What if dollar bubble bursts??!!

Right now I am not getting into if there really is a bubble and will it burst. We will discuss it sometime later. What we are talking right now is what if it does?

Have you hedged your position for such eventuality or you are over exposed?? Are you earning from a job, which is dependent on US and salary differential between India and US? Have you invested in Indian IT companies whose business model works on salary differential arbitrage?

You are still questioning the basic premises that dollar is going to burst...well lets discuss it. US is insisting China to depreciate its currency by 10% which means they admit that it’s over priced against Yuan. Indian rupee purchasing power parity (PPP) with dollar is around 15 (will check the figure), which the exchange rate is around 45. Which means its over valued against rupee too.

But the real problem is the amount of dollar reserve India and China are holding. India is holding around $150 billion and China another $600 billion. Just think what will happen if dollar starts depreciating? There would be a panic in these countries to convert its dollar to more stable currency like EURO, which would only accelerate the rate of depreciation of Dollar. We need to understand the strength of dollar lies in the confidence investors have in dollar...once that goes it would be go bust like a bubble. When will that happen is anybody's guess.

In fact every expert today agrees that dollar has to depreciate and its being artificially being kept up being the "World Standard" currency. But then it’s a double-edged sword. It has its benefit but once the confidence goes it would act against it. The only hope is that this slide would happen gradually so that nobody is hurt. It could happen if India and China decides to gradually convert their dollar reserve into basket of currency compromising of Euro, Chinese Yuan, Rupee and Dollar.

As you must be reading power equation in the world is expected to change and its expected that China and India will take over from U.S. Don’t you think that would also have a effect on the respective currency. My forecast is - the power shift would be gradual only if dollar depreciation is gradual.... THINK WHAT HAPPENS IF DOLLAR SUDDENLY CRASHES!!

If dollar crashes the so-called American multinationals would shift their corporate headquarters to India/ China because here is where the market and factory lies. Do not expect them to be loyal to US. They would behave like rats and would leave the sinking ship first. Yes, my prediction is that survival of these American MNC’s need not mean survival of America the Super power. (They may have to go through lot of mergers acquisitions, change of ownership etc.)

Other argument is - if there is a run on US currency they will use their oil reserve to fight it. Such distress sale never fetch you good money it would only lead to crash of oil prices too. (There would be downward pressure on the oil prices before the distress sale due to fall of US economy and this distress sale would only accelerate it)

Well dollar crash is not something India should be praying for because India is heavily dependent on US for its exports (software etc.) and dollar crash also leads to erosion of value of its foreign reserve. Same is the case with China. One option in front of them would be to pay back the dollar debts with these dollars but that depends on the maturity agreement of such loans. For business they would have to look across the Great Wall of China and trade more among themselves.

Its not, that, I am expecting this to happen soon. I am writing this blog just to suggest to Indian government two things:

1. Keep the foreign reserve in basket of currency rather then over exposing the country to fate of dollar

2. Look to develop trade with China; they are the partners we need in future. We compliment each other well in terms of strengths; we have control over 2/5 th of world market and geographically well located for trade. It’s time that we focus more on China and less on US.