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I have lost confidence in US Dollar and I am betting that Dollar will soon crash. These sorts of things don’t happen very often and therefore so called ‘experts’ (Microsoft Excel operators) will not be able to predict it. But once in a looooooong while these things happen as it happen with Russian Rouble. Russia was looked upon as superpower when that happened and predicting crash in their currency was nothing less than blasphemy then. Eventually it happened and then people marked those events as end of USSR era. I believe the current period will go down in history as end of USA era.
As I had mentioned 3 years back here in my blog the underlying asset to Dollar is Confidence and not Gold as it should be. And as you know the confidence is a very fickle asset, you don’t know when it disappears.
Newsweek: "Americans are glum at the moment. No, I mean really glum. In April, a new poll revealed that 81 percent of the American people believe that the country is on the "wrong track." In the 25 years that pollsters have asked this question, last month's response was by far the most negative. Other polls, asking similar questions, found levels of gloom that were even more alarming, often at 30- and 40-year highs………… "
Dollar is the prime currency today and is the standard for international trade. Almost all of international Crude Oil trade happens in Dollar. Most of the trillion dollar reserve held by China is in Dollar and same is true for more than 300 billion dollar reserve of India.
For decades now dollar has been the acceptable standard and nobody ever questioned it. After the Bretton Woods Agreement in 1944 when dollar became the international standard for trade, USA was supposed to keep Gold as underlying asset. However, in 1971 USA, unilaterally, has done away with that practice and has been happily printing Dollar ever since with Confidence as the only underlying asset. Till date Confidence has been an appreciating asset all the while with USA companies ruling the world economics. But with the turn of events over the last 12 months – Housing price crash, subprime, Credit crisis, bankruptcy of banks and financial institutions, bankruptcy of automobile companies - USA looks much more venerable today. This bubble has built up over the years as USA kept borrowing from the world to meet the domestic consumption bill of its nationals. CDOs etc had managed to delay the inevitable by creating fake confidence, but then it can only delay.
I believe the current government will continue to delay the inevitable will all kind of financial jugglery just to keep Republican chance alive in the next election. But the new government will have to clean the house and we can expect Dollar Crash prediction coming true around that period. In the meanwhile like Indian Government, USA government will keep on increasing the deficit bill (by off balance sheet items) impact of which will be felt with a lag only after the elections.
Frankly all countries will get adversely impacted by the Dollar Crash in the short term but for the long term general good it’s high time that World practices some “currency diversification”. Few major impacts against which countries & companies should guard against are:
1. Holding all or substantial part of Foreign exchange reserve in Dollar or Dollar denominated US government securities. India and China both are running this risk and I believe many more country is doing the same. It’s high time that we diversify.
2. International trade in critical items like crude only in dollar is another big risk. You don’t know when exactly the music will stop and you should guard against being caught with the parcel when the music stops.
3. Financial instruments which increase your exposure to Dollar. In the current world of financial derivatives, carry trade etc there may be many financial bombs hidden in your treasury department which you might not be aware. Its time to check your cupboards.
4. There are other risk like too much dependence on USA for exports which is difficult to diversify in the short term (IT companies face major risk here)
Sudden move by countries like China and India to diversify there foreign exchange reserve risk or move towards crude trading in currency other than dollar can trigger the crash but we don’t have any other option but to walk the thin ice. Sooner than later the ice will melt.
USA Government and especially Fed are trying to avoid the inevitable. Now it’s a matter of your confidence in their capability to tide over this crisis. I don’t have the confidence and hence I suggest diversification. (Note even if the dollar crash doesn’t happen there is nothing to loose by diversification. Diversification to currency like Euro will only help in the long run).
As I had mentioned 3 years back here in my blog the underlying asset to Dollar is Confidence and not Gold as it should be. And as you know the confidence is a very fickle asset, you don’t know when it disappears.
Newsweek: "Americans are glum at the moment. No, I mean really glum. In April, a new poll revealed that 81 percent of the American people believe that the country is on the "wrong track." In the 25 years that pollsters have asked this question, last month's response was by far the most negative. Other polls, asking similar questions, found levels of gloom that were even more alarming, often at 30- and 40-year highs………… "
Dollar is the prime currency today and is the standard for international trade. Almost all of international Crude Oil trade happens in Dollar. Most of the trillion dollar reserve held by China is in Dollar and same is true for more than 300 billion dollar reserve of India.
For decades now dollar has been the acceptable standard and nobody ever questioned it. After the Bretton Woods Agreement in 1944 when dollar became the international standard for trade, USA was supposed to keep Gold as underlying asset. However, in 1971 USA, unilaterally, has done away with that practice and has been happily printing Dollar ever since with Confidence as the only underlying asset. Till date Confidence has been an appreciating asset all the while with USA companies ruling the world economics. But with the turn of events over the last 12 months – Housing price crash, subprime, Credit crisis, bankruptcy of banks and financial institutions, bankruptcy of automobile companies - USA looks much more venerable today. This bubble has built up over the years as USA kept borrowing from the world to meet the domestic consumption bill of its nationals. CDOs etc had managed to delay the inevitable by creating fake confidence, but then it can only delay.
I believe the current government will continue to delay the inevitable will all kind of financial jugglery just to keep Republican chance alive in the next election. But the new government will have to clean the house and we can expect Dollar Crash prediction coming true around that period. In the meanwhile like Indian Government, USA government will keep on increasing the deficit bill (by off balance sheet items) impact of which will be felt with a lag only after the elections.
Frankly all countries will get adversely impacted by the Dollar Crash in the short term but for the long term general good it’s high time that World practices some “currency diversification”. Few major impacts against which countries & companies should guard against are:
1. Holding all or substantial part of Foreign exchange reserve in Dollar or Dollar denominated US government securities. India and China both are running this risk and I believe many more country is doing the same. It’s high time that we diversify.
2. International trade in critical items like crude only in dollar is another big risk. You don’t know when exactly the music will stop and you should guard against being caught with the parcel when the music stops.
3. Financial instruments which increase your exposure to Dollar. In the current world of financial derivatives, carry trade etc there may be many financial bombs hidden in your treasury department which you might not be aware. Its time to check your cupboards.
4. There are other risk like too much dependence on USA for exports which is difficult to diversify in the short term (IT companies face major risk here)
Sudden move by countries like China and India to diversify there foreign exchange reserve risk or move towards crude trading in currency other than dollar can trigger the crash but we don’t have any other option but to walk the thin ice. Sooner than later the ice will melt.
USA Government and especially Fed are trying to avoid the inevitable. Now it’s a matter of your confidence in their capability to tide over this crisis. I don’t have the confidence and hence I suggest diversification. (Note even if the dollar crash doesn’t happen there is nothing to loose by diversification. Diversification to currency like Euro will only help in the long run).
3 comments:
Diversification, not only in currency, but assets like gold, silver, Crude all is required
Even though some of the points you have raised makes lot of economic sense, but I guess world is not as rational as Economist would like us to believe. I think you have missed 2-3 main points in making the doomsday scenario:
TINA: First You need other currency replace dollar. Rouble was never used as an standard. I think the closest is euro conseriding yuan is not even floating yet. There is a pretty gud article in economist regarding eurozone performance and you will realise that its performing even worser than USA. Also without Britain, most of these markets are pretty much closed to the international set of investors who like to take money in and out at a drop of hat. As present there is no currency that can even stand to dollar. May be in 20 -25 years, yuan may become one.
Military power: Whether we like it or not, world has only one super power and that's US. It spends more on its military then next 10-12 countires combined defence budget. Even most optimistic predictions states that China will take another 20 -25 years to reach where USA is today. Let's not even talk about India even though I would love to be it there. Euro zone has always been a follower of US and it has never taken a lead (to the best of my knowledge) in any major military warfare. I think its difficult for me to believe that saudi arabia will even think of shifting to some other currency for oil trade without being risk bombarding as it has always been one of the stronger supporter of terrorims funding. Just to remind you most of 9/11 supporters / executors were saudi arabians.
Dominance of US firms:
Just take up the latest issue of Forbes and you will just realise the sheer dominace of US companies in the world. All the largest commodity / stock exchanges are in USA. Unless the country is closed to outside investment, there will be atleast 5 financial houses in top 10 belonging to US. It becomes difficult to believe that they will stop trading in dollars. Simply Because except for US government, nobody is going to help them when things become bad.
Dollar crash: A dollar crash will make all the foreign exchange of trillions in emerging countires go up in smoke. I doubt any body including emerging mkt / OPEC will want that to happen.
I think we have heard this before so many times. till a few days back there was a circulation that some oil exchange is going to open in Iran and then Dollar will go bust. so on and so on. not sure abt Dollar but am quite sure that exchange would have got bankrupt by now.
US will always be land of excesses. The boom will always be better than what any rationality would like us to believe and then the inevitable bust will always happen and that will again be much worser than rationality. So you got to live with it.
I agree with you on one basic point that things are going to get become much worser in US but i refuse to believe that other countries will be any better. So we all will be worser off, US may be slightly higher but still not enough for the doomsday.
Hi Neeraj,
Nice article. I was also shocked when i read about the malpractices followed by US Govt. to keep the Dollar demand high i.e. Dollar Hegemony.
Just to elaborate a little in your article, after 1971 when US could no longer afforded to give Gold in exchange with $ (1 ounce of Gold = $35), they come up with this idea of replacing Gold with Oil and influenced Saudi Arabia (largest producer in OPEC) to make Oil sale in US $. Since then, crude have been traded in US $ and there are only two major oil exchanges viz. NYSE and London Stock Exchange (not surprisingly, NYSE has major interest in London Stock Exchange). Both these exchanges, naturally, will not let crude to trade in any other currency but US $.
Now, lets come to Iraq War. In late 90's Saddam Hussain decided against the crude trade in $ and come up with Oil for Food program. US Govt. was never going to be happy with this and they made several attempts to stop it. And post 9/11, they found a reason to camouflage their attempts to protect the $ demand with destroying so called WMD in Iraq. Similar thing they are trying now in Iran who have taken a bold step to start an Oil exchange where anybody can sale in Euro, Rouble and Yen.
You may find this speech interesting:
http://www.house.gov/paul/congrec/congrec2006/cr021506.htm
Also, search for petrodollar/petroeuro in Wikipedia to know more about Iran's attempts to start an Oil exchange
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