"The dollar holds a privileged position as the dominant currency in the world. Global investors do not really have a serious competitor to investing in dollar backed securities. But, at what point does a coalition of the powerful finally decide that the risk of holding dollars is so great that they decide to create an alternative?
When the dollar completely erodes, we are in deep poo. Take the Great Depression and press on the gas pedal."
~ Mr. D, Who Is Bailing Out The U.S. Government ?, December 17, 2008
The coalition of the powerful, I spoke about last December, seems to be making their move.
Like Hillary Clinton recently boasted, "never waste a good crisis". Apparently the U.N. thinks that is a terrific idea.
"Now is the moment to think about a new global reserve currency," says currency specialist Avinash Persaud, a member of a U.N. commission of "experts on financial reform." This panel of "experts" will suggest this to the U.N. on March 25th.
The U.N. is not the only one grumbling about ditching the dollar. The Kremlin is pushing for it. Even little known Kazakhstan is pushing for a new alternative to the dollar, a global currency called acmetal. Clearly, there is a growing chorus of voices calling to shift away from the U.S. dollar to some kind of alternative currency as the store of value around the world.
What would happen if the world suddenly started dumping dollars?
Answer: the dollar becomes weak. Very weak.
What is bad about a weak dollar?
1) Inflation. Foreign made goods go up. How many of the things you buy are made outside of the U.S.? A lot. So your purchasing power shrinks. This has the exact same effect of your taxes going up or getting a pay cut from your employer. Either way, it hurts you.
2) Commodities prices go up ( oil, wheat, gold ). The effect is inflation. See point #1.
3) Global investors shift away from securities based in dollars because the dollar is no longer valuable. One of the biggest dollar backed security is U.S. Treasuries ... debt backed by the U.S. Government. Ever wonder how we are funding the bailout plus stimulus #1 plus stimulus #2 plus stimulus # n? Think we can simply tax the rich and get them to pay for it? Sorry, guess again. The answer is we are borrowing from the world, and there is still a market as long as our dollar has value. Take away our market for selling debt Obama's plans to save everything using the government evaporates.
Ultimately, higher prices hurts not only you, but hurts businesses as well because consumers have less money to spend. Less demand results in lower sales. Lower sales results in businesses laying off people which results in even weaker demand. Now, when demand weakens, businesses have to lower prices to sell things. That seems like a good thing, but in the extreme, it actually has a devastating effect on business. Don't forget, rapidly falling prices in the real estate market is what triggered the crisis we are currently in.
It is hard to see how an anemic dollar is a good thing ... no wonder the Kremlin is pushing so hard for it.
Friends, keep on eye on the talk about a "new global currency". It is a code word for throwing the dollar under the bus.
With the dollar ready to make its deepest plunge in 24 years, my question is, is this even on Obama's radar? Or, is he too busy unleashing scientists to tinker with human embryos while he basks in his stardom and makes lame jokes on the Tonight Show with Jay Leno?