Watch out, the greenback is going into the toaster oven...here's what Nouriel Roubini had to say in The New York Times:
"We may now be entering the Asian century, dominated by a rising China and its currency. This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable."
Yes, it could take more than a decade. But investors could take a big loss any day. All it would take would be a sudden move by China...or a shocking inflation figure in the United States...or a Treasury bond auction that doesn't go as planned. Everyone is watching the United States...carefully. And foreigners hold trillions' worth of dollar- based assets outside the United States. These are dollars that people hold, not to pay their bills or buy gasoline, but as a speculation. They're speculating the greenback will hold its value as well or better than the other things they might do with their money.
Europeans hedge their bets against the euro - with dollars. Asians hedge their bets against falling stock prices. Russians hedge their bets against the ruble. Latin Americans hedge their bets against their own pesos, bolivars, and cordobas. Everybody likes dollars because they are the most trusted money in the world. For the last 50 years, nothing could compete with the dollar. (Even though the dollar lost value against a number of other currencies over long periods of time.)
These foreign holders are already nervous. They've seen the mess the United States has gotten itself into. They read the headlines. They watch the news. They know that the United States is running a budget deficit this year equal to four times the biggest budget deficit ever - a record set just last year. It is as if a runner broke the record in the 100-yard dash...and then ran the course four times faster a year later. This is not progress. This is spooky.
The Chinese already let the United States know they are worried.
"We trust you to protect the value of our assets," they in essence said to the US Treasury Secretary.
And in the middle of May 2009, from the Financial Times comes news that Brazil and China are working toward using their own currencies in trade transactions rather than the US dollar.
This comes on the heels of the news that China's central bank governor Zhou Xiaochuan proposed to create a reserve currency "that is disconnected from individual nations."
What Mr. Zhou would like is to replace the US dollar as the world's leading currency with a new international reserve currency, possibly in the form of special drawing rights (SDRs), a unit of account used by the International Monetary Fund.
Then in June, Russian President Dmitry Medvedev questioned the US dollar's future as a global reserve currency and said using a mix of regional currencies would make the world economy more stable. Russia may consider ruble-yuan swaps.
The dollar "is not in a spectacular position, let's be frank, and its prospects cause various questions as do the prospects for the global currency system, " Medvedev said in an interview published by the Moscow-based Kommersant newspaper. Regarding the global financial system, "therefore our task is to make it more mobile and at the same time more balanced."
But for now, as long as these countries trust the United States to keep its promises and protect its money, they continue to hold US dollar investments - notably, US Treasury bonds. But just wait until the United States loses their trust. In a matter of minutes, China could dump enough US dollars to set off alarms all over the world. All of a sudden, dollar holders would rush for the exits - each one trying to get out before the others. In minutes, the dollar market could collapse...taking down US Treasury bonds with it.
Regards,
Bill Bonner and Addison Wiggin
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Bob on 23 September 2009:
Do you really think the Chinese govt are that stupid? The quote earlier in the article should be obvious enough. They want to protect their assets and they will until the time is right and they have diversified enough of their treasury holdings into real stable assets - commodity's and precious metals which is what they are doing at the moment. They're not dumping US dollars anyway but using those "defunct" assets to secure real assets - real wealth to help setup a new monetary system that would be a lot more diffcult to just inflate away. The NWO is losing it's grip
Comment by Julian Tonti-Filippini on 23 September 2009:
The Chinese spruiking of SDRs is a bluff. An SDR is simply represents a basket of currencies so there is *nothing* to stop China from already emulating SDRs by diversifying into multiple currencies, but they have instead chosen the USD.
And that won't change in the short term because it can't. Spreading out of the USD means shifting the USA's deficit to, primarily, Europe and Japan, which is simply not a politically acceptable scenario in either region.
As much as China hates the USD, China is stuck with the USD for now. There is an exit strategy in place being conducted through establishing direct currency swaps with trading partners, stockpiling durable commodities, and encouraging local consumption to replace foreign demand, but it will take many years, during which time China is actively cycling out of longer dated US Treasuries into shorter dated ones, explaining the inverse yield curve.
Ultimately, yes, the USD is doomed. Foreign nations will dump bonds, placing upwards pressure on yields. The Fed will have no choice but to create fresh new money to buy and rescue yields, thereby preventing a surge of mortgage defaults and associated bank failures leading to more bailouts. Meanwhile, the BRICs have already shown a strong desire to purchase precious metals, placing huge pressure on PM shorts that are now at record levels, potentially triggering an explosive short-squeeze. Both factors together spell inflationary death for the USD.
But not yet...
Comment by GaryB on 24 September 2009:
China has kept its currency undervalued for a long time - perhaps this has been a significant factor in the mess the US has got itself into. It's now a race to the bottom for the USD, so the Chinese will have to act or they'll be shafted.
Comment by georgia on 27 September 2009:
Only a decline in USD will assist the US to get out of its situation - therefore a good thing in my view. They can rev up the factories and produce for the world. That's how the 'Asian' tigers did it and that's how Oz managed to escape the Asian financial crisis. Not sure how we are going to escape this one when the AUD is priced so high and exports are too expensive. We can ofcourse just buy and sell real estate to each other....
Comment by Ned S on 28 September 2009:
GaryB - One bunch of currency manipulators (the US) moaning about another bunch of currency manipulators (China) being currency manipulators doesn't cut it - It's a red herring.
Think the Fed, almost two decades of Greenspan, a desire to get all the benefits of capitalism's booms while dodging all the busts, low interest rates, removal of regs that used to prevent excessive bank leverage, popularist policy makers helping poor people who couldn't afford them buy houses, non-recourse loans resulting in minimal accountability, false AAA ratings from the ratings agencies, the sale of toxic assets by the financials of a country that relies on those financials to earn a living rather than doing productive things and lots of middle class Americans with a resultant false sense of prosperity buying lots of stuff they never needed to create a "consumer based economy." With the latter concept being a total nonsense I fully suspect?
The facts are the US has not been productive or frugal for a very long time and has lived significantly beyond its means. If the US can accept that, it would be a good start.
And yes Georgia, part of the solution is for the USD to start to reflect its true value based on the state of the US economy and the nation's future prospects rather than some artificial status as the global reserve currency. Which will mean that those who are invested in it long term will take a hit I guess. With the lesson being don't invest long term in tired old democracies where the people have a high standard of living supported primarily by central bank fiddling and earnings from the country's financials.