The Crash has begun

The saga of the sagging American dollar continues. For the first time in 31 years, the Canadian loonie is stronger than the U.S. dollar.

In recent days, the dollar has also fallen to a record low against the euro for the seventh consecutive session.

Former U.S. Federal Reserve chairman Alan Greenspan said it is possible that the euro could replace the U.S. dollar as the reserve currency of choice.

Until the dollar might REALLY tanks, how dies the weakening dollar affect Americans? US consumers' standard of living may drop as they pay more for foreign goods, but demand for American labor will rise, say economists.

The last time that the buying power of the US dollar was this low was about a decade ago, and the major difference was that the price of oil ranged from $22 - 26 a barrel (in 2006 dollars). However, today the price of oil is about $80 a barrel.

Like when the buying power of the dollar was low, China's exports were tiny. The Census bureau reports the trade imbalance with China alone is $141 billion through July.

Globally, that skepticism has seeped over into the gold market and is one reason the price of gold is now above $732 a troy ounce, a 27-year high. So far this year, gold is up about 15 percent.

How the U.S. economy remains afloat

What does it mean that the US has a $800 billion trade deficit? It means that Americans are consuming $800 billion more than they are producing.

How do Americans pay for it? They pay for it by giving up ownership of existing assets--stocks, bonds, companies, real estate, commodities. America used to be a creditor nation. Now America is a debtor nation.

Foreigners own $2.5 Trillion more of American assets than Americans own of foreign assets. When foreigners acquire ownership of US assets, they also acquire ownership of the future income streams that the assets produce. More income shifts away from Americans.

How long can Americans consume more than they can produce? American over-consumption can continue for as long as Americans can find ways to go deeper in personal debt in order to finance their consumption and for as long as the US dollar can remain the world reserve currency.

Americans have increased their consumption by dropping their saving rate to the depression level of 1933 when there was massive unemployment and by spending their home equity and running up credit card bills.

Foreign governments and investors are diversifying into other traded currencies. As a result, the dollar prices of the Euro, UK pound, Canadian dollar, Thai baht, and other currencies have been bid up. In the 21st century, the US dollar has declined about 33 percent against other currencies. The US dollar remains the reserve currency primarily due to habit and the lack of a clear alternative.

[Excerpt of an article by Paul Craig Roberts, Assistant Secretary of the Treasury in the Reagan administration, and Associate Editor of the Wall Street Journal editorial page.]

Is China quietly dumping US Treasuries and buying Gold?

A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable.

"We won't know if China is behind this until the Treasury releases its TIC data in November, but what it does show is that world central banks are in a hurry to get out of the US. They don't seem to be switching into other currencies, so it is possible they are moving into gold instead. Gold is now gaining momentum across all currencies," Hans Redeker, currency chief at BNP Paribas said.

Any evidence that China was pulling out would risk setting off an unstoppable stampede, which is why such a policy would never be announced. It holds the world's biggest pool of resrves, followed by Japan.

While the greenback has been resilient over recent weeks, most experts believe that America's $850bn current account deficit will eventually cause the dollar to resume its relentless slide.

[Excerpt of an article by Ambrose Evans-Pritchard, The Telegraph]