MacroScope

Is it time to ditch the dollar?

July 8, 2009

Judging from the draft communique of the G8 leaders meeting in L’Aquila, no one is in a particular hurry to talk about ending the domination of the dollar in world  currency reserves.  Our correspondents at the Italian summit report that the debate being pushed by China and others is likely to be played down.

But the genie is out of the bottle. Beforehand, Beijing floated the idea of alternative to the dollar. Russia and Brazil weighed in with some thoughts. The United Nations also acknowledged earlier this year the desire of some countries for a “more efficient reserve system” in a series of proposals for global financial reform.

This issue is laid out in a Q&A here.

What do you think? Is it time to ditch the dollar? Is it doomed as a reserve currency over the long term?

Comments
18 comments so far | RSS Comments RSS

If the dollar is ditched the results would be far more devastating than the current economic crisis. The dollar would be devalued, the economies that use the dollar as their base would go into depression (including the US), and global would drastically decrease for a long period of time. Even China would be negatively affected as they depend on exports to drive their economy and if no one is importing because they can’t afford the goods then China would be up the creek.

So, no this is not a good time to do this thing.

Posted by Rick S. | Report as abusive
 

No, it isn’t. What else will we use and how soon could we use it? The proponents have almost as much to lose as they would gain from such a move. Besides, the jury’s out on when inflation will start to show itself. Debt continues to be written-off and deflation is still the bigger worry.

Posted by professor pinch | Report as abusive
 

Simply abolishing fractional reserve banking and the central banking system will improve things 10 fold. The system is flawed considering every dollar I earn is considered debt. We (as in the US) should print our own money. Our money should not be debt backed, and should not be controlled by a pseudo government agency. The Federal Reserve has designed our currency to keep us in debt up to our eyeballs thanks to the 12 largest banks in the country.

Posted by Brian H | Report as abusive
 

THe dollar will be replaced as the trading currency for oil. OPEC leaders have been looking to the Euro for quite a while and will soon replace the dollar. As to the damage to the USA will sustain, time will tell. I for one think a move to the Euro is a wise decision and will be good for the rest of the world as the USA tries to compensate for the loss. I have most my money in the European markets and a drop in the dollar will be a boost for me. I too am no longer a full time resident for the pollution, waste, obesity and lack of interest in schooling and medicine are disgusting. It’s time for a shake up in the USA and the sooner it happens the sooner the recovery. Sometime the forest needs to burn to be cleansed. Don’t blame Obama, he was handed this mess by the looters in the Bush war machine and lobbyists.

Posted by Independent Observer | Report as abusive
 

The question is not “if the dollar ditched” but when? When will China and China Inc decide they can take “acceptable economic losses” and dump the dollar, then emerge from the ashes as the absolute world leader, with no shots fired?
World pretty much knows our business and congress is for sale, and has been for a long time. They also know most citizens in USA so dumbed down and into “let someone else do it”, they cannot even do simple compound interest much less understand “value of dollar etc”.
I suspect this is just the opening move in a well planned out game. Our politicians-WS-Banks-CEO’s and that bunch, for a few bucks, and our trade reps turned lobbyist’s, gave away USA jobs, plants and technology, Wal Mart and others funded it. So now we in truth, the USA have NO “economic patriotism” for want of a better term. Just promised the citizens lower costs for cheap products and they gratefully trade away good jobs. The new USA is all about the value of paper not products, the marketing-com degree verst the tough ones that build a naiton, engineering, physics, etc.
China and all know the USA is not what it was 50 years back, lean and competitive. We are now soft, spoiled and divided.. for those to busy to read why and how ROme and the others fell.. well just look out the window, as now being brought to you live, by greed, ignorance, fear and division…
“So as seems to be our citizens main concern in this NEW USA, what’s in it for me?”.. you are soon to find out!

Posted by Charles | Report as abusive
 

Currency unions such as the Euro eliminated F/X in the EU’s Eurozone as did the US dollar for the 50 US States. Let the USD and the EUR form a currency union together with the GBP; the three are already acting in tandem to counter their banking crises and throw in the Swiss Franc for good measure… the four make up the bulk of the world’s money supply. THAT would be the reserve currency, or return to Bretton Woods.

 

Never mind what will happen to other economies, a general abandonement of the dollar is the only remedy for the US: we should no longer have the advantage of issuing debt in our own currency! Finally, economic responsibility will come when we can only run small deficits and thus have to pay for everything ourselves. America has grown truly fat and lazy with other people’s money, and its time the national credit card is liquidated.

Posted by Bob | Report as abusive
 

The trade imbalance which has crippled US manufacturing and damaged its competitiveness is largely a result of an undervalued renmimbi and an overvalued dollar. Although this imbalance is routinely called “unsustainable” by economists, along with the huge US trade deficits, the G8 wants to put off the inevitable crisis because of the dollars status as a reserve currency. Like the housing crash, this is an inevitable economic crash which could have been avoided is certain imbalances had been prevented in the first place.

If you are holding dollars, yes you should sell them fast. Selll them as if you were flipping houses in early 2007 or had 100% of your assets in Bank of American in fall 2007! Don’t forget that supplies of your best hedge (physical gold) were so tight in late 2007 they were almost unobtainable.

Without a doubt, the crash of the dollar is going to be a world crisis. But like housing prices, many will get hurt but the correction will restore the balance that should have been there all along. Houses are now coming back into line with salaries. A collapse of the dollar will realize the actual wealth of China vs. the US, and make it cost effective to manufacture in the US again. After the depression is worked off, then we will see some real green shoots.

Until then, gold in your mattress is the way to go.

Posted by Reconstructions | Report as abusive
 

The value of the currency is the value the world places on our country, and we have serious problems. Qualifying for a mortgage is still a sham, bloated overpaid bureaucracies run rampant, the military consumes an astounding 50% of every tax dollar, schools produce way fewer scientists and far too many lawyers, our big union factories produce junk (GM, Chrysler), wealth is generated by Goldman algorithms and not productivity or innovation, the environment is a mess, credit cards debt is ready to implode, the national debt is so high that it is beyond comprehension, and an attitude of entitlement is pervasive. Would you invest in this country? There may be no other immediate answer, but no wonder the world is looking for another solution.

Posted by Buck Mann | Report as abusive
 

A recent essay from Global Research (in Canada) notes the important fact that markets, not politicians, determine the role of a reserve currency. By any measure the US dollar is doomed and foreigners know this (especially China). As Ron Paul has repeatedly pointed out in public debates and interviews the Bretton Woods agreement (in 1944) broke down in 1971 when Nixon decoupled the US dollar from gold redemption (for foreigners). Since this time our twin deficits have soared and the US has been able to export its inflation and force the world to use the dollar as a settlement currency (particularly for crude oil contracts with OPEC). This macroeconomic model of recycling dollars is like taxation without representation as nations return dollars into our capital markets (stocks and bonds) as we project our military imperialism supported through Fed funding. Both China and Russia would like to see a diminished role for the US dollar and the G-20 (G-8) meetings are proposing a larger role for the SDR issued by the IMF. The current mix is 44% dollar and 34% euro with the balance in yen and sterling. Since the advent of the euro in 2002 it has increasingly been favored in central bank reserves and the EU has a larger GDP than the US – $18 trillion to $14 trillion. According to Bill Gross (PIMCO) and Robert Prechter (Elliot Wave) it is “inevitable” that US assets (bonds) will be downgraded by Moody’s, S&P and Fitch. When this happens, and it will, the US will suffer the same fate awaiting California (the world’s 8th largest economy). On July 6th Fitch downgraded California bonds to BBB and Moody’s is threatening a downgrade to “junk” status. When this happens institutions will be forced to liquidate these holdings (by law) and this collapse the municipal bond sector ($2.6 trillion). Moody’s has threaten to downgrade US Treasuries and is merely holding off due to pressure. The US dollar is doomed because the US bond market is doomed. Already foreigners are not buying our debt and at some point might even be forced to SELL! The only way out is a hyperinflationary cycle through the Fed with no negative feedback loop as nations dump the dollar. At this point we could see a new economic paradigm as the euro trajectory overtakes the dollar (six OPEC nations have already unpegged from the dollar and favor the euro). This is the general theme in my book America’s Financial Reckoning Day and you can download a free report at http://www.chuckcoppes.com. Yes, it is time to ditch the dollar and the dollar is doomed in the “short-term” not long term. Get out of US dollar-denominated assets and long term bonds, and do it now.

 

very good article and comments about this, someone did a follow up story at http://www.darkpooltraders.com which is pretty interesting as well.

Posted by Wellington | Report as abusive
 

I agree with Rick S. The consequences of ditching USD cannot be contemplated with certainity. This could lead to a collapse of international trade and settlement system and bring the monetary and banking system to a complete standstill. China, the leading proponent of the issue, stands to loose the most as it also happens to be one of the largest holders of USD denominated assets. If the rating downgrade did go through, soverign funds, in general, would loose too. Countries running trade deficits and carrying USD liabilities would be the gainers.
One misleading concept is the taxing power of the US congress. The premise that the US congress can levy various taxes to service the debt is questionable. As the taxes are increased to 100%, people loose motivation to work. If you know that the government will take away every nickle and dime that you are working for, you would rather stay home and do nothing. There is no such thing as unlimited taxing power.
USD has to go and something needs to be done about it soon before this issue goes into oblivion.

Posted by SK | Report as abusive
 

Its simply a question of time, the countries that fed massive amounts of money into the American financial system are already looking for a safe way out. Unfortunately there is no such thing as a safe way out and they know they’ll lose big time the moment they drop the greenback. All their efforts are now aimed at damage control and how to limit those losses.

 

1st ATTACK to the US DOLLAR

CHINA and BRAZIL announced yesterday that from now on, their trade relations will be held not in dollars, but in their respective currencies, according previously a fair change rate.

YUAN first appearance in an international trade agreement seems not to scare US dollar.

Nevertheless, this fact has, according to my view, an incredible psychological impact on the future trends….

BRAZIL is the main latinamerican economy. CHINA is the main economy in ASIA, together with JAPAN.

Then, two of the main economies in the world are ready to trade without the arbitrage of US Dollars.

The ALBA ( the populism movement in South America ) leaded by Chavez, Venezuela president, is ready to do the same with oil and other raw materials exports.

Once again, the future impact will depend on the capacity of CHINA economy to reduce exports to the US and begin serving its domestic demand. Analysts say this won´t happen till 2015.

This BRAZIL-CHINA movement is the 1st attack to the DOLLAR hegemony as a reference currency and therefore, as an arbitrage currency for foreign commercial agreements.

CHINA has to go planning the YUAN international show up to the world.
But, as usual, CHINA manages things their way, just like Frank Sinatra… CHINA will begin trading with those countries key for its economy, and step by step, it will be going out of its yuan fixed rate by billateral compromises.

In the middle of a global economic downturn, this is not good news for US Dollar. Since, and although americans want a weak dollar to begin exporting again,… we must not forget that the US is moreover an importing country.

If CHINA goes reducing its exposure to US exports, the US will have problems to stabilise its currency.

EURO seems to be absent from this battle, but obviously EURO has nothing to offer to the world, since EUROPE remains as a dead continent, only healed some times by Germany auto and heavy manufacturers, Italian fashion and car industries, and France, or Spain touristic acceptance.

I forecast a volatile currency market for the next 6-12 months, and a huge risk on US dollar stability. Therefore, my advice for EURO holders resides on keeping the EURO exposure vs USDollar and wait for future events.

Nevertheless, something with stronger impact seems to go rooting in the horizon. And it is not obviously green …

The huge Public spending of OBAMA policies, the forecasted high inflation rates for the next 2 years will not help a lot.

Jose Luis Revilla Escudero
Chairman&CEO
WWShares, Inc
-Global Wealth Management-
http://www.worldwideshares.blogspot.com

 

Here we are less than one year later, Bush bought the banks, Obama bought the car Industry, stock in this country is at its lowest point. And the biggies are buying, buying, buying….Why?
Obama has doubled the currency without talking about what Bush did. Now a dollar that was not worth much 6 months ago, is now worth half……One more stimulus AND THE JOB WILL BE DONE.
New money on th horizon
Dominick from
WSOP&NE

 

Brian H is right on the money. Tax cuts, tax hikes, money, money not there, none of it matters if the federal reserve exists and continues to behave in the manner it has in our entire lives.

Inflation will remain constantly high, the goal is just to have more than the next guy.

Posted by Michael Ham | Report as abusive
 

Russia and India have had mutual currency based trade from time immemorial
Now, China and Brazil have caught up with the trend. BRIC ( all above 4 nations) may soon accept any of their 4 currencies for trade, similar to EURO in Europe. At this rate Dollar will be downgraded to just another important currency on global stage like currently Japanese or some individual european currencies are.
I don’t think the international trade will be affected in any adverse way. And USA will do fine on its own.

 

This is in relation to Macro economics.
Previously,entire world depends on Dollar transaction for all business deals.
Now,the above general acceptance of Dollar is slowly viewing for a new international currency.
All latest developing nations like China,India,Russia and Brazil may try to bring a new world economic orders.
Dollar!s value is still there.But not likely to increase further in due course.

 

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