The US Dollar Is Still in First Place
The role of the US dollar in international finance is well established. The greenback is still the main global reserve currency and makes up about 60% of central bank reserves. In Forex markets around 80% of commercial transactions involve dollars. This is the present situation.
The Future
There have been numerous articles about the future of the US dollar, and the topic is being discussed in a lively fashion.
It is well known that the US is deep in debt, and in fact the US federal debt is $27.4 trillion ( U.S. National Debt Clock : Real Time ). This means that the US federal debt to GDP ratio is 128.58%. These figures have to be taken into account when examining future prospects for the US currency. It is not only the huge trade deficit that counts.
The background and history of the dollar as a global currency, a topic of interest to many, has been treated in a long article, “The Dollar’s Place in the World Is Shifting Over Time”, by Lyn Alden Schwartzer in Seeking Alpha, 4th December 2020, which has garnered 500 comments. That shows that the subject is of great interest.
Bearish on the US Dollar
This writer has no intention of reviewing the figures concerning the dollar’s role in global finance as the numbers are readily available elsewhere nor will this article review the history of the dollar as a global currency. What will be done here is to make some suggestions as to what could happen to the dollar and how this could impact the portfolios of investors.
Geopolitical considerations do not normally play much of a role in financial commentary on domestic economics, but the changing global situation requires at least some attention when it is a question of what is going to happen to the US dollar. The development of China and its emergence as a world superpower economically as well as its progress in becoming an imposing military power have to be considered as China introduces its new digital currency.
In the opinion of this writer it is unlikely that a new currency will take the place of national fiat currencies. Bitcoin could be a candidate, but it cannot be controlled by a central bank and can be banned and prohibited as valid currency by a government decree. In fact China has banned bitcoin exchanges. It remains to be seen what the impact of the digital renminbi will be on the global financial scene, but it is reasonable to assume that digital currencies will become the rule in one form or another along with blockchain technology serving as a basis for authenticity.
What is more likely is that the international system of numerous national fiat currencies will continue but with the US dollar gradually becoming less central and less important. Gold will probably continue to function as a safe-haven of last resort and thus count among central bank reserves. The attempts of the BIS and cohorts to drive down the price of gold in the markets will eventually fail as dealers, investors, funds and other purchasers demand settlement in bullion. Future contracts that cannot deliver in kind will no longer be used as a tool for manipulating the price.
As Asian economies grow and the US GDP diminishes in relation to the global GDP at the same time as other countries continue to use their own fiat currencies, the US dollar is bound to lose its function as the primary international reserve currency as well as its essential role in commercial transactions. The demand for US dollars will weaken, and that will result in a weaker US dollar on Forex exchanges.
This development can already be seen in the bilateral agreements made between China and Russia. The significance of this development is that it signals the beginning of the end of the petrodollar system. Iran, Venezuela, North Korea and Syria will hardly want to have anything to do with dollar dominance. One can thus see that geopolitical developments have and will have direct consequences on the status of the US dollar and its role as an international currency.
What this means for American investors is that their investments in other currencies, depending obviously on which currency, will increase in value in relation to the US dollar, which will become weaker and weaker in Forex markets. At the same time as the US dollar weakens, imports will increase in price, making life even more difficult and expensive for American workers. The trade balance will worsen further and contribute to a further weakening of the dollar as trust in the greenback diminishes.
This is why US domestic government financial policy is important. If the US federal debt continues to increase the way it has been doing recently and the debt to GDP ratio increases further, the US risks a financial reckoning that is not pleasant to contemplate. This would be perhaps not the worst case financial scenario that could be contemplated, but the very prospect that the dollar could suffer significant losses should spur every investor to take steps right now to anticipate such a development.
The American stock markets are presently very expensive as stocks are fetching very high prices. The speculative rally could continue even higher, but smart investors will start taking profits while the taking is good and putting their capital into alternative investments that will not suffer when the bubble bursts. This writer has mentioned various possibilities in earlier Seeking Alpha articles. Investing in foreign companies and also investing in foreign real estate requires time to find suitable acquisitions. So it behooves investors to start looking for viable foreign investments now.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Data from third-party sources may have been used in the preparation of this material and WWS Swiss Financial Consulting SA (WWW SFC SA) has not independently verified, validated or audited such data. WWS SFC SA accepts no liability whatsoever for any loss arising from use of this information, and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Please consult your own professional adviser before taking investment decisions.
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
All investments involve risk, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Data from third-party sources may have been used in the preparation of this material and WWS Swiss Financial Consulting SA (WWW SFC SA) has not independently verified, validated or audited such data. WWS SFC SA accepts no liability whatsoever for any loss arising from use of this information, and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Please consult your own professional adviser before taking investment decisions.
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
All investments involve risk, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.
No comments:
Post a Comment