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The end of the U.S. dollar era

 

It seems like a well known "dirty little secret" (except maybe in Washington) that the dollar is in deeeep trouble. Yet, most people in the United States don't know about it, or assume that since it has been going on for so long, it is just the way it is. According to many of the Nation's and the World's top authorities, after more than half a century as dominant global reference currency, the U.S. dollar is well into the early phases of losing its dominant status. As investors, this is the stuff we should really know about and understand, even if it is not popular. Our future wealth depends on it!

 

The beauty about historic data is that it does not lie. You can debate how strong or weak the dollar is, has been or is going to be, and who is to blame, but the facts lay it all out very clearly:

 

* Since 1971, when the dollar's gold peg was broken by President Richard Nixon ®, the U.S. dollar has lost over two thirds of its value against "hard" currencies like the Swiss franc

* Since the beginning of 2002, a little over 5 years ago, the U.S. Dollar Index has lost 33% of its value (it takes a 50% gain to make that up)

* Just this week, the U.S. dollar marked major lows against several currencies (e.g. the British pound and New Zealand dollar hit 26 year highs and today, the euro traded at an all-time high over the $1.38 mark!)

 

The U.S. dollar long term health history is best depicted by a plot of the U.S. Dollar Index, commonly referred to as the USDX . The USDX is the measure used most widely to gage how the U.S. dollar is doing against a basket of international currencies. The U.S. Federal Reserve Bank (Fed) began calculation of the USDX in 1973 to provide an external bilateral trade-weighted average. The six component currencies weighted against the U.S. dollar are: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. With the VERY long term support line right around 80.5, we stand near a deep precipice (today's close at 80.58!). If the index now closes and stays below that level, it means that the dollar is going much lower.

 

As the U.S. dollar is freely floated against global currencies, its value is set in the foreign exchange markets, and is ultimately dictated by the collective perception of global investors. The U.S. dollar is the common stock of the United States and, sooner than later it seems, the perception of its fundamentals and the confidence in management will reflect on the true future value of its shares.

 

Why is the U.S. dollar going lower? You take your pick:

 

* Global liquidity glut

* Long interest rates have changed their megatrend, upwards

* The housing market (e.g. subprime mortgage delinquencies at historic highs, foreclosure filings jumped to a new record during the first half of 2007- 926,000)

* The fiscal and monetary policies of the U.S. Government is leading to enormous triple deficits (Trade, Budget, and Current Account). Just this week, the Commerce Department announced a widening U.S. trade deficit, despite record exports

* Lower foreign appetite for U.S. debt (the Fed announced that in recent weeks, foreign central banks have become net sellers)

* A rapidly growing number of countries announcing plans to diversify their foreign reserves out of the U.S. dollar (e.g. China, Qatar, Russia, Sweden and United Arab Emirates).

* A rapidly growing number of natural resource countries will no longer accept the U.S. dollar as payment

* The on-going war on terrorism and exploding energy costs

 

It is hard to tell which of these factors comes first, which has the biggest influence, and which will trigger the next slide, but taken together they are formidable. The downward spiral appears inevitable as the U.S. Government, as so many before it, will likely continue to choose flooding the market with liquidity (debasement of the currency) over responsible fiscal and monetary policy (and economic depression).

 

Ultimately, what is playing out is a giant transfer of wealth, financial power and control (can you hear the sucking sound? ). It took a long time to gather up this financial "perfect storm" and it will in all likelihood take years to run its course, yet the speed and breath of what will occur will stun many.

 

 

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I think that is a very perceptive view of the US dollar. I don't agree with all of it, somewhat because my fortunes are tied to the dollar whether I like it or not. But it is getting the dickens beat out of it, due to our fiscal policies. If we were retiring the national debt instead of increasing it, I doubt that most of the things described would be happening.

 

That most Americans (citizens residing in the USA) are oblivious to this is very true. The Republicans dropped their traditional role of fiscal conservatism and started spending like the Democrats did when they ran things for forty years. Since we (in the USA) produce so little these days, I'm not sure what benefit a weak dollar has. But sadly those of us tied to the dollar via retirement are in for a rough ride in the next few years regardless of where we live.

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Bob Ward

I stay in touch with a friend who is a business manager for an international security firm (Mercenaries) based out of the UK but with worldwide partners. In fact they still do allot of work in Nicaragua for Oliver North's firm.

 

If you really want to know how the currency market is evolving, check with the people who stockpile large amounts of cash, the bad guys. Right now the hot currency for stockpiling is the Euro. It was 90% the US dollar for decades but the mix is 60% Euro to 40% USD at the moment.

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Alan S

Adter being THE currency of choice for many years, the US$ is now falling, and falling rapidly.

Way back, when I was in a bank, some of the so-called experts forecast this and were told by other alleged experts, that it would never happen.

 

It has. It will get worse.

 

A few days ago I saw the stats of US debt, which now exceeds that in 1929 (as a % of income) and we all know what happened then.

Sadly it may take a major depresson, as in the 1930's, before the US Govt, irrespective of which party is in power, tightens their belt and lives within their means, and that is what is needed to restore confidence and the $ value.

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smokey

i think the dollar is weak because of all the jobs leaving the us and the fact that the us spends so much on other countries needs.. Look at where we have military presence and think who pays for all of that... the oil north korea just received now i wonder who will pay for that? And the peso here i see over and over how strong the philippines is but i just don't see it.. As for the money coming in overseas.. isn't that money taking a hit on the exchange rate also..? And i think the vat money is being used by the central bank to prop up the peso and its all about the coming elections....for president ... i am not that smart on reading the numbers you see in the papers but i just don't see all this so called strenth in the economy here? They claim the vat collected 768 billion p in one quarter so where is it? i also read where the country will borrow another billion from japan for roads and a rail line?

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tom_shor
Adter being THE currency of choice for many years, the US$ is now falling, and falling rapidly.

Way back, when I was in a bank, some of the so-called experts forecast this and were told by other alleged experts, that it would never happen.

 

It has. It will get worse.

 

A few days ago I saw the stats of US debt, which now exceeds that in 1929 (as a % of income) and we all know what happened then.

Sadly it may take a major depresson, as in the 1930's, before the US Govt, irrespective of which party is in power, tightens their belt and lives within their means, and that is what is needed to restore confidence and the $ value.

 

 

Not a happy picture indeed. Hopefully someone will wake up in time to do something about it. We went off the gold standard and backed the dollor with our productivity and industry then we shipped the industry overseas.

 

Primatily to one of the countries that is dumping the dollar now. Anybody think this is a coincidence?

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donroberts

Many years ago (almost 50), when I was pontificating about the US trade deficit, a friend of mine pointed out that the Roman Empire never ran a positive balance of trade, but everyone kept on sending them lions & tigers, grain slaves & everything else they wanted anyway, as long as the Empire was the pre-eminent military power in the world. I recall reading a few newspaper columns by an economist named Eliot Janeway (dead now) about this. A strong nation will use it's power to create favorable arrangements in trade & thru treaties covering areas of interest to that nation.

 

The US dollar been the world's reserve currency since the end of WWII. Our currency became a "fiat currency" at the end of the Viet Nam war- When Nixon cut it's tie to gold. (Charles de Gaulle of France was active in the attack on the dollar at that time). For 30 years people have used these 'paper dollars' to settle international accounts. Central Banks can use these dollars to buy US Government Debt. The US government can use this money to pay up for everything: Social Security, Medicare, etc etc, & to create credit in the private banking system. Then us Americans can use this easy money to buy cheap stuff from China & everywhere else. This is a fragile arrangement. It makes US vulnerable to economic attack from China, Japan, the Petroleum exporters, etc. It leaves bankers in those countries holding huge quantities of depreciating, potentially valueless paper.

 

But it will continue to work as long as people believe in it. Economics strives to be a Science, but it's roots extend into the fields of Theology, Anthropology & primate Biology.

 

The emerging & re-emerging economies of the world will take a bigger piece of the world pie, and the US percentage will be smaller. The pie however is growing to be MUCH bigger, so I think our slice can be bigger than it was before.

 

The crucial matter is to not waste the military, cultural & economic strength of our country. The polarization that we see today has to end. We need more unity, less division. We need to get alliances in place to meet the new challenges we face: managing resource allocation & the rise of violent political movements originating in the areas we call 3rd world, but moving into Europe & North America.

 

Our leadership in the world has helped to create stability in Europe for the first time in almost 2000 years, & has been a big factor leading to the overall prosperity we see in the world today. This work has been done by Democrats & Republicans, moderates, liberals & conservatives. If we don't restore this bipartisan consensus, the Cathedrals in France will sprout minarets & Spanish will be the official legal language along our southern border, which will be renamed 'Aztlan' (google it). Look at the history of the Goths on the Danube border of Rome in the 4th & 5th centuries AD.

 

If we can reorganize our resources to retain our military & political power, we can continue to write our own terms of trade, & the shopping will not have to stop.

 

enough ranting from me, I have to go pack, I'm leaving for Cebu in 2 weeks, where I will have to stretch my money 20% more- The peso as a Hard Currency?? The Dollar is the new Peso?? Is there anything like Hamburger Helper that I can mix in with my dollars to make them go further?

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Bob Ward
Is there anything like Hamburger Helper that I can mix in with my dollars to make them go further?

 

Yes, they call it rice here! :crack-up:

 

BTW- I enjoyed your post immensely!

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jrincon17
Yes, they call it rice here! :sad_01:

 

BTW- I enjoyed your post immensely!

also with the amount of money we pour into CHINA is not helping the cause because of things going up. i think that they are trying to hurt them, maybe im wrong whats the difference between the 2 currencies over the last year?
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Pazific_Dreamz
also with the amount of money we pour into CHINA is not helping the cause because of things going up. i think that they are trying to hurt them, maybe im wrong whats the difference between the 2 currencies over the last year?

 

Right answer.

 

In addition

 

1. US trade deficit in relation to China is enormous and growing. This tradedeficit makes the value of the dollar go down. In the recent dispute on food-goods restricting imports both ways - China seems to come out stronger than the US. There is nothing that looks like this is changing. This means a USDollar in free fall.

 

2. The Iraq war is actually financed by loans every day. This also makes the dollar fall in value.

 

3. Iran is now demanding that everyone - Japan included - who are buying oil from them pay in non-US - currency. Japan now pays in Yen.

 

4. The bush administration seems to not care about the free fall of the dollar. What they could do is try for importrestrictions on goods from China, withdraw from Iraq and use diplomatic connection to persuade Japan to buy oil outside of Iran. But none of these actions seems very realistic at this point. I am sorry to say. But I beleive the dollar will definately fall to less then 40 pesos for a dollar. Simply because the dollar is in free fall.

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stevehann
But I beleive the dollar will definately fall to less then 40 pesos for a dollar.

This is the rate my wife expects by the end of this year.

 

We might have to do a recount of Americans living here if you two are correct.

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jrincon17
This is the rate my wife expects by the end of this year.

 

We might have to do a recount of Americans living here if you two are correct.

 

it will rebound they re doing this stuff on purpose

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it will rebound they re doing this stuff on purpose

 

44.80 for week-end, that's after freeing the Italian priest. after the SONA tomorrow, what will it be on Tuesday? And yet according to news, 7 out of 10 filipinos are getting poorer everyday, where's the logic there? :as-if:

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jrincon17
44.80 for week-end, that's after freeing the Italian priest. after the SONA tomorrow, what will it be on Tuesday? And yet according to news, 7 out of 10 filipinos are getting poorer everyday, where's the logic there? :as-if:

 

it would have been nice to start the forex trading when this downward spiral of the dollar started

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Pazific_Dreamz
it would have been nice to start the forex trading when this downward spiral of the dollar started

 

The dollar always rebounds. But it usually takes like half a decade for it to do so. And we have not seen the lowest exchange rate yet.

 

I would like to think there is some good reason for the strategy - but I daught what it is? Probably just for the benefit of some of the worlds richest and anonymous investors. Who owns Goerge Bush? There you have the answer.

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