While I was in Europe a few weeks ago, the Financial Times published an article stating the U.S. finally withdrew its objection to China developing its own reserve currency on the same level as the euro. According to the article, the Bank of China (the Chinese central bank) will immediately begin to develop an Asian reserve currency, thus driving yet another nail into the dollar's casket.
China and Japan currently hold a little less than a trillion dollars in their reserves. Once these two nations achieve their own reserve currency, they will no longer need to support dollar value by buying U.S. debt. On the contrary, these Asian nations will be forced, out of necessity, to use the new Asian reserve currency system instead of dollars. This new Asian reserve currency will serve as another major competitor to dollar use.
The dollar could lose half of its users over the next several years. This likely possibility comes with both good and bad news. The good news is that a loss of 35 to 50 percent will bring U.S. debt down a similar amount over time. Therefore, the $14 trillion to $16 trillion of U.S. national debt would shrink approximately 50 percent because all debt would be paid off with a lesser valued dollar.
The bad news is that the dollar's current value is what is used to measure our country's wealth and standard of living. If dollar value drops, then a significant portion of the U.S.'s total wealth will plummet with it. There is one exception-those who carry a percentage of their total wealth in the form of inflation hedges will find that some of their wealth will be free from dollar devaluation.
What's more, you can add euros and Swiss francs to inflation hedges. It should be tediously apparent by now that the dollar has few prospects. The question is not whether the dollar will plunge, but when. My guess is during the Chinese sponsored 2008-2010 Olympics.
Currently, the stock market is attempting to discount the future. This period may very well end up resembling that of the mid-1970s when gold skyrocketed 100 percent (from $100 to $200 per ounce) as a result of the central bank selling gold, and then forced to move back to its break-out price of $100. Then, in the late 1970s, gold moved over $700 per ounce, and, by 1981, it had reached $850 per ounce.
Gold's skyrocketing price was not completely a result of discounting future price inflation. Instead, it can be more accurately attributed to the discounting of a growing possibility that Europe would form its own currency, the euro, in the mid-1980s, thus leaving the dollar with fewer and fewer adherents.
Had this occurred on that short of notice, dollar value would have been devastated. The Fed Chairman at that time, Paul Volcker, along with a 16 percent Fed Funds Rate, saved the dollar from complete destruction. This gave Europeans enough faith in the dollar to postpone the euro for another 20 years.
This is exactly what is happening now. The market is trying to portend when this new Asian reserve currency will arrive, its value, and more importantly the number of foreign dollar users who will be lost as a result, as well as the number of dollars that will go unused compared to an expected lower dollar use.
When it comes to our financial and monetary stability, nothing is as important as the future of our dollar and the future of the new Asian reserve currency. The Federal Reserve will do anything and everything possible to make sure this information remains undisclosed and out of the media for as long as possible. During the 1970s, no one knew what propelled the market downward and gold skyward. It was not until the late 1980s when the average American was made aware of the coming euro.
The bottom line is this-do not allow the current gold and silver paranoia to force you out of all your inflation hedges. Gold and silver prices may decline in the short-term, however, the fate of the dollar is written in stone. The dollar will not survive as it exists today because it will face increasing competition from the euro, the Swiss franc, gold and silver, and soon, a new Asian reserve currency. STAY TUNED!
