The disappearing dollar...

We are finding ourselves coming to a juncture in our nations history, or shall I say future. It is known throughout history that nations rise and fall. Economies and societies form and collapse. Trade is what makes up a capitalistic system and trade is what is happening to the world today. It is just that the world is beginning to trade the leading economic valuation of the dollar for something else. What will be the defining valuation we will come to see as the future unfolds, but to say that the dollar will remain is probably a bit naive.

For those that feel the dollar is still king are not living in reality. The dollar has shown is vulnerability to the Euro, Asian markets, Oil, Gold, Silver, Corn, Soy, Wheat, Copper, and more as the emerging Asian markets vie for more and more energy, food, materials and luxury goods. The power of the dollar continues to decline as wages continue to stay constant or fall. The buying power of the dollar has declined for much of the past three decades in relation to earning power. Most recently, within the past decade, the buying power of the dollar has seen much evidence of serious trouble.

The Fed has continued to attempt to rescue the buying power of the currency not by attempting to assist the administration to balance the budget or help to reduce any spending habits of the administration but by allowing the American consumer to get heavily debt ridden. With the departure of Alan Greenspan, who during his tenure as Fed Chairman helped to open the credit markets to anyone and everyone we saw the new Fed Chairman Ben Bernanke discredit the work of his predecessor for mishandling his job. Yet, now we see the Bernanke team following in the same footsteps of those with whom he stated did not know what they were doing.

It seems that The Fed feels that nothing can ever stop the U.S. economy. They anticipate that continued growth is inevitable and — the ultimate delusion — our officials appear to truly believe that they can control it. When the economy slows The Fed has declared lower and lower interest rates as a means for encouraging more and more debt. They continue to make the American people feel that is called sound policy. The debt load of the average American is reaching its highest point in our nations history based on inflation.

Just what is money and what is debt. The U.S. Government has worked hard convincing all of us that all of the dollars that get exchanged for work and consumer goods is actually money. When in fact, though, everyone knows they have no tangible value. I have discussed this before. When the Government decided to take a paperbacked currency and devalue it from gold we were on our way to our demise. Although, this action did allow us another 70 odd years of manipulation of global exchange and currency to our benefit. But this paradigm cannot sustain itself and it is now reaching its tipping point.

The dollar is backed by a promise of the government to honor the debt. The government goes on to continue to assure us that the dollar has the value of the dollar. This may be true in the United States, but the value of the dollar and its buying power in relation to global commerce has changed within the past decade. It has dropped by over half to many currencies and more to numerous commodities throughout the globe.

Thus the honor of the government to back the currency has diminished. How is it that the government continue to promise to pay its debts when the total of that debt keeps getting higher and higher? Our current administration has spent the past seven years spending money in the tune of trillions of dollars on borrowed funds. The war has been paid for by our children and their children's future earnings. At this same time we have found our own infrastructure and government programs be stripped of their balance sheets to create the facade to the American public that in fact the dollar is still worth a dollar. In fact, the implied promise that a dollar is worth a dollar has to be looked at with suspicion as well.

The near future could prove to be a financial disaster for anyone who continues to have faith in the strength of the dollar. In fact, a collapse is inevitable and it's only a question of how quickly it is going to occur. Greece fell, Rome fell, Egypt fell, America will fall. There will be declines in the stock market and savings will become worthless. The bond market will begin to fall apart. As the value of the dollar falls, that dollar will no longer be worth a dollar, as we have begun to see; it will be worth only pennies on the dollar. It will be an eye opening experience for those who have become complacent about America and their invulnerability. There is that word again. Complacent. When will we learn...?


How did we let things come to such a place? Our leaders have allowed foreign interests to take control of our economic destiny, and we cannot necessarily count those foreign interests as allies. This is how a global economy works and interacts with each other, however, this creates a facade of the balance of trade and power. We are not threatened by imminent invasion as we have spent at least the past seven years by over spending to our defense department. We are not threatened by a loss of freedom to move about as we find that democracy throughout the globe is a leading desire for most new countries. Although, the extravagant American standard of living is about to be changed, drastically and suddenly. This has come about by three changes in fiscal status.

First, the strength of the dollar and the level of interest rates are no longer in the control of the Fed. Second, good jobs have been sent overseas, and the so called recovery has consisted of low paying jobs. Third, because average wages are falling, Americans cannot afford inflation; even with our increasing credit card and mortgage based bubble economy, the illusion of prosperity cannot go on forever.

As I have stated previously that the administration holds a mirror to what eventually it's people act. What I mean by this is that it's not just the consumer who has spent beyond their means. The government has led the way by bad example. U.S. borrowing has expanded to the point that foreign central banks own major portions of the U.S. debt. The Bank of Japan held $ 668 billion of Treasury securities in 2004, compared to the Federal Reserve holdings of $ 675 billion. In other words, the Bank of Japan nearly matched the Fed in ownership of U.S. debt. Currently, with the addition of China, South Korea, and India the Asian banks own a lot more debt than the Fed does. What does this mean for the U.S. and the dollar?

With so many Asian currencies tied to the dollar, isn't it in their interests to keep dollar values high? Yes, but only to a point. Asian central banks will ultimately allow the U.S. dollar to fall to contain inflation in their countries. And the more debt those central banks control, the greater their control over the U.S. dollar — and over the standard of living in the United States. This helps not only their currency power over time, but their trade power and global bargaining power. Again, this is capitalism working correctly. It just depends on which side of the buying power one wishes to be on.

What about Asian inflation? In 2008, growth of gross domestic product (GDP) is continent - wide at an expected 9.8 percent, slightly less if you look at recent past performance in Vietnam (8.2 percent), Singapore (7.5 percent), Malaysia (6.1 percent), and South Korea (4.9 percent). Then there is China, where growth is still amazingly strong, although it is expected to slow down from 10.8 percent to 9.8 percent in 2008. With the exception of Japan, which is struggling at 1.5 percent, my point is real GDP growth in these countries is two and three times ours in the United States. Ultimately, these trends will lead to inflation. As inflation takes hold and a currency begins to lose its value the best way to fight inflation is to let your domestic currency grow in value. Therefore it is suffice to say that the Asians are hedging their currency with the dollar as they build their infrastructures and the consumer growth in their nations rise. So, here is where large holdings of U.S. debt become important.

We are now seeing a trend in Asia toward buying fewer U.S. dollars and then selling the holdings they already have, as well as selling off U.S. bonds. Perhaps since their currencies, which are pegged to the dollar, begin to have more global strength they no longer need the falling dollar to balance off their books. These changes will force the U.S. dollar to fall and interest rates to rise here at home. In other words, Asian inflation is held in check and transferred into U.S. inflation. This will ultimately be the price the United States will have to pay for allowing its federal and consumer debt to get out of control.

What can be done to stop this? We need to rebuild America rather than Iraq. Use our tax dollars for infrastructure and services rather than defense spending. We need to require a balanced budget rather than allow our government to continue to spend the next three generations of profits today. We need to control our consumer spending. We need to begin to augment our savings rather than continue our debt loads. All of this can be done, however, if we don't do these actions today, history will repeat itself...