UN Report: The Dollar's Imminent Collapse is Being Caused by U.S. Debt

It is not a matter of “if” the dollar will collapse, but “when” it will collapse. At Gold Stock Bull, we think the dollar could fall below 80 cents before year end. Once that support gives, it is anyone’s guess how low it could drop.

The U.S. dollar is facing imminent collapse in the face of an unsustainable debt.

At a UN Headquarters press conference, launching the 2007 World Economic Situation and Prospects Report, mid-year update, Rob Vos, the Director of the Development Policy and Analysis Division of the Department of Economic and Social Affairs (DESA), told reporters that,

The United States debt, which has now deepened to well over $3 trillion, might turn out to be unsustainable in the rest of 2007 or next, putting further downward pressure on the United States dollar.

He also pointed out that since its peak in 2002, the dollar had depreciated vis-a -vis the major currencies by some 35 percent and by 25 percent against a broader range of other currencies.

Let’s take a closer look at some of the statements that came out of the U.N. press conference:

With that increased debt, the risk of a sharp depreciation of the dollar continued, he warned. If countries willing to invest in United States dollar assets expected further depreciation, they might be less willing to hold dollar assets, triggering a much sharper fall in the U.S. dollar. The risk of disorderly adjustment and the steep fall of the dollar existed. The policy challenge was how to prevent a hard landing of the U.S. dollar, and forge a benign adjustment of the global imbalance.

In terms of the United States housing sector, he noted that a recession in the housing sector had continued in 2007, with a slowdown in activity and a large number of unsold homes. While house prices had not fallen, that might happen in the months and years to come if the recession continued as expected. A decline in prices would affect the domestic market, particularly household consumption in the United States, resulting in the risk of a serious recession in its economy, slowing growth from 2.1 per cent to 0.5 per cent in 2007 and 2008. That would then significantly slow the world economy and transmit the recession into the rest of the world.

The U.S. deficit had increased to $860 billion at the end of 2006, and was expected to fall to $800 billion in 2007. That deficit was basically being financed by surpluses in the developing and oil exporting countries, as well as some major developed countries, in particular Japan and Germany. The European Union, at large, was projected to continue to have a slight deficit on its current account.

Continuing, he said the current tendency in macroeconomic policy was not all in the right direction, particularly in the surplus countries where there had been a tightening of monetary and fiscal policies, particularly in Germany and Japan, making it more difficult for the United States to lower its external deficits by export growth. The United States would also need to adopt some contractionary policies to slow down its deficit, he recommended.

The flurry of new ETFs in the past few years has offered better, lower-cost ways to play specific industries, foreign markets and even foreign currencies. Take for instance, the Currency Shares Euro Trust (FXE). This ETF holds euros and after 18 months of existence, has topped $1 billion of assets under management. Year to date, the fund is up 1.8%, and since its December 2006 launch, it has surged 12.8%.

Of course, our favorite way to play the coming dollar collapse is with gold and gold stocks. You gain additional leverage with the stocks and hold a tangible asset with the metal. After all, the euro is also a fiat currency backed by nothing but faith in the European Union. The chief ‘asset’ of the euro is its extreme youth, and the absence of many years of accumulated euro denominated debts around the world.

View the full U.N. press release.

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Comments

[CrossProfit_:]

There is a contradiction in the UN report.

If the Dollar is going to collapse, then house prices will increase - not decline. The collapse of the Dollar would cause stagflation. Everything would go up, perhaps not in real terms, but definitely in nominal terms as prices maintain currency equivalent value. Currency equivalent value (CEV) is a term we use in order to simulate hyperinflation.

I disagree with this scenario, just thought that the contradiction should be pointed out.

Disclosure: This is the opinion of a CrossProfit analyst and may not reflect the opinion of CrossProfit.com.
www.crossprofit.com

2007 Jun 05 06:07 AM

[Tom B:]

"He also pointed out that since its peak in 2002, the dollar had depreciated vis-a -vis the major currencies by some 35 percent and by 25 percent against a broader range of other currencies."

I was under the impression that the dollar had pretty much already collapsed. You really think it hasn't bottomed, with debt so high already and GDP so awful? The nice thing about the dollar is that US, at least, is in a moderately safe part of the world. I see geopolitical unrest in many other places-- the Middle East, Korea, Southeastern Asia.

2007 Jun 05 08:51 AM

[k_denninger:]

I believe we could see a break below 80 this year, as do they, and the low 70s is not beyond the realm of reason at all.

2007 Jun 05 09:53 PM

[flow5:]

The further it falls, the cheaper our stocks, bonds, & real estate - which will cushion and limit its fall (PPP).

2007 Jun 06 10:48 AM

[flow5:]

Gold decoupled from gold in 71 for only 1 reason. The U.S. had a net liquidity deficit in every year since 1950 (with the exception of 1957), Up to 1976 (when the private sector contributed its first trade deficit ) these deficits were entirely the consequence of excessive U.S. government unilateral transfers to foreigners (re: foreign policy – solely our far flung military bases and personnel).

The U.S. will always have a current account deficit because of our insistence on being the world's policeman and our dependence on foreign oil.

In the long run, the United States will be forced into (1) a high degree of economic isolation, (2) reflect an increasingly totalitarian mold, (3) and will only be capable of operating under a command economy.

2007 Jun 06 11:07 AM

[k_denninger:]

We do not <b>need</b>... to be dependent on foreign oil. We have more than enough for the next 50 years right here offshore our coasts, and another 50 in shale out west on FEDERAL lands.

We just refuse to go get it. That's all.

It is a choice; nothing more or less.

2007 Jun 06 11:36 PM

[User 220514:]

"We do not need to be dependent on foreign oil"

We are not dependent on foreign oil. We are dependent on the sale of oil in DOLLARS ONLY. Even if America produced all it's oil, we would still need to control the world's oil markets to keep our dollar in circulation. Our dollar is backed by oil. Oil is sold in dollars only (this is not law - it is U.S. policy enforced at gunpoint). If you want to buy oil, you must have dollars. This is the reason the world holds our currency. Products flow into the U.S. and dollars flow out so the world can buy it's oil. This is why we have become a nation of consumers. With our excessive debt and risky foreign policies the world has lost confidence in our dollar. If the world adopts a stronger currency (euro) for the oil trade our currency will collapse and U.S. military intervention in the world will cease. (A prime reason for the world to abandon the dollar). In November 2001 Saddam switched the Iraqi oil market to Euros and his profits soared. The world (especially OPEC) took notice. Although it did not do significant damage to the dollar, Bush realized, that if OPEC abandoned the dollar for the euro as well, America would collapse. We invaded and a few months later Iraqi oil was again traded in dollars. This is what Bush meant by "mission accomplished". He was informing the holders of U.S. currency that the threat to the dollar had been eliminated. This is also why we have been informed that the 911 hijackers were Saudi. It was a clear warning to the Saudi's that if OPEC dropped the dollar we would use this as an excuse to invade them as well. Oil must be traded in dollars to ensure the survival of America's currency. When Iran announced their intention to replace the dollar with the euro, they joined the "axis of evil" and became a "nuclear threat". No problem with Chavez until he commenced direct trade of oil and bypassed the dollar. The War on Terror is actually a currency war against the stronger euro. Producing our own oil to meet our domestic needs is not even an issue in America's foreign policy.

2008 Jul 01 05:31 PM