The US Dollar Ready to Collapse?

The turmoil across North Africa and the Middle East is threatening not only to overthrow aging dictatorships, autocracies and monarchies, but also to upset the geopolitical balance between the countries of that region and the Western powers that has existed since at least the 1950s. For the West, the issue has always been the security of oil. For the US there is a second issue, and that is the security of Israel. Now both are under threat.

Some 56 per cent of the world’s oil reserves are in the Middle East, with another nine per cent in Africa. Therefore, unrest in the region could be the catalyst that sets off a global monetary-oil shock. The unrest in Libya has sparked a sharp rise in oil price. Libya holds the world’s ninth-largest reserves and is the twelfth-largest exporter, providing about two per cent of the world’s daily oil supply. Not large and it is possible that Saudi Arabia could pick up the slack but it sends out a wave of uncertainty and it is unknown where the next outburst might occur.

Saudi Arabia is the world’s second largest producer, behind Russia. Saudi Arabia exports roughly 75 per cent of its production. If the unrest spreads to Saudi Arabia then all bets might be off the table as to how high oil prices can go.

Saudi Arabia is governed by an absolute monarchy which rules by decree. While its people are generally well-off, it has a minority Shia Muslim population (about 20 per cent), largely employed in the oil-producing regions, who are at the margins of the society. Saudi Arabia has a poor human rights record and its Wabbabi brand of Sunni Muslim religion has often been noted to be behind alleged terrorist organizations. Unemployment is high at just under 11 per cent, although that is better than most Arab countries.

The US is the world’s largest consumer of oil, at roughly 19 million barrels per day. It imports almost 10 million barrels per day. China is now the second-largest consumer. Among the top 15 consumers we also find Japan, Germany, France, Canada, Italy and the UK. Yet outside of Canada and China (which, like the US, produces roughly half of its daily consumption and is also the world’s third-largest producer), none of the others are in the top 15 for production. And amongst the Western economies, only Norway and Canada are listed in the world’s top 15 exporters.

It has often been said the US dollar is a petrodollar. That is to say, it is earned through the sale of oil. Oil-producing countries such as Saudi Arabia and Venezuela, which peg their currencies (within a band) to the US dollar, are as result quite dependent on the value of the US dollar. These countries and many others earn large amounts of US dollars because of their oil production.

The US dollar is also the world’s reserve currency. All commodities are priced in dollars – not just oil. It is the most marketed currency in the world and it is owned more widely than any other currency. One would therefore believe that a strong dollar is not only in the interest of the United States, but everyone else as well.

But the US dollar is also a fiat currency. A fiat currency has value only because the government says so. The Latin word fiat translates as “let it be done”. Thus, the value of money is dictated by government decree.

Today, all national currencies are fiat currencies. The trend began in August 1971 when President Richard Nixon took the US dollar off the gold standard thus also taking the world off of the gold standard. Increasingly from then on, money was whatever a government said it was. As such it has no real value except being declared legal tender.

Fiat currencies have a long history, mostly of failure .The Romans didn’t have paper money but they developed an early form of fiat by constantly decreasing the amount of silver used in the denarius, their main medium of exchange. They continued this debasement until the coinage became intrinsically almost worthless.

The Chinese were the first to issue paper currency in around the tenth century but eventually they printed so much that hyperinflation occurred and their currency became worthless, even though its usage lasted close to 400 years.

History is respite with the failure of fiat currencies. The most recent example was collapse of the Zimbabwean dollar, and a famous example was the Weimar Republic of Germany in the 1920s.

Fiat currencies have a history of ending in hyperinflation – if a country starts printing money excessively, it is often on the road to ruin and hyperinflation. And this is the United States today. The US has unparalleled deficits and debt; it has increasing expansion of its money supply, using a fiat currency; and it is being misleading about its true economic situation through its published economic statistics.

But it also has the world’s reserve currency, and international trade is carried out in US dollars. Any country buying oil, for example, must first convert its currency into dollars to pay for it. The selling country receives those dollars, which are often recycled right back into purchasing US debt, so that the selling country does not adversely impact its own currency.

But the US dollar is a declining currency. In the last 100 years it has lost over 96 per cent of its purchasing power (this process accelerated after 1971).

Many items, including Social Security payments, are tied to the reported rate of inflation. With a much higher rate of inflation, many items would have increased in price faster and the US Treasury would have had to pay out far higher entitlements.

The recalculation of the inflation numbers were provided by www.shadowstats.com. That chart suggests that the US dollar has lost over 98 per cent of its purchasing power over the past 100 years.

Many would say that it doesn’t matter, that society today is far better off than it was 100 years ago. And it is, and more appear to be joining the middle class. But technological advances have changed society in a dramatic way from 100 years ago. That and lots of money provided by a rapidly expanding money supply and debt all courtesy of a fiat currency. With nothing tangible to back money, money intrinsically has no value – except what the government says it is.

But with the explosion in debt and money and the decline in the purchasing power of the US dollar, society has become more divided. Income and wealth is increasingly concentrated in fewer and fewer hands. During the financial crisis of 2008 the bailouts went to the financial institutions (and corporations) that were either indirectly involved or directly involved as the cause of the crisis. The taxpayer (public) footed the bill.

Meanwhile the housing market collapsed with tens of thousands (millions?) losing their homes to foreclosure and tens of thousands lost their jobs. General wages have been stagnant for at least the past two decades and those living on fixed incomes (pensions) have seen a constant decline in their living standards. Meanwhile, those involved in the creation of money particularly at the banks and investment management companies have seen an explosion in their wealth and pay packages.

The unemployment rate soared and while the headline unemployment rate (U3) in the US is at 9 per cent, the Bureau of Labour Statistics U6 number is closer to 17 per cent and www.shadowstats.com have calculated that based on calculating unemployment as it was it was done in 1990 the actual rate may be closer to 22 per cent. The current U3 number leaves out longer term unemployed, part time workers looking for full time work and very long term unemployed. If your unemployment insurance runs out the person falls out of the U3 number to the U6 number.

Today, with the future liabilities of Social Security, Medicare and Medicaid estimated (conservatively) to be about US$50 trillion or (more liberally) at upwards of $200 trillion, the US, with a debt at over $14 trillion and rising, has little chance of ever recovering or ever being able to pay it back. It has been said that the US could tax 100 per cent of income and still not be able to cover its commitments.

Further, the world is rife with imbalances. The US is the largest consumer in the world and imports heavily, creating huge trade deficits. It also runs huge budget deficits to finance entitlements and the Pentagon that finances the war machine. The US dollars circulating throughout the world, either because of general imports or because of oil, are recycled back into the US to purchase their debt. All of this appears to have worked reasonably well over the years but now the model is coming under severe stress. These global imbalances are not only causing problems for the US they are causing problems for other countries as well.

If the US were any normal country, its currency would now be in complete collapse and it would be arranging for IMF bailouts such as Greece and Ireland saw recently. But because it is the world’s reserve currency, the US has one big advantage: it can just print more dollars.

This strategy has unnerved the holders of US debt, led by China, which is estimated to hold almost $900 billion as of December 2010. Japan also holds almost as much. The UK has over $500 billion. Almost 60 per cent of the US debt held by foreigners is in the hands of just those three plus the oil producing nations led by Saudi Arabia. Of the total US debt of over $14 trillion, over $9 trillion is held by the public and roughly half of that is held by foreigners.

No wonder there are calls for an end to US dollar hegemony and a new Bretton Woods agreement to determine a new world reserve currency, and possibly even bring back a gold standard. The calls have ranged from the IMF, the World Bank, and many countries including France and Germany and of course China, the country that has the most to lose, given its large holdings of US dollars. Even Saudi Arabia has joined a group of countries seeking an alternative for the pricing of oil solely in US dollars. China and Russia are now conducting trade between themselves in Yuan and Roubles.

US debt is vulnerable to a downgrade as well. The IMF and the rating agencies have issued numerous warnings about the US debt situation. The effect of the US losing its AAA rating could be a financial earthquake. The US is also approaching its legal debt limit and, with the rift in Congress, the Republicans have threatened not to grant a new, higher debt limit. This could in the worst case result in the shutdown of government and a US debt default. This is not to predict that any of this will happen, but only to point out that it could.



Some are also saying that the so-called quantitative easing, or QE, could spiral the US into hyperinflation. While there are currently few signs of it, an event such as an oil shock in the Mid-East could trigger severe inflation which in turn could trigger further QE and start an acceleration in monetary inflation. Sharply rising oil prices have a history of causing recessions so it could stop the current feeble recovery in its tracks. An economy reeling from higher oil prices plus rapid monetary inflation could soon spiral out of control.



In the midst of all of this it is no surprise that gold has soared over 450 per cent in the past decade. Although relatively flat thus far in 2011, gold is up almost 28 per cent since the end of 2009. It is becoming an alternative currency. The world’s central banks still hold some 30,000 metric tonnes of gold, and investment demand for it has brought investment holdings in line with what is in the world’s central banks. In many countries, particularly in Asia, gold is seen as a savings vehicle rather than the speculation it seems to be viewed as in North America.



It is not so much that gold prices are rising but that fiat currencies led by the US dollar are declining. The chart of gold shows the stair step action that has taken place since the double bottom lows of 1999 and 2001. The action since that time has seen a series of triangular patterns form that continually break to the upside. And gold is rising not only in dollars but in all currencies, as the series of charts below attest.



Finally not only is the US Dollar Index declining the trade weighted Dollar Index is also falling. The trade weighted Dollar Index called the Broad Index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners. The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares. In some respects this more fairly reflects the value of the US dollar then does the more broadly watched US Dollar Index. The US Dollar Index is a weighted valuation against a basket of 6 major free trading currencies. Notably the US Dollar Index excludes the Chinese Yuan.




Source

Countries Fighting Collapsing Dollar Value

A number of countries around the world are acquiring larger positions in the U.S. dollar in hopes it'll help shore up the plummenting value of the greenback to the detriment of their exports.

The most recent countries snatching up the dollar are Russia, South Korea, the Philippines and Thailand. The 15-month low of the U.S. dollar continues to raise concerns on slowing down any economic recovery because of exports from the countries having strong domestic U.S. competition because of the dollar's weakness.

Countries like Taiwan an Brazil are also concerned about the strength of their currencies against the dollar, and in the case of Taiwan they've now forbidden foreign investors from placing time deposits in the country in hopes of weakening their own currency. Comments from official in Brazil also imply there could be more action on taking steps to weaken the real.

In spite of rhetoric from Washington that they support a strong U.S. dollar, no steps have been taken to make that happen, and so it seems that's a direct nod to U.S. manufactures and unions who had backed Obama's presidential run. Exports from the U.S. increase when the U.S. dollar declines in value.

For now, China doesn't care whether the dollar rises or falls against the yuan because it's pegged to rise or fall against the dollar, keeping it at an even keel. Other countries have been pressuring China to allow the yuan to rise in value as Chinese exports also benefit from a weaker dollar as far as when competing against non-American exports.

With that in mind, there's no incentive for China to change its monetary policy, even though regional competitors complain about it. We might see some carrots thrown out to manage some of the complaints, but other than that, I don't see China making any drastic changes to their current monetary policy any time soon.

China holds all the cards in this economic battle, as if too much pressure is put on them, they could keep the import of goods from those particular nations at a small level, a major concern with the huge population in China and a solid, emerging middle class which will resume spending once the global economy rebounds.

Consequently, individual nations will have to take their own steps to make their currencies competitive, and not mistakenly wait around for some type of move by China.

For the U.S. dollar, it almost assuredly will continue to fall in value, making it even harder for other nations to compete on the international stage and with China for U.S. imports. Other nations as well are concerned, as the Euro continues to strengthen against the dollar, also making it harder for European nations to increase exports to the U.S.

Will China's Currency Experiment be Final Nail in U.S. Dollar's Coffin?

In a bid to protect their export business, China is implementing an experimental program concerning their currency to see if it will work better than the failing U.S. dollar. If it's successful, the program, along with other pressures on the dollar, could spell the end of the greenback as we know it.

Shanghai Daily reports how the program will be implemented:

"China will allow the yuan to be used for settlement between Guangdong Province and the Yangtze River Delta, China's two economic powerhouses, and the special administrative regions of Hong Kong and Macau, according to the central bank.

"Meanwhile, exporters in the Guangxi Zhuang Autonomous Region and Yunnan Province in southwestern China will be allowed to use the yuan to settle trade payments with members of the Association of Southeast Asian Nations.

"Those moves are expected to facilitate overseas trade, as Chinese exporters might face losses if they continue to be paid in US dollars..."

With every move by the U.S. government and Federal Reserve the wrong one, and as they continually interfere with U.S economy through socialist expansion programs, the greenback has little chance of surviving as a viable currency.

Combine that with this move by China, and the conclusion is there will probably be a paradigm shift in the global currency market in the not-too-distant future, with the U.S. dollar simply another weak currency in the market, if it survives at all.

U.S. Dollar Weekly News Roundup

=====

US dollar rises against Chilean peso on news of Central Bank intervention

The U.S. dollar closed 2.85 percent higher against the Chilean peso Friday after the Central Bank announced it will buy up to US$8 billion (euro5 billion) of the currency this year, a move expected to halt the dollar's recent slide here.

=====

Yuan up 4.3% against US dollar in 2008; 18.3% since Jul 05

The Chinese currency broke this week the psychological benchmark of seven Yuan to the US dollar which could signal a change of policy in Beijing since a stronger currency should help fight inflation and makes food and energy prices cheaper.

=====

Canadian dollar closed 0.44 of a cent lower to 97.71 cents US

The Canadian dollar closed at 97.71 US, losing 0.44 of a cent on Friday. The U.S. dollar stood at 102.34 cents Cdn, up 0.46 of a cent.

=====

The Gulf Common Currency: Implications for the U.S. Dollar

Amidst the US Dollar’s recent depreciation in the global marketplace the looming adoption of a common currency by the Gulf Cooperation Council has weighed down on the minds of many economists and market participants alike. With the adoption of the common currency tentatively scheduled for 2010 it is worth examining both the motivations for a common currency, and its implications in the global marketplace.

=====

Falling US Dollar and Trouble with the Trade Deficit

Ever since the falling dollar really hit the radar screen of the mainstream media, one predictable, knee-jerk response was that this would be a miracle elixir for our ailing export economy. Further, they asserted, the weak dollar would cure the trade deficit.

=====

Early U.S. copper futures fluctuate with dollar

U.S. copper futures at the New York Mercantile Exchange's COMEX division fluctuated in early business on Friday, with the market taking its short-term cue from the volatile swings in the U.S dollar, traders said.

=====

Weakening U.S. Dollar has China Exporters Looking to Other Currencies

Chinese exporters are moving away from the American dollar as rising labor and material costs are cutting into their profits.

The Financial Times cited the CEO of B2B company Web firm Alibaba.com, who said that the vast majority of the 700,000 Chinese suppliers are no longer using U.S. dollars to take care of non-U.S. transactions.

"They are moving to euros, pounds, Australian dollars or even quoting prices in renminbi (yuan)," CEO David Wei told the "Times."

Another drawback is when prices are quoted in U.S. dollars, they are now only valid for a seven day period, in contrast to the former 30-60 day periods.

So far in 2008, the yuan has climbed 3 percent against the dollar, but has declined against most other major currencies.

Dollar Returns to its Downward Trend

I don't think anybody really thought there was going to be a sustained rally with the U.S. dollar, as after a brief rally last week had some people almost euphoric and starting to talk as if something big was happening there. Most knew better.

Today the reality of the weakness of the dollar reasserted itself, as it continues its downward spiral.

Yen

For the third day in a row the yen increased against the dollar, as Japanese investors brought their money back home as concerns credit problems will spread across the world.

"Repatriation flows are likely to pick up and this will boost the yen," said Takuma Kurosawa, global markets treasurer in Tokyo at HSBC Bank, a unit of Europe's biggest lender. "Financial market turmoil increases Japanese investors' home bias. People are genuinely worried about the U.S. economy."

The yen rose to 98.72 a dollar, up from the 99.20 it was at late Tuesday in New York. Kurosawa added that the yen could trade as high as 95 a dollar next week.

Euro

Against the euru, the U.S. dollar fell to near a record low again, as more governments and investors believe the U.S. will have difficulty avoiding a recession. It traded at $1.5806, after the more significant 1.3 percent drop it experienced yesterday.

Yuan

The Chinese yuan rose to its highest level against the U.S. dollar since it dropped the peg in 2005, reaching 7.01 yuan to one dollar. That's up from the 7.0252 of Wednesday.

With the Chinese seeking to strengthen their currency, it's believe by analysts it'll drop below 7 yuan a dollar in a very short time.