Collapse of the Dollar: Truth or Fiction? (Pt 2)

by The Wall Street Geek on June 8, 2009 · 1 comment

On May 15th, Rep. Ron Paul popped up on Morning Joe to perform his periodical “he may be onto something, but he’s scaring the hell out of me” commentary. Click here to see it.

Although the US market enjoyed a rise since Ron Paul’s commentary a month ago, the question still remains: is the dollar in danger of disappearing?

Current US Dollar Reserve Currency Status

Consider this chart courtesy of the IMF, which shows the percentage of global commerce that each currency represents (note that the Euro was created in 1999):

 Collapse of the Dollar: Truth or Fiction? (Pt 2)

  • Most transactions globally are still overwhelmingly performed in US dollars–it’s currently the world’s reserve currency. If you travel to Europe or Asia, for example, you may get away with using dollars in some places to buy things instead of converting to another currency first and paying the conversion fee.
  • Since there’s still a strong market for US dollars, the cost to the US government to borrow money is relatively low. It’s also cheaper for the US to buy commodities such as oil since the US doesn’t have to convert to a different currency first.
  • Other countries–in particular, China and Japan–are even hoarding dollars to keep dollar demand high vs their own currencies, which encourages US dollar holders to buy their cheaper goods since the exchange rate works in the Dollar’s favor.

But notice something disturbing about this chart? The Euro is increasing its share while the Dollar is decreasing. Which leads one to ask…

What is the Future of the Dollar’s Reserve Status?

Many economists–including Alan Greenspan–say that it’s conceivable that the dollar will lose its reserve currency status by 2020 if other countries in Europe adopt the Euro or if the Dollar continues to decline in value. Which means international commerce will become more expensive to the US, which may cause a blow to our rich and well-positioned economy.

One of the biggest threats to the value of the dollar is inflation. Inflation rises when there are too many dollars chasing too few goods.

The US has been forced to print money in order to pay for bailouts since it’s unable to borrow enough to cover the cost. While this kept the US economy from hitting a brick wall in 2008 by preventing further banking collapses, printing extra money is known to encourage inflation and $1000 loaves of bread.

Inflation is usually managed by raising interest rates. But with folks on Main Street needing to borrow money to start businesses towards creating more jobs, the US can’t raise interest rates and make these loans more expensive to pay back.

Also, why would countries such as China continue to hoard the Dollar if US consumers aren’t buying Asian exports (because consumers are saving more)? This may cause the US to lose Asia’s support in keeping the US as a reserve currency if the Euro continues to increase its percentage of global commerce.

What’s Next?

In my mind, it’s no coincidence that higher car efficiency standards and green energy are key initiatives–perhaps to prepare the US to not be in a position to buy overseas commodities like oil made more even more expensive if the Dollar is no longer a reserve currency. (And note to investors: these may be areas of growth to invest in).

However, losing reserve currency status means the loss of worldwide strength and perks listed above. It’s like losing your American Express Platinum card and getting a Duane Reade card. No offense to Duane Reade, but their card can’t get you preferred treatment.

Also, US consumers seem to have the choice between higher interest rates (which may mean more expensive loans) or inflation in the next few years as the ramifications of the money printing settle in.

So what’s a US economist to do? Another solution has been floating about: The Amero.

Yikes! Stay tuned…

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Price CapitalAfter turning $1100 into $7015 in the stock market right out of college, Michelle worked 15 years on Wall Street at Morgan Stanley, Citigroup and Goldman Sachs. She wrote "How to Buy Stocks Online", and is a fee only financial advisor providing investment help in New York City.


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