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Another Perfect Storm - the Dollar Devaluation!

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Published: 04Jul2009
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Economists and government officials keep pointing to the glimmer of light at the end of the tunnel. We are led to believe that the worst is now more or less over.

Not so soon! Another perfect storm is brewing - the dollar devaluation. The next financial crisis could well be the dollar crisis.

The U.S. underlying economy is still very weak: business is not expanding, and the credit crunch remains despite bailouts and capital infusion.

According to a recent comment in the New York Times, "the decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order."

Indeed, a perfect storm of the greenback is brewing, and the reasons are obvious:

The U.S. government is spending more than its income, and this has been going on for the past two decades.

The U.S. government is continuing to print money to bail out its ailing economy, which seems like a bottomless pit.

There are trillions of dollars held by investors and speculators outside the United States. Their sentiments over the value of the dollar may shift anytime soon. The value of the dollar is perceived merely in the eyes of the beholders, many of whom are getting very nervous about the prospects of their dollar-based assets.

Foreign governments, in particular, China, are becoming more nervous and less patient of what the Federal government is doing to their assets. Most recently, the Chinese government told the American Treasury Secretary: "We trust you to value your assets."

Currently, the U.S. currency still holds its value, but things could get nasty. A change of sentiments over the greenback may lead to drastic decline of the dollar, and this dollar crisis could be triggered by several factors.

A sudden move by the Chinese government to dump their U.S. dollar-based assets could trigger a free fall of the dollar. Everybody is banking on the presumption that such a move by the Chinese government would not be in the best interest of China itself (as a matter of fact, such a drastic move would be suicidal to China's economy and detrimental to the welfare of its people). However, one thing we must remember is that the current situation is tantamount to the scenario of the game of musical chairs - the music will have to stop sometime and somehow, and no foreign government would like to be the last one to find that there is no more chair to sit on. A dollar crisis precipitated by dollar devaluation could lead to massive exit of investors and speculators worldwide.

According to a recent report, Brazil and China will work towards using their own currencies in trade transactions rather than the U.S. dollar. This move follows recent Chinese challenges to the status of the dollar as the world's leading international currency. In fact, China has proposed replacing the U.S. dollar as the world's leading currency with a new international reserve currency, possibly in the form of special drawing rights (SDRs), a unit of account used by the International Monetary Fund.

Another factor that could accelerate the decline of the dollar is inflation. For the past decades, the Federal Reserve has been successful in curbing inflation while printing money at a record level. What the Federal Reserve has been doing is to allow the slow and orderly dollar devaluation. The question is: Can the Federal Reserve continue this reckless policy while focusing its attention on how to put the economy back on its track? When inflation would rear its ugly head again - it is a matter of "when" and not "if" - that could be the demise of the dollar.

Another factor that could trigger the sell-off of the U.S. dollar is that a Treasury bond auction that does not go as planned. The U.S. government cannot continuously borrow from foreigners to make both ends meet.

Given that there are several scenarios that could spell death for the dollar, and that its impact on the economy could be much more devastating than the current bank failure and foreclosure crisis, the U.S.government should be bracing itself for the perfect storm - the dollar devaluation.

Stephen Lau is a writer and researcher. He has published several books and many websites on money matters, health, healing, depression, eating disorders, and golf. For more information on finance and money matters, and also get your FREE copy of the 143-page e-book recently published by Stephen Lau, go to: http://www.smartcreditsmartmoney.com/sm.html

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