Saturday, October 31, 2009

Death of the US Dollar: Greatly Exaggerated?

Given that it is as strong as the government that backed it, will the US dollar slowly fade away given that the 21st Century will be less likely ruled by American geopolitics?

By: Ringo Bones

Despite of the rumors about it’s death, it is still safe to assume that for the foreseeable future that the US dollar will still be a “financially fashionable” item and investment tool. The reason why the US dollar has hung on for far to long than rationally justifiable is that there has never been a credible and viable replacement and / or alternative. Whether you base your financial decisions via political jingoism or cold hard facts, the dollar is still a good way to hedge your capital gains given that it is still a good source of value. But what started the rumors surrounding the death of the US dollar?

Primarily due to the collapse of the Lehman Brothers back in September 2008. Where somewhat panicky investors who are more driven by fashion trends than by long-term profits had been moving away from the US dollar – probably after sniffing the signs of an impending subprime mortgage crisis near the end of July 2007 – and into more flavor-of-the-month safe haven investments like gold. And even to the Japanese yen. Also a Republican-run America can only convince Wall Street to be greedy and indifferent only up to a certain point to prop-up their version of economic prosperity as in the Reagan days. Add to that the Bush-Cheney Consortium that borrowed trillions from China to buy Arab crude oil while prosecuting their “War on Terror” in a malfeasant manner could make everyone wonder just what it would take to destroy the US dollar?

Back in 1944 during the Bretton Woods Conference where every nation allied to the US reached a consensus of pegging world currencies against the US dollar and America being a victor nation of World War II gained enough clout to make it so. Then August 1971 came when then US President Richard Nixon removed the US dollar from the gold standard, which engendered the multi-billion dollar global foreign exchange industry. It did made the value of the US dollar fluctuate periodically but it made the US dollar stronger nonetheless - but only (and it’s a big one) when the global economy retains a semblance of stability. With the status of the American economy still somewhat uncertain despite of the DOW recently returning to the over 10,000-point mark, could this be the beginning of the US dollar losing its global dominance?

Even if China looks unfavorably at America’s debt, it won’t be the death knell of the US dollar because a lot of Chinese bond holders will be left high and dry if they’ll do something that undermines the value of the US dollar. You would never do something to undermine someone who borrows money from you his or her ability to pay you back, right? Despite some economists calling for a viable replacement for the US dollar to improve global crude oil price stability, a truly viable alternative is yet to be found. Even the basket of various currencies used by the IMF and World Bank, as Special Drawing Rights are still too dependent to the US dollar. The euro seems promising, but at a little over a decade old, it still yet has a lot to prove. Looks like the US dollar will be hanging around longer and much louder - like a drunken fraternity brother.