J. D. Heyes
June 6, 2013
As high as food and gasoline and other basic commodities are across the U.S. these days, they would cost much, much more were the American dollar not the world’s reserve currency. Economists have known that for decades.
But the U.S. dollar’s status as the global currency of choice is fast coming to an end, as our government continues to spend trillions of dollars more than it takes in annually, even though it is already at a level that can never be repaid, even if with the wealth of the entire world combined (as of this writing, that amount is approaching a mind-numbing $125 trillion-plus).
The U.S dollar is shrinking as a percentage of the world’s currency supply, raising concerns that the greenback is about to see its long run as the world’s premier denomination come to an end.
When compared to its peers, the dollar has drifted to a 15-year low, according to the International Monetary Fund, indicating that more countries are willing to use other currencies to do business.
The U.S. currency is still king of the hill – for now. It makes up $3.72 trillion, or about 62 percent, of the $6 trillion in foreign exchange holdings by central banks around the world. But other currencies – the Japanese yen, Swiss franc and what the IMF counts as “other currencies” such as the Chinese yuan – are gaining ground fast. So much so that monetary experts already see a day of the dollar’s demise.
‘…The United States is the loser’
“Generally speaking, it is not believed by the vast majority that the American dollar will be overthrown,” said Dick Bove, vice president of equity research at Rafferty Capital Markets, in a note. “But it will be, and this defrocking may occur in as short a period as five to 10 years.”
How does Bove figure that? Several metrics are involved, but collectively he focuses on the U.S. dollar as a percentage of the world’s total money supply. And that global total has decreased dramatically – from 90 percent in 1952 to something like 15 percent today. Bove also told CNBC that the Chinese yuan, the yen and the euro have captured greater shares of the world’smonetary reserves.
“To the degree that China succeeds in increasing its market share of the world’s currency market, the United States is the loser,” Bove said. “For years, I have been arguing that the move of the Chinese makes perfect sense from their point-of-view but no sense for the Americans.”
China has been accused by the U.S. for years of artificially deflating its currency to boost exports. But successive U.S. administrations have done nothing about it except allow the Chinese to capture an ever-increasing share of the U.S. consumer market – wealth Beijing is using to build a more powerful military and expand Chinese influence in regions of traditional U.S. hegemony.
And, as the U.S. deficit grows, the decline of the dollar becomes more serious. Per CNBC, “For a country with a budget deficit in excess of $1 trillion a year, the consequences of losing standing as the world’s reserve currency would be dire.”
‘The No. 1 security issue…’
“If the dollar loses status as the world’s most reliable currency the United States will lose the right to print money to pay its debt. It will be forced to pay this debt,” Bove explained. “The ratings agencies are already arguing that the government’s debt may be too highly rated. Plus, the United States Congress, in both its houses, as well as the president are demonstrating a total lack of fiscal credibility.”
The talk of economic recovery in the U.S., buoyed by a stock market setting record highs, has pushed the issue of U.S. debt under the radar. But Bove and other experts see it as pure nitroglycerin set to explode.
“If (dollars) no longer offer the safety that investors have come to expect, they will not function as the stable collateral required by bank funding markets,” Barry Eichengreen, a professor at the University of California, Berkley, warned in a Financial Times piece late last year. “They will not be regarded as an attractive form in which to hold international reserves. And they will not be seen as a convenient vehicle for merchandise transactions.”
Adds Michael Pento, president of Pento Portfolio Strategies: “The No. 1 security issue we have as a nation is the preservation of the U.S. dollar as the world’s reserve currency. It’s a thousand times more important than a nuclear bomb being tested by North Korea. It’s a thousand times more important that we keep the dollar as the world’s reserve currency, and yet we are doing everything to abuse that status.”
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This article was posted: Thursday, June 6, 2013 at 8:44 am