Thursday, June 04, 2009

The Future of the U.S. Dollar

America’s trading partners do not have large enough trade surpluses to finance a federal budget deficit swollen to $2 trillion by gratuitous wars, recession, bailouts, and stimulus programs. Moreover, concern over the dollar’s future is causing America’s foreign creditors to seek alternatives to US debt in which to hold their foreign reserves.
  • Russia’s central bank now holds a larger proportion of its reserves in euros than in US dollars.
  • China has increased its gold reserves by 75% in recent years.
  • The governor of China’s central bank is calling for the abandonment of the dollar as reserve currency, using the International Monetary Fund’s Special Drawing Rights in its place.
  • China and Brazil are considering bypassing the dollar and conducting their mutual trade in their own currencies.
  • Chinese officials [indicated] that neither China nor the entire world has enough spare money to purchase $4 trillion of US Treasuries over the next two years.
  • [Meanwhile] War, bailouts, and stimulus plans have pushed the Obama administration’s annual operating budget 50% into the red.
  • Federal Reserve Chairman Bernanke thought he could push down interest rates on Treasuries by purchasing $300 billion of them. However, the result was to cause a sharp drop in Treasury prices and a rise in interest rates.
  • Every sector of the US economy is in trouble.

As monetization of federal debt goes forward, US interest rates will continue to rise, worsening the problems in the real estate sector. The dollar will continue to lose value, making it harder for the US to finance its budget and trade deficits. Domestic inflation will raise its ugly head despite high unemployment.

The next shoe to drop will be the dollar’s loss of the reserve currency role.

[Excerpt of a review by Paul Craig Roberts, Assistant Secretary of the Treasury in the Reagan administration]

1 comment:

Grant Montgomery said...

This week Russian President Dmitry Medvedev played regional power broker, hosting China and Central Asian nations for a summit in Russia. The 8-year-old Shanghai Cooperation Organization is dominated by Russia and China and includes Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, with countries such as India, Iran and Pakistan holding observer status.

President Medvedev opened the two-day meeting by saying the group would discuss the global financial crisis as well as the key issue the organization was created to address: regional security.

The summit was followed late Tuesday by the first full-fledged summit of BRIC, a group linking the emerging economies Brazil, Russia, India and China.

Medvedev made statements to the effect that existing reserve currencies, including the dollar, have not performed their function, and a new supranational currency was in the making.

Meanwhile a decision by China to reduce its US Treasury holdings suggests concern about the US attitude towards its economic woes.