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.




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Collapsing US Dollar Driving Gold Prices

The continuing weakness and collapse of the U.S. dollar is driving gold prices as much as anything else, as in terms of the U.S. dollar, gold broke an all time record again, reaching $1,500 a troy ounce, as investors ignore the plunging jewelry demand from India and other nations and look toward safety and an inflation hedge.

To get a grasp of how weak the U.S dollar is, in other currencies gold is far from breaking records, as in being measured by the yen it's 15 percent below their all time record in gold, and the Australian dollar is even stronger, being 30 percent away from their all-time high for gold prices as measured by their currency. Even against sterling gold is 6 percent away from record past highs.

Again, gold is being moved by the increasing lack of faith in the U.S. dollar, along with complete uncertainty on the condition of the economy, as mixed signals and postive thinking reports from the government continue to hide the real condition of the global and U.S. economy, which is probably much worse than being reported.

The response to the U.S. dollar shows investors believe this completely.

U.S. Dollar Still Under Pressure

As some foreign currencies respond to their own pressures and result in raising of interest rates, the decision by the Federal Reserve to hold its rates down will continue to put downward pressure on the collapsing U.S. dollar, as the Fed holds to its loose monetary policy.

Other growing factors of concern for the dollar are the increasing number of countries calling for either a new reserve currency, basket of reserve currencies, or to trade in targeted sectors like oil not using the dollar as the currency used for trade.

That will also continue pushing the price of gold up as investors migrate to the yellow metal to hedge against the inevitable inflation coming, and which some say is largely understated by the U.S. government.

Jim Rogers: Inflation Going Higher

U.S. Dollar Inflation

In a recent interview, Jim Rogers said that the U.S. government is lying about inflation, and that the current rate is probably more around six to seven percent, in contrast to what is being asserted.

Rogers simply points to the obvious, that when you go out shopping, the prices are definitely higher, and obviously that can't be spun by the government.

The best play going forward, according to Jim Rogers is to invest in gold and commodities, as raw materials will outperform other assets in the future.

U.S. Dollar Inflation

Sell Dollar Investments Fast

The warning is getting stronger as time goes on from about any credible investor in the world, that the U.S. dollar is on its way to crashing, and those heavily invested in dollar-denominated vehicles will be crushed if they don't get out of them as soon as possible.

At minimum, we should at least own something not denominated in U.S. dollars, and weight our investment portfolios in that direction.

Even today it was announced the Federal Reserve is going to continue to buy up mortgage-backed securities, to the tune of over $500 billion more through April 2010. That means even more dollars are going to be printed to pay for all of that, again, putting even more downward pressure on the U.S. dollar.

If you're overexposed, you'll sink along with the U.S. dollar collapse, don't let that happen to you while you still have time to change things.

Julian Robertson: Betting on Inflation

One of the greatest hedge fund managers that has ever lived - Julian Robertson, said in a recent interview on CNBC that he was just about betting everything on the inevitable inflation, which will decimate the U.S. dollar.

He stated one of the key problems with the U.S. financial policy, and that is that it has led to complete dependence on China and Japan buying our debt if we are to economically survive, or at minimum, we'll face "severe economic problems."

"It's almost Armageddon if the Japanese and Chinese don't buy our debt,” Robertson said in the interview.

Concerning inflation, Robertson stated, “If the Chinese and Japanese stop buying our bonds, we could easily see [inflation] go to 15 to 20 percent. It's not a question of the economy. It's a question of who will lend us the money if they don't. Imagine us getting ourselves in a situation where we're totally dependent on those two countries. It's crazy.”

Roberston added that while the Chinese probably won't stop buying US bonds, it's quite possible the Japanese will, and sell their long-term bonds, which he said would be worse than someone not buying at all.

"The U.S. has to quit spending, cut back, start saving, and scale backward Robertson said. "Until that happens, I don't think we're anywhere near out of the woods.”

While Robertson said he thinks the recession is in a temporary lull, because so many of the financial problems haven't been dealt with, and the Federal Reserve hasn't stopped printing money, that could readily change.

He said it's impossible to pay back what we've borrowed, and the only change of that remotely happening is if the Chinese and Japanese continue to buy bonds from the U.S.

As a result, Robertson is betting a lot of his fortune on the fact that inflation will eventually come and soar, something all of us at minimum need to be financially defensive about.

Marc Faber: Ignore Ben Bernanke

Marc Faber

Marc Faber is advising people to not keep their investments in the U.S. dollar, and not to invest in things like US bonds.

As far as the assertion by Ben Bernanke that "We will keep inflation in check," Faber says to completely ignore that fantasy.

Why Faber says this is the inevitable need for the U.S. government, via the Federal Reserve, to print more money, which will continue to put downward pressure on the greenback. He said with someone like Bernanke running the Federal Reserve, we need to operaton under the assumption the U.S. dollar will be worth close to zero, if not zero. He reinforces what he has said in the past, that we shouldn't in any way trust the Federal Reserve.

Faber instead says investors should place their money in investments that will hold their value, using gold as one of the options investors need to have some of their money in.

Over the next 10 years, Faber points to the soon rush to retirement of Baby Boomers, who will put increasing demands on Medicare and Social Security, which, along with other areas, will force the government to print an enormous amount of money.

That will result in even more inflation, and the loss in buying power of the U.S. dollar, if not its complete collapse.

Marc Faber

Dollar Plunges on Inflation Fears

Weakening Dollar

The U.S. dollar plunged against the Euro, pound, and numerous other currencies today, as renewed concerns about inflation drove up the prices of commodities, with many investors adding raw materials like soybeans, copper and oil to their portfolios.

Investors fled government bonds and the dollar looking for a hedge against inflation, as many are expecting the outrageous spending of the Obama administration to devastate the greenback, bringing enormous inflation for the years ahead.

"A falling dollar is viewed as inflationary," said Richard Feltes, senior vice president and director of commodity research for MF Global in Chicago. "The best inflationary hedge is typically to increase one's exposure to commodities."

Another positive thing for foreign investors is the weakening dollar allows them to buy the dollar-denominated commodities at bargain prices as their currencies strengthen against the U.S. dollar.

While the weather looks like it's cooperating with grains in the U.S., that won't matter for some, as while supply is increasing with wheat, for example, global demand is falling, which has caused wheat future prices to drop over the last couple of months, while being down by 33 percent from last year.

Along with gold, silver, oil and gas, many other precious metals also increased in value, including copper, aluminum and platinum. Heating oil also rose to $1.8713 a gallon.

Among the metals, copper continues to be a huge winner, as it has closed at a 10-month high, gaining 4.4 percent, much of that coming from increased demand from China, whose manufacturing sector has started to rebound a little, promising potentially even more demand.

Some are trying to twist this into some type of recovery, but in general, it's not huge demand driving these prices up, but the expected inflation coming from the weakening U.S. dollar; that, more than anything, will continue to spur foreign investment in commodities which is a bargain for them.

Weakening Dollar

How Long Will the U.S. Dollar Continue to Rise?

... At least as long as it takes for investors to unwind their positions.

The major reason behind the strengthening of the U.S. dollar is the money investors borrowed over the last several years that is now being called in by lenders.

With the vast majority of that debt being dollar-denominated, it has forced investors to do whatever they can to find greenbacks to pay off those loans. That, of course, has pushed up the value of the dollar.

The majority of this is happening because of the positions held by institutional investors.

Even though this is all true, the tremendous upward movement of the dollar is due for a correction, and I would think it will have to happen sometime soon.

In reality, the dollar really isn't stronger than other currencies, as explained, but it is the currency used in most transactions that have to be unwound. Once that period of time is over, we'll see tremendous downward pressure on the dollar as inflationary pressures once again dominate the currency.

Still, the dollar is expected to continue rising, even though it will experience temporary breathers and drop over a few sessions during this time of unwinding.

U.S. Dollar in Strongest Showing Against Euro in 20 Months

The U.S. dollar continues to strengthen, as it had its best showing against the euro in 20 months. Much of this is generated from the possibility of a second financial rescue package by the U.S. government, along with talk of a second stimulus package as well.

Commodity prices of responded by continuing to plunge in the short term as the dollar-denominated raw materials continue to struggle, even though underlying fundamentals haven't changed.

Fear will keep this trend going for a time, but as Jim Rogers says, we're now in a "forced liquidation" stage for commodities, but once liquidity comes back to the market, we'll see commodity prices go up again, as demand has only slowed down, but the commodity bull market will now be longer than originally expected because of the financial crisis.

In the short run we'll see the commodity market slow in growth as countries cut back on or put off projects. In the long term we'll see things return to where they've been concerning commodities. We will also see the dollar weaken significantly again in response to the ill-advised bailout that will eventually pummel the dollar and increase inflation from pouring more greenbacks into the economy.

Weaker US Dollar and Related News

Dollar slides on higher US inflation, oil gain

FOREX-Profit-taking, weak stocks drag US dollar lower

U.S. inflation pressures mount

Dollar Gives Crude a Lift

The Dollar, Oil and Airlines: A Nice Relationship Until The Government Steps In

Gold firms as US dollar eases but uncertainty remains

Gold ends up; weak dollar fuels commodities rally

Canada's Dollar Rises as US Dollar Falls, Commodities Rebound

Canada's Dollar Rises as US Dollar Falls, Commodities Rebound

U.S. Dollar Mixed Against Latin American Currencies

The U.S. dollar was mixed against its Latin American counterparts, as it fell to a multi-year low against the Mexican peso, while also falling against the Colombian and Chilean pesos on Friday.

Against the Brazilian real the U.S. dollar increased from multi-year lows, while it also gained against the Peruvian Sol.

Citing inflation concerns over food and commodity prices, the Mexican central bank held interest rates where they were, as inflation was higher than expected in the early months of 2008. The dollar ended the session at 10.4706, after falling to a low of 10.4348.

After falling to muli-year lows earlier in the session, the dollar gained some back against the Brazilian real, reaching a high of 1.6730.

At about mid day, the dollar fell to a low of 454.75 against the Chilean peso, in contrast to the high of 459.65 it reached on Thursday.

Against the Peruvian Sol the dollar went as high as 2.7235, after reaching 2.7175 the day before.

The Columbian peso gained against the U.S. dollar, as it went to 1786.00 on Friday, after weakening at 1794.50 earlier in the day.

Investors Ignore G-7 Currency Shift

Seeming to think the the warning by the G-7 about steep fluctuations in the exchange rates could cause harm to the global economy, French Finance Minister Christine Lagarde talked down to investors saying they don't understand the significance of the G-7's shift in its outlook on exchange rates.

That was in response to the ongoing decline of the dollar which is starting to impact exports from the strengthening currencies of other countries.

Legard said in an interview: "It's a strong statement which I am not sure the markets have yet fully understood and appreciated."

My thought is: Who cares? That's why it's called a market, and market forces are impacting the currency rates; that's how it should be. To attempt to strenghthen the U.S. dollar so European companies can benefit doesn't do anything for Americans.

Until there are real actions taken, rather than just talking the talk, most investors aren't going to sell their euros or other strong currencies in order to listen to some bureaucrats who want their interests to be put ahead of others.

U.S. Dollar Weekly News Roundup

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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.

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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.

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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.

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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.

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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.

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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.

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