Tuesday, March 20, 2007

The Dollar is Too Big To Fail . . . Or Is It?

Many countries have recently abandoned their currencies' peg to the dollar and/or abandoned the dollar as their reserve currency (link).

However, foreign countries hold many trillions of U.S. dollars. In addition, the U.S. (the world's top debtor nation) owes its creditor-nations tremendous sums of money.

Therefore, most financial analysts say that the dollar "is too important to fail".

Are they right?

Well, China and Saudi Arabia will keep the dollar from going under because:
"China benefits as the U.S. consumer stays in the game.

Saudi Arabia benefits by selling more oil, at high prices, as global demand remains intact.
In other words, the complete destruction of the dollar would destroy the ability of Americans to purchase imports. It would therefore hurt China and Saudi Arabia's economies, as China would not be able to sell as many goods into the U.S., and the Saudis would not be able to continue selling expensive oil to Americans. Similarly, Japan makes so much from its exports to the U.S. that Japan has, in the past, massively intervened to prop up a failing dollar.

Will foreign countries continue to prop up the dollar? In the short run, yes, because their economies are so dependent on the U.S. market, and they hold so many dollars that they can't induce a panic that would wipe out their value:
The United States Dollar has now achieved a level of “TO BIG TO FAIL.” Foreign holders of dollars are stuck with so many they must tip toe around the market edges in dumping dollars. If a global bank of any nation publicly renounced U.S. Dollars stating they were selling them out, the resulting bank runs would ruin the global financial system in a day.
Indeed, if the Euro's exchange rate compared to the dollar becomes too favorable, the European Union may cut interest rates in order to weaken the Euro, so that the EU's exports are not hurt.

But in the long run, countries will slowly get out of their dollar holdings. Why? Well, the European zone has become the world's largest market, and China is becoming the next economic superpower. The 5-trillion dollar Iraq war has destroyed America's economy, as have bad financial management by the fed. The dollar has become too weak and too unstable.

But countries will get out of the dollar in a way which does not cause a wave of panic which would render their dollar-holdings worthless:
Currently US owes foreigners over two trillion dollars. In addition many trillions of dollars are also held in foreign central banks. These countries are in trouble and they will try hard to stabilise the US economy, if only for saving their own money.

They just need stability to reduce their dollar holdings gradually and hence save as much of their reserves as possible. If they mention this openly, the dollar will collapse over-night and they lose. So the long-term plan would be to reduce their exposure to the dollar as gradually and as quietly as possible.

So in the short run, the dollar is too important to fail. But in the long run, it is not.

The dollar's moment has passed. The fed and some wealthy nations are simply playing a game to fool the American consumer into thinking everything is fine so that they will keep buying Chinese, Saudi and Japanese imports, and America can keep borrowing huge sums from China and the oil-rich countries, to buy enough time for the elite to withdraw their dollar assets so that the inevitable dollar bust doesn't wipe them out.

The fed has basically killed the dollar, but is acting like the dollar is as stable as ever so that the American consumer keeps on spending. Its like one of those comedy movies where the murderer kills someone, and then waves the dead guy's arms around so that no one gets suspicious that anything is wrong.

Anyone who thinks that it is unpatriotic to say that the dollar is dying is confused about what America has become. Modern America is more like its creditors -- communist China and the corrupt royal families of the Middle East -- than the America of the Founding Fathers. In borrowing and doing business with dictators and sheiks and communist bosses, America's leaders have become like them. The American people may be good, but our leaders have become corrupt elites.


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