Sunday, January 24, 2010

Death of the Dollar?

A lot of free market economists have been calling for the death of the dollar in the near future. The main reason for this of course has been the insensible expansion of the United States federal goverment debt, which is financed primarily through large inter-governmental loans and Ben Bernanke's printing presses at the Federal Reserve.

But will the dollar actually die, and if so how soon? According to a report from Robert Fisk late last year, several countries including China, Japan, Russia, and several in the Middle East, have already started planning to drop the dollar as the world reserve currency in a series of supposed secret talks. Robert Fisk is an English writer and journalist based out of the Middle East, a man with more international awards in journalism than any other foreign correspondant, according to the University of California at Berkeley. The plan, according to Fisk, is to slowly stop trading oil in dollars and move to a basket of more stable currencies.

As you may know, the U.S. dollar is the world reserve currency, meaning that all commodities throughout the world must be bought and sold with with American dollar. This supreme position gives the United States government the immense luxury of being able to print however much money it pleases in order to finance its extensive spending habits, knowing that there will always be a steady demand for more dollars. This of course is changing.

According to economist Marc Faber, the United States has borrowed too much money, so much that it will either default on its sovereign debt or start printing even more money to monetize the debt. He says that it is most likely that Mr. Bernanke will keep his printing presses running untill we see a hyperinflationary environment in the U.S. Of course Dr. Faber also says that many other fiat currencies around the world aren't in much of a better position than the future of the dollar, including Japan and many countries in the European Union. When questioned about what happens after hyperinflation, Dr. Faber usually responds with an explanation that throughout history government's who have gotten themselves into this much trouble usually go to war. War has always been a great tool for distraction, and when tensions are running high between countries over the state of differing currencies and economies, it is definately a possibility that we will see an increase in our war efforts around the world.

So far nearly all the countries accused of having secret talks about dropping the dollar have denied all claims. Although, Fisk holds strong to his position, claiming that when he gathered the information he was told that, the fury of denials would prove his findings true. This of course has to do with the fact that most of these countries have large stakes in the current value of the U.S. dollar, with countries like China holding approximately 1 trillion dollars in reserves. Any shock to the price of the dollar, would be a shock to the value of China's savings.

So when can we expect the world to drop the dollar? Fisk reports that this is all very new, and probably as much as 9 years out, untill we see any major changes. Dr. Faber predicts the United States will have to start dealing with the real crisis sometime in the next 5-10 years. Fortunately some very brilliant people out there have come up with some very brilliant responses to this crisis. Look forward to my next post for an optimistic approach towards rebuilding the crumbling economic structure of the U.S.