There's a financial crisis taking place all across the globe, and many Western democracies are facing bankruptcy and social unrest. And thanks to the actions and policies of the last 2 administrations here in the US, America's economic future is hanging by a thread too.
The US dollar is in serious trouble. The Federal Reserve has printed so much money over the past decade, the dollars "reserve currency" status provides nothing but a false sense of security. America's economy is facing a doomsday scenario crash, and the central banks are preparing for a post-dollar world.
Suiting Up for a Post-Dollar World
To begin, the People's Bank of China has just this week decided to permit a wider trading range between the yuan and the dollar. This is the first step toward ending the infernal yuan-dollar peg. While the impetus behind this abrupt change remains a mystery, I have a sneaking suspicion that, as my colleague Neeraj Chaudhary explained in his commentary last week, the nationwide labor strikes were a prime motivator.
In response to the 2008 credit crunch, the Fed printed so many dollars that the People's Bank of China was forced to drive Chinese inflation into double digits to maintain the peg. The pain has fallen on China's workers, who have seen their wages stagnate while prices for everything from milk to apartments have skyrocketed. This week's move indicates that, regardless of its own policy motives, the Communist Party can no longer afford to keep pace with the dollar's devaluation. The result will be a shift in wealth from America to China, which may trigger a long-anticipated run on the dollar, while creating investment opportunities in China.
Just days before China's announcement, Russian President Dmitry Medvedev rattled his monetary sabre by telling the press of his intention to lead the world toward a new monetary order based on a broad basket of currencies. Giving strength to his claim, the Central Bank of Russia announced that it would be adding Canadian and Australian dollars to its reserves for the first time. Analysts suggest that the IMF may follow suit. While Russia floats in the limbo between hopeless kleptocracy and emerging economy, it does possess vast natural resources and a toe-hold in both Europe and Asia. In other words, it will be a strategically important partner for China as it tries to cast off dollar hegemony.
Speaking of Europe, the major powers there are moving toward a post-dollar world by rejecting President Obama's calls to jump on America's debt grenade. The prescriptions coming from Washington translate loosely to: our airship is on fire, so why don't you light a candle under yours so that we may crash and burn together. Given that dollar strength is largely seen as a function of euro weakness (as Andrew Schiff discussed in our most recent newsletter), debt troubles in the eurozone's fringe economies have created a distorted confidence in the greenback. However, as you might imagine, Europe has higher priorities than being America's fall guy. Led by an ever-bolder Germany, the European states are wisely choosing not to throw themselves on our funeral pyre, but to wisely clean house in anticipation of China's rise.
In another ominous sign for the dollar, the Financial Times reported Wednesday that after two decades as net sellers of gold, foreign central banks have now become net buyers. What's more, more than half of central bank officials surveyed by UBS didn't think the dollar would be the world's reserve in 2035. Among the predicted replacements were Asian currencies and the euro, but – by far – the favorite was gold. This is supported by Monday's revelation by the Saudi central bank that it had covertly doubled its gold reserves, just about a year after China made a similar admission.
Central banks join gold rush
Foreign governments have been getting in on the recent gold rush, driven by continued fears about Europe's debt crisis and the pace of the global economic recovery.
Last year, foreign central banks were net buyers of gold for the first time since 1997. India, China and Russia have been the biggest buyers. And more recently, the Philippines and Kazakhstan jumped into the fray with big purchases of the precious metal during the first quarter, according to data released by the World Gold Council Thursday.
The death of the US dollar may seem crazy, but it's happened countless times before. In fact, every paper currency created throughout history, has eventually died. Only gold has remained a constant.
The unsustainable debt isn't new either.
We're Not The First Empire To Have A Serious Currency Problem
You really should take this stuff seriously. Political pundits don't know what they're talking about. They rarely get politics right, let alone economics and finance. CNBC is there to entertain you while cheerleading the stock market, not help you. Like most things in life, you're on your own. Besides, your family finances are just that - your family, not politics.
This isn't a game folks. Democracies will fall, and so will the US dollar. So be prepared for anything.
