Exodus Away from U.S. Dollar On?
“Michael, you don’t know what you are talking about.” That’s pretty much what I was told back in 2005 and 2006 when I was warning extensively that the U.S. housing market would collapse.
When a boom in any form of investment is going on, and millions of people are participating in that boom, it’s hard to convince people the boom is about to bust. At a certain point, we start hearing that old saying “it’s different this time,” which means people simply don’t believe the boom will end. They try to legitimize it.
But like all booms, the bust did happen. The housing market went bust big-time, and we all know what happened after that.
Today, there’s another asset class that is booming, that investors large and small are literally running to. No, I’m not talking about the stock market (it’s already in bust mode). I’m talking about the greenback, the good old U.S. dollar.
In recent days, and despite trillions of dollars in new money created by the Federal Reserve, the U.S. dollar has gained traction as investors search for safety amid the collapsing emerging markets.
Personally, I think investors are wrong to find security in the U.S. dollar. In fact, I see its days as the leading currency of the world being numbered.
But the fundamentals that make the dollar a “safe haven” are damaged. Aside from the fact the Federal Reserve has printed trillions in new money and the government continues to take on never-to-be-repaid debt daily, central banks around the world are reducing the amount of the reserves they keep in U.S. dollars.
Please look at this chart:
In the chart above, I have plotted the U.S. dollar as a component of the total foreign exchange reserves at central banks around the world, from the first quarter of 2000 to the third quarter of 2013. The chart clearly shows central banks have been reducing the amount of U.S. dollars they hold. In the first quarter of 2000, total foreign exchange reserves in U.S. dollars were 55%. In the third quarter, they accounted for only 33%.
But this isn’t the only phenomenon that gives me cause for concern over the U.S. dollar. Momentum is growing for further distancing of central banks from the U.S. dollar. One example of this: former chief economist of the World Bank Justin Yifu Lin told a Brussels-based think tank, Bruegel, that “The dominance of the greenback is the root cause of global financial and economic crises… The solution to this is to replace the national currency with a global currency.” (Source: “Replace dollar with super currency: economist,” China Daily, January 29, 2014.)
Another example of “taking the focus off” the U.S. dollar is the rise of virtual currencies like the Bitcoin; it may never become a mainstream currency, but it’s certainly interesting to see a rush towards it.
Adding to the concern over the U.S. dollar, the U.S. government continues on in its reckless spending ways. Recently, Congress and the House passed a bill that essentially raises the national debt limit another $1.1 trillion. Basic economics tell us the higher the national debt goes; the weaker the U.S. dollar becomes.
Dear reader, I don’t mean to scare you in any manner; but the fragile state of the U.S. dollar is something you need to be aware of. As the U.S. dollar loses its reserve currency status, which is a process that will take some time, your money will buy even less. In other words, a return to inflation is in the cards for the U.S. economy according to this economist.