Peter Schiff has very succinctly encapsulated the mounting problems of the declining US dollar (click here).
The issue is really one of transition. Decades of fiscal irresponsibility and imperial ambition have taken their toll on the inherent worth of the US dollar in its now rapidly fading status as the global reserve currency of the 20th century.
Consider the following developments: Euro-denominated investments have surpassed US dollar-denominated investments in net value for the first time since World War II. The Chinese are on the way to doubling their $1 trillion dollar US holdings of last year as soon as next year. The British pound sterling (global reserve currency of the 19th century) is returning to its historic 2:1 ratio (and then higher) against the US dollar. The Canadian dollar is again nearing parity with the US dollar.
To simplify the issue, America is giving away US dollars far too quickly and easily, and they are accumulating (and backing up) all around the world. Due to decades of inflating the currency (printing unbacked US dollars to pay for every American excess – and it is a litany of excesses), Americans continue to spend $2-3 billion dollar per day internationally more than they receive in income. Americans are thus selling out their assets, including the US dollar itself – at a $2-3 billion dollar per day clip.
As any budgeter knows, daily expenditures add up. The day eventually comes that the family simply cannot pay the bills. That reckoning day is drawing ever nearer for increasingly indebted Americans. Others have called this historic development the long emergency, the great unraveling or financial reckoning day.
The good news is that when US dollars are no longer readily taken up by citizens of other countries at a $2-3 billion dollar per day rate, Americans will then have to face the consequences that will ultimately require them to behave responsibly. And this will be the first time in more than half a century that such a moral and financial reckoning has been required.
I continue to believe in the inherent goodness of the American people. They will respond appropriately. But this will now occur from weakness, rather than from strength. This time around, the resulting enrichment of the American spirit will be moral in nature, rather than financial.
Such a transition is overdue – and will perhaps ultimately be welcomed, as a great global rebalancing will certainly result.
($9000 gold as the US dollar collapses? Click here.)
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Good post, what you didn’t discuss is the fact that American’s borrowing binge is largely funded by foreign holders of the dollar.
ReplyDeleteIt is estimated that over 50% of dollars are held by national central banks, foreign institutions and foreign investors. As long as central bankers accept the dollar as legal tender we are not going to suffer the consequence of our economic mismanagement. Iran will be one of the first countries that successfully decouple the dollar from the world’s currency exchange system.
Personally I think that we have lived far beyond our means for far too long and most Americans do not understand the impact that our spendthrift ways has on the world’ moral foundation.
Thanks for your clarification. I referred to foreign "citizen" holdings without distinguishing institutional from non-institutional holders. By implication, the $2-3 billion dollar per day current account deficit ends up in foreign hands. I agree that institutional holders of the US dollar don't desire to collapse the currency, as they would be doing in their own assets - but many are announcing their plans to "diversify" (read: decrease US dollar risk). I think the tacit agreement is that there will be a long, slow decline in the value of US assets and the currency, but sometimes these things don't work out as planned. If the plan unravels, there could be a dramatic dislocation.
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