Is the U.S. Dollar on the Brink?
Source: Julian Phillips, Gold Forecaster (3/1/11)
"Does the U.S. government want a weak dollar?"
The U.S. Dollar Fundamentals
Can Government Govern Finances?
The United States, right now, is on the brink of having used up all its legislated credit capacity. At $14.3 trillion there is a desperate need for a higher credit limit. Unless, by Friday, they have passed legislation to raise this, the government cannot issue checks or pay staff. Yes, they can use various tricks to delay this to accommodate political brinkmanship, but the outside world will be alarmed that the government is unable to tend to such basics or allows politics to overrule finances. Here there is a clash of systems, the need for financial correctness against the games politicians play. With President Obama's administration without sufficient power to legislate, as they want at a critical time when government should be strong, there is little to inspire confidence in the U.S. government. Global confidence in the U.S. dollar will be shaken if such a financial mess were to happen. We would most likely see the ratings agencies downgrade U.S. debt before that happens. From outside it looks as though the U.S. is oblivious to foreign investors' opinions at a time when the U.S. is reliant on foreign investors buying U.S. debt.
Moving down the ladder, we have seen so much in the press that individual States are on the brink of bankruptcy and some already there and little seems to be being done to rectify matters to date. Or should foreigners just presume that the Fed will rescue them with bailouts? If that is to be the path followed that again will undermine foreign investors' confidence in the dollar.
What must be understood: Government finances at all levels must be sound to inspire confidence. It seems a simple, obvious statement. So why isn't it being applied? Even Fed Chairman Bernanke is calling for government to sort out the Federal deficit, but all we see is a partisan battle that seems unconscious to their country's crying needs. Or do we misunderstand the scene. Are politics more important than good order? Today saw the revelation that China owns $360 billion more Treasuries than was previously thought. Doesn't the government worry about this dependence? Or does it want to ensure that the USD weakens? This is a strong impression pervading so many foreign exchanges now.
And the inflation coming from the food and energy worlds is globally pervasive and capable of threatening what little economic growth there is in the developed world. It will affect many countries and could reach the U.S. We expect the UK to experience a shrinking of its GDP in Q111, announcing the arrival of a double-dip recession;, so shrinking growth could also affect the U.S. with its already lackluster economy. What will this somewhat emasculated government do then?
The Trade Deficit
For so many years now, the U.S. has run a trade deficit balanced by a surplus on the capital account. This inflow of capital is the flow of power from the U.S. to foreign creditors. Already we are seeing a tendency to try to diversify away from the U.S. dollar. If this trend gathers momentum then the overall picture on the balance of payments could sink to a deficit. How close is it now? Or is it happening as foreign investors' diversify into other currencies to stave off or reduce the impact on their surpluses of a falling USD and overweight natures of their dollar holdings. It's bound to happen if only because of prudence. And yet the U.S. is doing nothing to address the situation. Why not? We see that the main beneficiary of a weak dollar would be the U.S. on the trade front as well as on the debt front. One question that must be answered: Does the U.S. government want a weak dollar? Or, is it unconcerned at the USD's exchange rate?
It seems Europe and other nations are more worried about the U.S. dollar exchange rate than the U.S. This laissez-faire attitude appears to confirm that the U.S. has no intention of protecting this exchange rate. For that reason, we must conclude that the USD is inevitably headed for more weakness. In the past, the 'top dog' nature of the U.S. currency meant the rest of the world had to suck it up. Now, it's only a matter of time before the U.S. is second to China's economy. . .When that happens—and it could well before 2020—the USD, like all other global currencies, will have to pay its own bills with goods—not freshly printed dollars.
The USD and the Euro Gold Price
Is it any wonder the gold price is rising in the USD? The euro, franc, pound and other currencies are rising in the USD, too. It's not the gold price rising in the USD—it's the USD falling in terms of gold. Likewise, other currencies aren't rising against the USD—the USD is falling against them. To get a clearer picture of what's really happening in the gold price, one has to look at the price in the euro or franc to better reflect demand and supply. We have and will see gold rise in the euro for fundamental reasons; but for accuracy's sake, we must relegate the USD price of gold to second or third place, as that's more about the dollar than gold.
Gold as Part of the Global Monetary System
Today, we read that the shareholders of the Bank of Italy want to use the gold held by the central bank to shore up their balance sheets. The BOI has gold reserves of 2451.8 tons (68.6% of its foreign exchange reserves) currently. As shareholders assets, Italian banks look a lot healthier when such reserves are listed at market value. Yes, this is a touch of 'cooking' the books, but it recognizes that gold has a monetary value. In international-currency transactions, gold is being used to secure loans. Its de facto role in the monetary system is getting harder and harder to avoid.
Could Gold Be Confiscated?
Gold will never be confiscated for the reasons it was in 1933 (money supply expansion). Its role today can be as collateral for international transactions, as it's being used now. In a global world, it's the only real monetary asset that bypasses nations to be global money that is truly mobile. Should a nation find itself in trouble, gold sits there waiting to shore up balance sheets and serve as collateral for nations with questionable creditworthiness. Will the dollar fall into that category once the yuan is a truly international currency? Certainly, holding gold will bypass that eventuality. Even in the hands of the U.S. government, citizen's gold could give the dollar a golden hue. In China, everyone understands that all of the nation's assets, including citizen's gold, is state property. In the U.S., citizens are allowed the privilege of owning gold and don't have the right—a small step to confiscating the huge tonnage of citizen's gold.
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