Dollar Concern: This would be absolutely disasterous for the U.S.

This is a very real and growing concern as China is looking to dump USD$ as the world primary reserve currency. And I really think most people don’t have a clue what this means.

It means that the only thing keeping the U.S. dollar from plummeting in value against other foreign currencies is the fact that it is the reserve currency. So whenever someone wants to buy money when stocks and commodities look bad (like now) then they would traditionally buy U.S. dollars because since they were the official reserve currency; they were practically guaranteed to retain their value.

But with America spending SO incredibly wrecklessly; printing money like mad; this should have made the greenback more and more worthless - except the reserve currency status kept it from falling.

If that goes, the greenback will free fall. And everything Americans buy offshore will absolutely skyrocket in price. Oil, phones, tv’s, raw materials not available in the ’states in sufficient quantities. The purchasing power of the average American will plummet. And inevitably, America will turn completely protectionist again. And if they do that (which is really what triggered the great depression) then this deep recession will easily turn into a depression that could last for a decade.

Who on Earth is going to want to buy US dollars with the American government massively in debt and running almost 2 trillion dollar yearly deficits with no reserve currency status? No one.

And with high unemployment already, the American economy being set up far more for consumption and service then for manufacturing and her dependence on many foreign commodities and goods - it will be short term (at least) disaster. Oil prices will skyrocket. Not just 30, 40, 50%. Double or triple. And America runs on oil. And that doesn’t include all the other foreign based cheap products/commodities Americans have gotten to depend on.

And assuming this leads to protectionism, then that will further shoot up prices. And inflation could go out of control - at least in the short term. And run away inflation is a nightmare that no one wants. At this point, I certainly think a devaluation of the dollar/inflation is becoming more and more attractive as a solution. The current administration is placing one last bet on trying to get the wheels turning in a way that won’t make that necessary - but to me it is just that, one last bet with a low probability of success (which is not the same as saying it is not worth trying since the outcome will be about the same if you do nothing).

The US using money printing could quickly solve the housing problem (even though it will mean interest rates will soar for a while - but the credit will evaporate just as it did in the 70s and 80s). It will also mean the US debt will evaporate in ways that will be necessary to cope with what is becoming an increasingly impossible situation. Of course this will be like admitting that the US economy have failed and the long term implications for the US as a trusted economic special power will be massive - but the Bush years of neglect have already made this largely a reality.

China sees this and wants to try to make sure its loans are renewed in a way where they US cannot cheat their way out of paying them back with money that is worth what they are lending (they won’t be able to keep up with the interest tool and they know they probably can’t deny credit since that will mean they risk losing everything) and that Chinese companies get paid for their products in a currency that is dependable. Who can blame them? Doing this would of course take away much of the US special powers that everyone has thought they could be trusted with, but that most now think they will misuse at some point.

In the end, the US will fight this bitterly whatever Administration is in place. After 8 years of neglect - I doubt they have the powers to stop it though (unless Obama’s current moves are surprisingly effective).

Who cares which party is too blame - they both are in my view. This is a disaster coming. And will be the (temporary?) end of America as the world economic superpower.

Related Posts:

• P/E RATIOS SET TO RISE IN Q4 THROUGH 2010
• There is much more going on than the dollar and our bonds.
• A really good article on capacity utilization in the NYT.
• Why the market should go up on this encouraging data
• U.S: The entire system requires increasingly large amounts of debt to keep the pyramid scheme, er I mean our monetary system afloat.

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