This article is written and owned by Stephen Lau
Economists and government officials keep pointing to the
glimmer of light at the end of the tunnel. We are led to
believe that the worst is now more or less over.
Not so soon! Another perfect storm is brewing – the dollar
devaluation. The next financial crisis could well be the
dollar crisis.
The U.S. underlying economy is still very weak: business is
not expanding, and the credit crunch remains despite
bailouts and capital infusion.
According to a recent comment in the New York Times,
“the 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.”
Indeed, a perfect storm of the greenback is brewing, and
the reasons are obvious:
The U.S. government is spending more than its income, and
this has been going on for the past two decades.
The U.S. government is continuing to print money to bail
out its ailing economy, which seems like a bottomless pit.
There are trillions of dollars held by investors and
speculators outside the United States. Their sentiments
over the value of the dollar may shift anytime soon. The
value of the dollar is perceived merely in the eyes of the
beholders, many of whom are getting very nervous about the
prospects of their dollar-based assets.
Foreign governments, in particular, China, are becoming
more nervous and less patient of what the Federal
government is doing to their assets. Most recently, the
Chinese government told the American Treasury Secretary:
“We trust you to value your assets.”
Currently, the U.S. currency still holds its value, but
things could get nasty. A change of sentiments over the
greenback may lead to drastic decline of the dollar, and
this dollar crisis could be triggered by several factors.
A sudden move by the Chinese government to dump their U.S.
dollar-based assets could trigger a free fall of the
dollar. Everybody is banking on the presumption that such a
move by the Chinese government would not be in the best
interest of China itself (as a matter of fact, such a
drastic move would be suicidal to China’s economy and
detrimental to the welfare of its people). However, one
thing we must remember is that the current situation is
tantamount to the scenario of the game of musical chairs -
the music will have to stop sometime and somehow, and no
foreign government would like to be the last one to find
that there is no more chair to sit on. A dollar crisis
precipitated by dollar devaluation could lead to massive
exit of investors and speculators worldwide.
According to a recent report, Brazil and China will work
towards using their own currencies in trade transactions
rather than the U.S. dollar. This move follows recent
Chinese challenges to the status of the dollar as the
world’s leading international currency. In fact, China has
proposed replacing the U.S. 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.
Another factor that could accelerate the decline of the
dollar is inflation. For the past decades, the Federal
Reserve has been successful in curbing inflation while
printing money at a record level. What the Federal Reserve
has been doing is to allow the slow and orderly
dollar devaluation. The question is: Can the Federal
Reserve continue this reckless policy while focusing its
attention on how to put the economy back on its track? When
inflation would rear its ugly head again – it is a matter
of “when” and not “if” – that could be the demise of
the dollar.
Another factor that could trigger the sell-off of the U.S.
dollar is that a Treasury bond auction that does not go as
planned. The U.S. government cannot continuously borrow
from foreigners to make both ends meet.
Given that there are several scenarios that could spell
death for the dollar, and that its impact on the economy
could be much more devastating than the current bank
failure and foreclosure crisis, the U.S.government should
be bracing itself for the perfect storm – the dollar
devaluation.
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Stephen Lau is a writer and researcher. He has published
several books and many websites on money matters, health,
healing, depression, eating disorders, and golf. For more
information on finance and money matters, and also get your
FREE copy of the 143-page e-book recently published by
Stephen Lau, go to:
http://www.smartcreditsmartmoney.com/sm.html
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