Inflationomics

Several More Cracks in the Dollar Dam

  1. As confidence in the U.S. dollar wanes, gold’s popularity rises. More and more people are realizing that gold (and silver) are safer (as a store of value) than are paper dollars.

    Not only are central banks becoming more reluctant to sell their gold holdings, but some nations are actively trying to increase their gold reserves. China, in particular, with more than one trillion U.S. dollars in reserve, is trying to accumulate gold as quickly as possible without causing a panic rush into gold. A panic would raise gold prices quickly, thus defeating China’s ability to accumulate more gold at a reasonable price and simultaneously reduce the value of its U.S. dollar holdings. In fact, China is requiring a majority of its domestic gold mines to sell their finished product to the Chinese central bank. Even U.S. citizens are demanding more gold and silver coins than the U.S. Treasury can produce.
  2. The flip side of central banks’ move into gold is that they are shying away from U.S. debt and the dollar as the world’s reserve currency. Although the U.S. dollar is still the world’s reserve currency, the BRIC countries (Brazil, Russia, India, China) are starting to purchase fewer U.S. Treasury instruments. If this trend continues, there may come a time when the U.S. Treasury will have difficulty selling its instruments. Should this occur, the Fed may have to either purchase the instruments, or bribe foreign central banks to purchase U.S. Treasuries.

    Would the U.S. government ever allow certain foreign entities the right to purchase U.S. assets with their dollars? A trade of fiat currency for hard U.S. assets!!! Probably not. They’d rather fight than sell. Consider the political backlash and withdrawal of CNOOC’s bid to purchase Unocal in 2005.
  3. China, Russia, India, Brazil and other countries are moving to avoid the U.S. dollar in transactions among themselves. There is a movement to go directly from one currency to another without using U.S. dollars in the middle. There’s also more talk these days of establishing a supranational currency to replace the U.S. dollar as the world’s reserve currency. It might be comprised of a basket of fiat currencies, or the IMF could develop a currency. While no one has yet suggested the supranational money of the ages—gold —someone will eventually figure out that the use of gold would be the best way to preserve the capital that is the lifeblood of a stable economy.
  4. Interest in U.S. Treasury securities is waning, except by the Fed and other central banks. Of course, the Fed can set up middle-men to purchase the Treasury’s debt in the short run (to make it look like the Treasury’s debt is still in demand) and they can allow foreign central banks to swap their debts for U.S. Treasury debt, thus monetizing the U.S. government’s debt.
  5. The weight of U.S. public and private debt is becoming unbearable. Defaults and bankruptcies are on the rise. Banks, in turn, are failing in record numbers. The FDIC is trying to protect $7 trillion of U.S. bank deposits with $42 billion in reserves. The U.S. government budget deficit is growing daily. It’s becoming more difficult for the U.S. government to maintain the value of its I.O.U.s, i.e., the U.S. dollar.

When will the dollar dam burst? When will the world lose confidence in the U.S. dollar’s value? It’s hard to know, but one thing is sure—we’re getting closer every day.

For an excellent and related article, click here.

Robert Jackson Smith

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