Thursday, October 15, 2009

The Demise of the US Dollar

The US dollar, as we know it, is dead. There.... I said it. The currency will never disappear, but the 'greenback' will no longer be considered the premier currency in the world. It may maintain its status as the world reserve currency for the foreseeable future. But, this will probably change at some point. China and other countries are already buying more gold and other currencies instead of the US dollar.

The current administrations ability to spend money is driving the dollar into oblivion. Yes, the currency will bounce back from time-to-time. And, we'll hear rhetoric about how 'a weak dollar helps exporters'. But, truth be told, a weak dollar is inflationary... pure & simple.

Oil is settled in dollars and as the dollar falls, a barrel of oil continues to rise. The media will lead you to believe this is due to an economic recovery. This may have some validity. The bigger story though is a weak dollar = higher oil prices = inflation.

Our government informs us inflation is about 2% per year. Does anyone really believe this? The last time I checked bread, milk, fruit & vegetables, prices have almost doubled in the last few years. Even something as simple as a can of tuna fish went from $0.99 to $1.29 (+30%).

Admitting there is high inflation would require the government to raise social security payments. With the current financial state of the system in question, what's the likelihood of the government fessing up to the real rate of inflation? It's like the fox guarding the hen house. It's not going to happen.

A balanced budget is key to monetary policy. With a deficit growing larger by the minute, there is no way the dollar can maintain any resemblance of stability. It's the NZ Kiwi, Australian Dollar, Swiss Franc and to a smaller extent Euro & gold that is gaining in popularity.

The economic power shift is taking place. Throughout history, it was the manufacturing nations that rose to greatness. Spain, France, UK, United States and now China represent the changing of the guard. The key to all of the greatness... manufacturing. Making products at competitive prices is the key to success. Now that the US is a service oriented economy, we no longer have the edge.

We will continue to be a great nation. A symbol of freedom. However, as an economic force, we have handed off the baton.

1 comment:

Anonymous said...

A bold and thought provoking statement my friend. Although I hate to admit it, I think you're right on the money. I think the only point I might differ from (only slightly) is the comment on manufacturing. While it's still a huge component of GDP, there has been a fundamental shift in what a "healthy and modern" economy looks like, which accounts for a smaller component of traditional manufacturing, and a growing component of high tech industries, such as software development. As a nation matures and develops it seems to progress toward higher-tech industries eschewing (and in some cases exporting) the traditional low-tech industries of the past. There are growing pains with lost jobs (as is the case with telephone based customer service reps), but ideally those that lost the lower tech job will be re-trained in a higher tech field to fill a demand newly created by innovation.

In that respect I believe the U.S. holds a significant advantage in technological innovation over other nations which will bolster the economy for the short term. However – this will not hold up over the long term against a crippling deficit. It’s more of a band-aid on a bullet wound.

Tom J