U.S. Dollar: Still the World's Reserve Currency?

Although the film below is outdated and does not reflect the recent swing towards the dollar, it still rings true and projects where it will go. I also don’t see other currencies being too successful either, because they aren’t backed by gold. That is the reason why I strongly support gold, silver and oil (streetTRACKS Gold Shares (GLD) iShares Silver Trust (SLV), U.S. Oil Fund ETF (USO) or BP plc (BP)).

Gold and silver are great, but its oil’s time to ’shine.’ It might take some time before it catches fire again, but it definitely will, once the impact of the recent doubling of the FRB (Federal Reserve Bank) Balance sheet is felt. Because the FRB uses a fractional reserve system, which allows it to lend $75 for every dollar it ‘has,’ this means that the Fed has the ability to monetarily create $150 trillion from the $2 trillion it currently has on its balance sheet. When this money is lent out, commercial banks can then turn around and lend at least ten times this amount, so this could possibly turn into $1,500 trillion. Wait, what is that - a quadrillion? Within a few years, that could be the next term to become familiar with (we’re only recently coming to terms with a trillion). This is starting to sound suspiciously like Russia, when they used their currency as toilet paper and barreled it to the store. Are we going to see a return of the $1,000 and $10,000 and $100,000 bills?

There are two ways to capitalize on this:

1. One is to have fixed rate debt like a 30-year fixed mortgage. If inflation doubles dollars, then your $1000 mortgage has just effectively become a $500 mortgage. However, inflation is not a good thing, because salaries typically do not keep up with it.
2. The other is to put money into commodities, which are the universal currency and were the original currency, like the old school fur traders, or you can short the price of the treasury bond through the ProShares UltraShort Lehman 20+ Year Treasury ETF (TBT). Essentially, this says that the demand for dollars will go down and thus the price of bonds and the yields will go up. I explain this in another post.

Disclosure: The author owns USO and BP.

Comments

[bluesmoke:]

I haven't been able to verify this, but I heard several middle east countries are supporting the idea of a new currency backed by - you guessed it - gold. Any truth to that?

Feb 12 09:33 AM

[manya05:]

bluesmoke, it is not a rumor, it is a fact. Sometime late this year or early next, all Gulf states will attempt to achieve monetary union (like Europe) and use their own currency no longer pegged to the dollar. It will be like the Swiss franc, partially backed by gold, but not totally. Details are still sketchy but all Gulf states are currently trying to stabilize their currencies against each other so they can all jump on a common currency in 2010.

Feb 12 10:43 AM

[wmh:]

blue, do you have a link? I have not yet seen this confirmed.

Feb 12 01:31 PM

[Dirk McCoy:]

There's no way the Fed creates $150 Trillion in money, or debt. Bank lending pulls money from the Fed, not vice-versa, and the banks have excess reserves they're not currently lending, and until asset deflation and economic destruction settles down, the demand and supply of credit will continue to contract.

Zimbabwean money printing would need to be created to change this dynamic ($10-20 Trillion), and that's not happening- the general consensus today is that $2 Trillion of sterilized Fed balance sheet increases and up to $10 Trillion of Fed loan guarantees is already aggressive.

There are too many dollar-denominated goods and services available in the US and the rest of the world for the dollar to become worthless, even with trillions of new dollars.

Feb 13 12:59 AM

[kelm:]

It is a sure bet that if some large trading nation or group of nations moves to a gold peg the global reserve currency dynamic will make a violent shift to the extreme detriment of the dollar. To me this is the kind of seriously-dark-swan that the vast majority of people content in their myopic view of the US dollar are failing to think about.

I'd love to see a link, any link to the mid-east shift that is discussed above.

I presented a similar brainstorm scenario some weeks ago on my site involving China (now the largest gold producer)

www.murdockglobalinsig.../

Feb 13 12:00 PM

[CJJ:]

Why exactly would the Gulf nations creating a unified currency "partially" backed by gold be a plus for them. There is no proof one way or another on that.

Also, these countries can't do anything together smoothly, why do are they getting a free pass on this. It has just as much chance to be a negative for the region as a positive.

Feb 22 04:05 PM

[Sean Privitera:]

Great discussion-

Bluesmoke- I haven't heard anything formally, but I have heard about a new currency that the middle east was trying too start for oil, but it couldn't be finalized because the underwater cables were cut "accidentally". Sounds 'fishy'. Either way you look at it, it won't be an overnight collapse, and might not happen for a few years yet, but one indicative sign that it is coming is the change to oil trading denominated in Euros now instead of dollars.

Feb 22 08:22 PM