Death of the Dollar

We’ve all done it, haven’t we? Chucked something in the wash and turned it on too high, only to see it pop out at the end of the cycle and it ends up the size of your hamster. Well, Obama has been doing the same. Except this time it’s not your winter woollies that he’s shrinking, it’s the greenback.

The US currency is shrinking as a percentage of world currency today according to the International Monetary Fund. It’s still in pole position for the moment, but business transactions are showing that companies around the world are today ready and willing to make the move to do business in other currencies.

The US Dollar has long been the world’s number one denomination in world currency supply. It represents 62% of total holdings in foreign exchange in central banks around the world. But, it is in for a tough race from up-and-coming strong currencies. The Japanese Yen and the Chinese Yuan are both giving the Americans a good run for their money. The Swiss franc is too (surprisingly).  There is $6 trillion in foreign exchange holdings around the world at any given time, on average and the US Dollar represents almost two-thirds of that.

The fact that Brazil and China have also just signed a currency-swap deal worth something to the tune of $30 billion stands as living proof that the dollar may be further on the wane. China will exceed all expectations in the future as the world’s largest economy. The US will be overtaken. The Chinese currency will one day overtake the Dollar too. Has to be!

Although, it’s not quite there for the moment. China is not near being the world’s reserve currency yet. In order to be the world’s reserve currency there would be the need to produce enormous quantities of what the world wants. China has got that one off pat already. Then, countries holding the reserve currency would need to be able to spend that currency elsewhere in other countries or find a place to put it while waiting to do so. World capital markets are currently in dollars (40%), which means that there would be no possibility of using the Chinese currency. But, that’s only a matter of time. Some are predicting this will happen pretty soon.

The Federal Reserve has come in for some strong criticism over the unconventional Quantitative Easing methods that have resulted in 3 trillion spanking new dollars rolling off the printing presses. This has certainly brought about some degree of worry around the world that the dollar is not quite as safe as it might have been thought to be in the past. Is the world worrying that the dollar is not as safe a bet as it used to be in world domination. Are central banks worried that it will shrink in the wash and the colors will run?

Some are predicting that the dollar will shrink rapidly over the next two years and it will lose its top place as the world’s reserve currency by 2015. In the 1950s the dollar was 90% of total foreign currency holdings around the world. The dollar has definitely lost out to other currencies that are stronger. If there is a continued move and the dollar shrinks, then the resulting catastrophe that will ensue will have a spiral effect on the already enormous US budget deficit (over $1 trillion a year on average).

The only reason the Federal Reserve has been in a position to print more money recently is simply because they are in the strong position to be able to do so as the world’s leading reserve currency. If that changes, then the Americans won’t have the possibility of just hitting the button and setting the printing presses rolling. That means the US will be in no other position than to end up having to pay their debt back.

The US economy and the market are starting to show signs of recovery. Signs. It’s not sustained, hope as they might. If the dollar loses its attraction, then it won’t be used as the international reserve currency. Businesses will start using another currency and the dollar will lose out further still.

Some experts are saying that the problems of the dollar are like a time-bomb ready to explode. Ultimately, it will bring about the death of the dollar. As we stand on and watch, huddled around the coffin as it is lowered into the ground, we know it’s all too late. The flowers have been sent and the Stars and Stripes has been played in recognition of loyal service for the nation.

The QE methods are nothing more than aiding and abetting the already problematic situation of the greenback. We might look back in years to come and reminisce over whether it was the right (long-term) solution to use QE, whether printing bucks sent the greenback to an early grave, or whether it just reached the end of its life and croaked peacefully without making too much noise.

But, criticism of and worry over the dollar and its longevity have been hot topics for years now. The US dollar is a fiat currency that can easily lose status, deriving its value from government regulation and law. But, then again, so is the Euro. So, people living in Europe shouldn’t start throwing stones…they live in glass houses too…and that’s before they start.

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  • Olivier

    Reply Reply May 30, 2013

    In terms of "officially unredeemable" currencies, the USD doesnt have much competition. If anything, the Renminbi is much worse, and I don't even see why someone would mention the Japanese Yen. With stock markets at all time highs, the USD is still ripping. But of course it will die, as its issuer will never redeem it for specie. The first convincingly redeemable currency to come will start the fire. Until then, I would do as Marc Faber says and diversify. One quarter in physical gold in a safer place than the US. But as a trade, I remain long USD for now.

  • sharad avasthi

    Reply Reply May 31, 2013

    interesting view but I doubt the time frame by when china would topples us or more rightly when the dolars fiat status will be reversed

  • Mussad

    Reply Reply May 31, 2013

    I don't think USD will die any time soon. Any major currency out there is fiat money, and every government could start the printing press at any time. You can hide in this ultra-globalized-financial-world.

  • Mussad

    Reply Reply May 31, 2013

    *you cannot hide

  • Dan Golay

    Reply Reply June 1, 2013

    You didn't mention the petrodollar. That's what keeps the US in the world reserve currency driver's seat. Of course it doesn't help that China is building an oil refinery in Saudi Arabia and if the Saudi's start taking non-dollars for oil - we're cooked. No more middleman cut for us. BTW no one cuts us out of our oil profit skimming operation/ DOD protection racket. Saddam found that out the hard way.

    All those $3T QE bucks we exported overseas to be hidden away and diverted as global petrodollars will come back to our shores as a massive sh*t tide. As economist Paul Craig Roberts points out, the world can absorb only so many QE petrodollars so we can't export our inflation forever.

    The 12 family Federal Reserve elite is desperately trying to keep the fiat dollar scam going as long as possible in a desperate attempt at inflating bubbles and suppressing real competing money like gold. History shows Central Banks using fiat currency last on average 30-40 years before they collapse thru inflation.

    This fiat dollar scam started in 1971 when Nixon took the dollar off the gold standard and it's been about 40 years - so we're due for a dollar inflationary sh*t storm if history is any guide. Bernanke puts on an impressive confidence show, but deep down these crooks are running scared and don't know what the hell they are doing.

  • tony

    Reply Reply August 19, 2013

    the US dollar is created out of debt. In a debt collapse, lending and borrowing will cease and those who hold dollars in their hands will do very well. Those who have digital dollars might find out that they have lost their monies as defaults proliferate.
    If the dollar collapsed in value, that actually would be great for the US govt because it means their debt would be wiped out. That is not going to happen.

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