency and collateralize it if they don’t want any more dollars? Not much of the world would buy Chinese crap if they raised their employees pay to $3 an hour.