Pressures
are mounting around the world that will probably result in a sharp decline in
the exchange value of the US Dollar. The source of the problem is the US current
account deficit that has destabilised both the world economy and the
international monetary system. The reason is that there is no automatic
system in place to correct the US trade imbalance. Urgently
required now is a decline in the US dollar exchange rate to a point where the
US current account deficit is eliminated by lower imports and higher exports.
How much the US
dollar needs to decline to achieve this transformation is uncertain, but it
could be as much as 30%-35%. This would cause the US Dollar Index to drop
from the current level of 72 to somewhere in the region of 47 to 50.
The article
“Chaos Chronicled” sets out the reasons why the US current account deficit is to
blame for the present economic malaise. The articled can be referred to at:
http://www.freebuck.com/articles/afield/080410afield.htm
The US
is the only country that has been able to run an ongoing current account
deficit, with imports exceeding exports, paying for that deficit by the
simple expedient of creating more US dollars. There are increasing signs that
the world has lost patience with this state of affairs and that people are
starting to demand action. The US dollar’s reign as the world’s
reserve currency is about to come to an abrupt end.
Those countries
that have been running trade surpluses and accumulating vast US Dollar
reserves have a serious problem. In the article “Tribute Paid in
Oil” by Hugo Salinas Price, the plight of Mexico is explained. Mexico is the third largest source of imported
oil into the USA.
Mexico’s problem is
that it is running out of oil reserves and within a few years (6 to 8), Mexico will
actually have to import oil. Meanwhile it is selling this valuable asset in
exchange for newly created US Dollars which are causing their reserves to
swell. What do they do with their accumulated dollars? How do they ensure
that the benefits of their valuable oil exports are not squandered?
The full article
on Mexico
by Hugo Salinas Price can be found at:
http://www.321energy.com/editorials/price/price062908.html
The new Russian
President, Demitri Medvedev,
in a Press Conference in Moscow
on 3 July 2008 said the following:
“I’m
speaking about attempting to solve the problems that we have already got now
and to make this system more flexible, more suited to today’s needs,
learning to manage the processes that led to a significant change on the
global financial market. This is not an easy task and, what is more, it does
not necessarily mean that today’s financial structures created over
several decades should be broken. But it should be modified and should become
more modern, more protected from risks and should not be nationally
egotistic, it should instead be more fair in
relations between states. The new system can
not be oriented towards only one country of one currency. In future it should
be based on the harmony of leading economies, on their substantial growth and
on the principle of several reserve currencies.”
Full Report at: http://www.russiatoday.ru/medvedev/news/26960
It is unlikely
that Medvedev’s idea of several reserve
currencies will work. That would result in there being several countries that
could run current account deficits and pay for them by creating more of their
own local currencies. That is the system that has caused all the current
troubles. More of the same obviously is not a cure. What is important is that
the problem is receiving attention at the highest levels. Unfortunately
nothing will happen until there has first been a rapid, shocking, decline in
the US Dollar exchange rate.
Richard Russell,
who is very sensitive to changes in market sentiment, commented as follows in
his 7 July 2008 web site review:
“To start
with, my instinct tells me that we are moving into an era of momentous
events. I believe that huge changes are being thrust upon us. I don't think
these changes are being recognized as yet. I believe that underlying those changes
will be the subject of fiat money and the importance of central banks
throughout the world. The creation of "wealth" through the
mechanism of fiat money is basically irrational and yes -- immoral. You can
not mandate prosperity through the process of printing money. Yet nations and
their politicians and central banks have been doing this since 1971. My guess
is that we are fast moving toward the period in which "the piper will be
paid." That's the big picture as I see it.”
The next quote
is from Larry Edelson at www.moneyandmarkets.com:
The
Dollar's Eight Year Slide Looks
Like It's About To Get A Heck Of A Lot
Worse!
“The
supply of money in the U.S.
is suddenly surging at an annualized growth rate of more than 16%. By some
estimates, that's the highest rate of growth in the money supply since 1971!
The scary part
— things will only get worse ...
- There is no way the U.S. dollar can hold its
current value when fiat money is being created with abandon out of thin
air.
- There is no way the U.S. dollar can hold its
current value when the Fed refuses to raise interest rates ... while
other countries around the world are actively raising rates to bolster
their currencies and put a damper on inflation.
- There is no way that the U.S. dollar can hold
its current value when foreign economies are outgrowing the U.S.
economy by miles.
- And there is absolutely no way that the U.S.
dollar can hold its current value when so many overseas investors
— who have lent Washington hundreds of billions of dollars to prop
up the economy — are now waking up to the fact that holding
dollar-denominated assets is a losing proposition.
Foreign
investors are losing loads of money on their investments in U.S. Treasury bonds. They're even
further in the red on mortgage bonds, real estate and stocks.”
The final quote
is from an article titled “Scorched Earth Policy” by David Galland, MD of Casey Research:
http://www.321gold.com/editorials/casey/casey070408.html
“In a fiat
monetary system the only tangible barriers to money creation are provided by
a loss in stakeholder confidence. While the average American is, sad to say,
almost completely ignorant of what a fiat monetary system is, let alone the
consequences of same, the same cannot be said of the foreign holders of an
unprecedented $6 to $7 trillion dollars.
To be a touch
more specific, by unprecedented I mean as in "never happened
before". While, under other circumstances this fact might evoke a raised
eyebrow or a concerned comment over cocktails... going into the jaws of a
vicious economic/dollar crisis those foreign dollar holdings become akin to
playing toss with a lit stick of dynamite. He who holds the dollars when the
fuse meets the powder are in for a very, very bad day.”
An earthquake
analogy is appropriate. When countervailing forces are at work, as in
tectonic plates moving against each other, pressures build up. Initially
there are minor tremors felt along the fault line. Eventually the pressures
become so great that a major movement takes place. An earthquake happens with
sudden, unexpected, ferocity.
The same sort of
thing happens in markets. It is the source of the saying that “markets
spend 90% of the time making up their minds and 10% of the time doing what
they have to do”. Countervailing pressures build up causing minor
tremors. Then pressures continue to build until there is a major change in
the market place, the equivalent of an earthquake.
The US dollar
index was 120 seven years ago. It is now 72, a decline of 40%. This
magnitude of decline over a seven year period gives the impression of several
minor declines (tremors) stitched together. The world situation is now fast
developing to the point where the downward pressures on the US dollar will
become overwhelming and there will be a sudden, earthquake-like, decline to a
level where there is the prospect of the US trade deficit being
eliminated.
Once
the US Dollar index drops to a new low below 70, events will probably happen
quickly. That will be the signal that the dollar’s doomsday will not be
far away.
Alf Field
Disclosure and Disclaimer
Statement: The author is not a disinterested party in that he has personal investments
gold and silver bullion, gold and silver mining shares as well as in base
metal and uranium mining companies. The author’s objective in writing
this article is to interest potential investors in this subject to the point
where they are encouraged to conduct their own further diligent research.
Neither the information nor the opinions expressed should be construed as a
solicitation to buy or sell any stock, currency or commodity. Investors are
recommended to obtain the advice of a qualified investment advisor before
entering into any transactions. The author has neither been paid nor received
any other inducement to write this article
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