Monday, February 01, 2010

The long-term demise of the U.S. dollar

For various reasons (including the fact that I do a fair amount of international travel), I pay attention to the relative value of the dollar and other currencies.

Long before I ever left the United States, I was well aware of the German hyperinflation of 1921 through 1923, and was disturbed by the demise of silver coinage in the United States (1965) and the closing of the gold window by Nixon (1971).

I have been deeply concerned about inflation here in the U.S., and have tried to pay attention to how the dollar shifts in value compared to other currencies.

Recently (in the last couple of weeks), the value of the U.S. dollar has risen compared to the Euro. The reason for this shift? Greece among others (the PIGS they are called all together: Portugal, Italy, Greece and Spain) . . . but Greece, in particular, is running too great a deficit: 12 percent of GDP when the agreement among the Euro countries is that they would not borrow more than 3 percent of their GDP in any year.

A number of pundits have chortled over the European Union's bad practices. "Oh!" they say. "How awful that Greece has placed the Euro in jeopardy."

"See," they seem to suggest, "the U.S. dollar cannot be replaced as the international reserve currency."

I think they are sadly mistaken.

The U.S. may be granted a few more months--maybe even a few years--of reprieve. But our day of reckoning is near, I have no doubts!

I thought this commentary by Ashish Advani of World Currency Watch is particularly cogent and to the point:
Greece (along with Portugal, Italy and Spain) has always been the weaker of the Euro partners. The fact that Greece has a GDP deficit of nearly 12% is not a surprise. And yet, we have seen such panic in the markets that it has surprised most currency investors.

Let’s get some facts straight. The deficits of Illinois, New York, California and Florida, to name a few, is significantly higher than Greece. Their economies are significantly worse than Greece with no immediate end in sight. And while I [question] Greece’s plans to reign in its deficit, I have not heard of any significant plan from our states on their plans to cut their deficits.

The states mentioned above are [at] different stages of preparing to default unless they get re-financed. And with the federal demand (via new Treasury issuances of $2.5 Billion in 2010) growing each year, it is very likely we will see a state default on its debt before Greece defaults on its. . . .
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