The Sun Sets on the Dollar's Supremacy

According to a quote in the Telegraph, HSBC (HBC) has issued a new report stating that the Federal Reserve’s ultra-loose monetary policy is forcing China and other emerging countries to create a new global currency “order”. According to David Bloom, HSBC’s currency chief, the dollar looks like the sterling did after World War I.

For those a little dusty on their history, the British pound sterling (so called because its value was backed by sterling silver) was the world reserve currency until the 1930’s. After that, the sun set on the British Empire and the sterling was replaced by the US dollar. Now it seems the dollar's time in the sun has come to end as well. The Telegraph article states:

Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia’s “mercantilist mindset” of recent decades is about to be broken by the spectre of an inflation spiral.

A monetary policy of near zero rates – further juiced by quantitative easing – is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis.

Mr Bloom said regional currencies would emerge as the anchor for their smaller trading partners, with China, Brazil, or South Africa substituting the role of the US. Australia is already linking its fortunes to China through commodity ties.

This is nothing new, but it is the first time a major bank has openly stated this. But the important question hasn’t been answered.

What does it mean to the average American?

In order to obtain the necessary financing to fund the multi-trillion dollar stimulus/bailout package the government needs to sell bonds. Traditionally, the Chinese and other foreign governments have used their excess reserves of US dollars to purchase these bonds. If we switch to some other currency (or mixture of different currencies), the amount of US dollars held by foreign governments will decrease and the demand for US treasuries that yield next to nothing will decrease substantially. In order to entice the buying of these treasuries, the interest rates will have to jump substantially higher. And when this happens, the cost of the US government’s debt will start to rise. As will the cost of borrowing for US citizens and businesses. The government already pays nearly a billion dollars a day in interest payments (hat tip: Silver Bars Direct). If this cost were to double, and we add in the additional $9 trillion in debt the White House has admitted it is likely to borrow, we’re looking at over a trillion dollars a year in debt payments.

In order to repay this interest (and maybe the original principle too), do you think the government is likely to raise taxes or just print more money? If it prints more more, its just fueling the debt spiral which will lead to Zimbabwe-type hyper-inflation.

So what should you do?

Invest in hard assets that have been proven to keep their buying power during inflationary times. Along with gold and silver bullion, buy some cheap land to either farm, hunt or bury your precious metals! And if you’re one of those people who think buying gold and silver is useless then hold on to your dollars and watch them become even more worthless. Since 1900, when the dollar coin actually contained silver, the dollar’s purchasing power has dropped to only 4 cents. This trend is only likely to get worse.

Disclosure: I own gold & silver bullion, numismatic coins and mining stocks.

Comments

[doubleguns:]

Dollar down to 4 cents! 96 cent drop. Look at this from the other side of the equation. Dollar up 100% is back to 8 cents. woohoo, back to 16 cents up 400%, back to 64 cents up a whopping 1,600% now that's a return. Back to $1.00 is 2,400%.

We need a 2,400% increase to get back to where we once were.

Don't think we will see that kind of return any time soon. We have been screwed by our own govt that turned over the control of our money to the FED.

Sep 23 08:51 AM

[chap08:]

The need for a regional currency in Asia does not mean that China et al will stop buying treasuries. If they stop buying treasuries then their currency will rise and their exports will suffer. This would have politically disastrous consequences, so it's not going to happen. They will keep buying treasuries, but gradually diversify away as their domestic and other Asian consumer markets grow. That's a long term game.

Sep 23 12:16 PM

[Alan Young:]

Nice to hear about the rest of the world figuring out how to solve its problems without the US. I'd like more information about that, if you have it.

I looks from your chart like the dollar lost half of its value in a very short time during WWI, when it was still on the gold standard. That doesn't make a good case for gold standard as the protector of currency value. Since 1920--also from reading your chart--it lost an additional 92% in 89 years, just 1% per year. How much does it cost you to buy/store/insure your gold bullion--or land, for that matter? Maybe there's a case to be made for this kind of investment, but you haven't made it.

Sep 24 03:45 PM

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Sep 24 07:40 PM