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March 26th 2007

The Demise of the Dollar

Your Money, Your Life

Does the value of the United States Dollar concern you? Find out how recent trends have contributed to its decline. Countless geopolitical factors have had an effect.

Burning Twenty. China has rapidly accelerated its monetary situation. Asia as a whole holds the foreign reserves ransom while the region regroups from its mid 90s financial debacle. And the Euro, not even a decade old, continues to strengthen—the currency is the newest and hippest kid on the block.

Has the dollar’s disease quickened due to Bush administration actions or was the economical situation a historical matter  that the latest White House only inherited? How much has the trip-up cost the U.S. currency its reputation among the foreign exchanges and have other more eligible currencies turned the heads of foreign reserve managers?

Presidential Administrations

Dollar.Countless comparisons have been made between Bush and Clinton economics. The two dovetail temporally, but diverge ideologically. Clinton critics are eager to find fault first with his Administration. Statistically, when the graphs are all done and the brightly colored pie charts printed out, the Clinton administration managed to come out ahead in regards to overall economic strength. But most of this euphoria was based on domestic economy. The fact is that neither Clinton nor Bush managed to improve the overall trade deficit; both ran it into negative territory.1  And while other robust factors have added combustibles to the fire, the trade deficit is a multi-faceted issue that figures prominently in the assessment of the USD value equation.

As much as trade is now a specter in currency value, it hardly functions on its own. Economic pedagogy teaches us that a strong domestic economy in any country makes for a more stable currency. Clinton did in fact produce favorable results in jobs, unemployment, national debt, poverty, and important economic factors like property ownership. Under the Bush Administration, every indicator but Productivity has slipped significantly. Fewer Americans are able to own homes, more are without health insurance, household incomes have fallen, and the number of well-paying full-time jobs has decreased.2  Add to this the alarming reversal of national debt and the recipe is one of economic volatility.

 Long-Term Tax Cuts

The President’s first order of business in his initial term was a long-term series of tax cuts beginning in 2001. The latent intent was to boost consumer confidence, and consequently the economy and the dollar. The tax plan was largely advertised, however, as a benefit for the middle and lower income demographics, especially families. Critical analysis now illustrates a number of fatal cracks in the plan: the tax cuts were too long-term to effect an immediate and necessary economic and dollar push; national debt continued to escalate out of control; and Social Security and Medicare costs increased.3

War and Gas Prices

Gas.Absolutes that have devalued the dollar are the Iraq War and gas prices. These taken together provide the traditional economics for a weak dollar. The war has contributed unheard-of debt.  The only reason, according to many economists, that the U.S. has any global monetary power is the fact that so much of the foreign reserves are still heavy with U.S. greenbacks; in this lies dollar value.

Early in the war and even leading into it, economists portended the global economic bedlam from a lengthy war. Primary arguments centered on the economic supposition that “uncertainty” would uproot the dollar’s value and “a global economy dominated by only one currency would break down.”4

Trade Deficit Blamed on China

As was pointed out before, both the Clinton and Bush administrations drove trade deficits into the red. According to many economists though, variables diverged between the two. Clinton’s trade deficit was the result of previous Bush Sr.’s economic policy and a rapidly expanding economy. In contrast the GW Bush trade deficit is driven by an imbalance of cheap imports to expensive exports, in which the current administration prefers to blame on Asia’s undervalued currencies, specifically the Japanese yen (JPY) and the Chinese Yuan.5

The China Syndrome

The Yuan, the unit of Chinese currency, has affected American workers, whether they know it or not. In many cases, when jobs have been cut, especially in areas heavy on manufacturing, international trade issues are to blame. Just look at the growing influx of Chinese products. China’s currency in technical juxtaposition to our own has deeply undercut the U.S. dollar value and concurrently dealt an upper-cut to American international trade, state the charges from the White House.

China.China has without argument rapidly matured into an ample geopolitical force. China’s haste to strengthen its domestic economy is the basis for their fattened foreign reserve coffers. China holds one of the biggest chunks of dollar denominated currency second only to Japan.6 The U.S. has challenged the Chinese government’s strategy which seeks to keep its own currency undervalued, a benefit to their growth. And up until 2005, the Chinese Yuan was pegged, or fixed, to the U.S. dollar, a design that both former and current Treasury Secretaries Hank Snow and Henry Paulson, respectively, vigorously railed against. But for both Bush terms this Chinese foreign exchange strategy has been used to rationalize the trade deficit and in turn serve as a primary argument for the depreciation of the dollar.7

China has been a juggling act for the current Administration, for both political and economic reasons. In 2003, just prior to the Presidential election, China was THE buzz in mainstream news. Key sticking points: How GW would approach the Asian power in relation to North Korea, and flagging U.S. trade on the other. Allegations were leveled at China for their currency manipulations. An undervalued Yuan is stronger internationally than the strong dollar.8

China’s influence in Asia, especially in regards to North Korea, cannot be impressed enough. On the other hand there’s the vast stores of U.S. greenbacks the Chinese foreign reserve has no intentions of parting with. Geopolitically the Chinese are expanding into other countries, buying industry and business. China as a key attribute in the dollar’s tumble is pure speculation. Financial power and international leverage may best describe the Chinese foreign reserves, then and now. A hot-button for the last two Bush administrations is the U.S. government’s inability to control the Chinese government’s leverage, or manipulation as some have suggested, of these vast stores of U.S. dollars for their own suggested swindle.9

Currencies On the Rise

Currencies.Accounting by the European Central Bank shows that as of 2006 the share of reserve currencies, distributed among the international coffers of the world’s exchanges and banks, looked like this: U.S. dollars accounted for over 65%, the Euro over 25% and the sterling pound a bit over 4%. Not far behind the pound, the Japanese yen weighed in at just over 3%. “Other” currencies made up 1.5% and the Swiss franc accounted for .2%. The larger context, though, shows trends that underscore a diversification of reserves. For example, the reserve of U.S. dollars reached its peak in 2001 when it consumed 70.7% of the total.

While it has experienced mild fluctuations since, by far its largest drop was from this high in 2001 to its rank in 2002—it thudded to 66.5%.10 At or near this level the USD reserves have vacillated since. In contrast the Euro has gobbled up increasing bite-sized chunks of the total reserve pie.

On January 23, 2007, a Market Watch headline proclaimed: “The dollar fell to a 14-year low against the British pound and two-week low versus the euro Tuesday, on growing expectations of further interest-rate hikes in Europe and as oil prices rebounded.”11  Headlines such as this may not be so uncommon in the future.

Diversification of Foreign Reserves

Chatter over diversification of foreign reserve currencies has heated up in the last few years. The dollar still consumes the biggest chunk of the reserve pie, but foreign fund managers have found traction in other more stable and liquid currencies. Indeed, it is this diversification search that best typifies current trends in reserve management, as well. In a paper published by the European Central Bank in 2006, an international task force explored the newest management techniques afoot. Concurrent with diversification, it seems increasing ranks of reserve fund managers are also expanding their investment tools in order to squeeze the most from their long-term asset piles.12 The biggest concern not only nationally, but globally is the power the dollar has yielded up until now:

“Unlike country-specific economic indicators like GDP or consumer confidence, the dollar and its junior partners, the euro and the yen, track movements in the global economy. Since the early 1970s, the American dollar has been the financial glue holding the global economy together. But if the dollar falls too fast it devalues the worth of its holdings. Then a rush to the euro and the yen could easily occur.” (Schurmann, Pacific News Service)13

Euro

Euro.The Euro was first introduced in 1999. However, as a commonly traded currency the Euro should not be compared to the dollar until 2002, when it became a commonly traded currency. Since then the Euro has made regular and marked valuation increases in comparison to the USD. As of the close of 2006, most financial reports were identifying the total value in circulation of the euro to be rapidly gaining, if not overtaking, the dollar denominations.14

Simply put, in early 2002 an American would have exchanged 88 cents for a Euro; in early 2007, one Euro costs $1.33.15

What’s startling is that back just a few years ago, the dollar’s decline was applauded as a necessary correction in an imbalanced economy.16  At the time most investors were high on their housing market takes, but current events have yielded a situation not imagined upon the Euro’s launch. Perhaps the dollar’s flimsiness is not  encouraging a “correction” anymore. If some speculators are correct, the euro could beat the dollar in the overall reserve market within the next twenty years.17

Pound Sterling

British Pound.While some financial gurus plug London as the next hottest financial market Mecca, the British pound sterling (GBP) is about as shallow as the U.S. dollar, most say. The economics of England run similar to the U.S.’s in war and general national debt, the trade deficit is substantial, consumers are in personal debt up to their eyeballs, and the housing market went bust well before the U.S.’s. Economically this all adds up to a weak currency.18  Even though the GBP is falling in contrast to the dollar, an American would pay out close to two American dollars in exchange for one pound. Ironically, after all the bad domestic news out of London, the GBP “has become the ‘anti-Dollar’ of choice for the world’s central bankers.”19 

The currency remains remarkably well received among governments whose goal is to diversify their portfolios of foreign reserve currencies. For a short-lived period of time the GBP was displaced by the Japanese yen in the top three foreign reserve currencies, but has since regained its spot among the leading power currencies.

Japanese Yen

Yen.Like China, Japan has vigorously stockpiled dollar denominated currencies in its foreign reserve since the Asian financial crisis of the 90s. Neither Japan nor China were as significantly impacted as the East Asian countries, but still their best defense to any further economic tremors was to fatten federal reserves full to the rim with U.S. dollars.

This has been most measurable since 2000.

As of 2004, according to the Federal Reserve Bank of San Francisco “[Total] worldwide foreign reserves holdings reached $3 trillion…up from $2.4 trillion in 2003,” with the biggest coffers belonging to Japan first and China second.20  Regardless of the size of Asian reserves, the yen poses little challenge to the value of the U.S. dollar. Perhaps one day it will. Already the yen has made small advances in international portfolios, but it undoubtedly is much weaker than the leading currencies.

Dollar in Retrospect

The results are in on many economic fronts. The U.S. dollar has had its heyday. Whether in response to direct U.S. government maneuvers or as a result of inevitable economic maturation, the dollar has been shaken by financial globalization. Apocalyptic predictions have the dollar free-falling to a sudden collapse21, while moderate ideologues and economists point to the predictable balancing22 of a more ideally diversified global economy.

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Footnotes

  1. Progressive Policy Institute, “Bush vs Clinton: An Economic Performance Index,” Robert D. Atkinson and Julie Hutto, October 2004.
  2. Ibid.
  3. U.S. News and World Report, “President Bush’s Tax Cut Suicide,” James Pethokoukis, March 2007.
  4. Pacific News Service, “Watch the Dollar: Bush Needs a Lesson in Currency and History,” Franz Schurmann, Feb 2003.
  5. Progressive Policy Institute, Atkinson and Hutto.
  6. Federal Reserve Bank of San Francisco, “What if Foreign Governments Diversified Their Reserves?” Diego Valderrama, July 2005.
  7. U.S. Business Blames Poor Economy on Chinese Yuan’s Fixed Dollar Value,” Elizabeth Becker and Edmund Andrews, Aug 2003.
  8. Ibid.
  9. Ibid.
  10. European Central Bank, “The Accumulation of Foreign Reserves,” Feb. 2006.
  11. Market Watch, “Dollar Hits 14-Year Sterling Low; Euro/Yen at New Record,” Wanfeng Zhou, Jan 2007.
  12. Ibid.
  13. Pacific News Service, Schurmann.
  14. Financial Times, “Euro Notes Cash In To Overtake Dollar,” Ralph Atkins, Dec 2006.
  15. Oanda, FXHistory: Historical Currency Exchange Rates.
  16. MSNBC, “Consumers Could Get Caught Under Falling Dollar,” Martin Wolk, Dec 2004.
  17. Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?” Menzie Chinn, Jeffrey Frankel, Jan 2006.
  18. Bullion Vault, “A Beauty Contest for Misshapen Half-wits,” Adrian Ash, Dec. 2006.
  19. Ibid.
  20. Federal Reserve Bank of San Francisco, Valderrama.
  21. World Net Daily, “U.S. Dollar Facing Imminent Collapse?” Jerome Corsi, Dec 2006.
  22. The Economist, “Sustaining the Unsustainable,” March 2007.
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Posted by Adam Kritzer | in US Dollar | 1 Comment »

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One Review of “The Demise of the Dollar”

  1. John Holbrook Says:

    By my observations only, it appears that the demise of the American dollar has been taking place since the beginning of this Great Experiment, our beloved Nation, The United States of America. She was and I still believe in my heart of hearts a nation of freedom, justice and the pursuit of happiness. There has never been a nation on the face of our creator’s beautiful resplendent and resourceful planet that has provided the basis through this nation’s democratic government for its citizens to become whatever their dreams inspired them to be. Yes, we are faced, once again, with another economic fiasco. This one has the energy and the tendency to be worse than the Great Depression of 1929. Much of it due to the greed of our financial giants and a system that allowed them so much latitude without oversight.
    This nation of just over 230 years has lead the way for many other nations around the globe to lead better lives for themselves and their lineages. America has been the hope and the place for many of the earth’s peoples, for many years. She is not only a melting pot of most of the earth’s nations, but she has always been a generous benefactor to the world at large. Here, we find ourselves, along with all of these other nations of the earth in one of the worst economic situations any of us has experienced in all of our lives, and the only thing I’m hearing is how the United States of America is to blame. It appears to me that ever since this nation made the decision to align itself with the rest of the earth’s nations – becoming part of the world community – it’s been a downhill proposition for the USA. Instead of the world joining us, they seemed to have taken a lot more than they’ve given. Why has there been such an outpouring of US greenbacks in all of the European and Asian coffers? Over the years, we helped to rebuild and restructure all of the nations and been there for them in times of crisis, famine and extreme poverty. Yes, there have been wars and huge divisions in borders, as a result of those wars, but the USA never usurped their lands, nor enslaved their citizens as a result of those wars. In fact the USA has always served as a bastion of democracy and freedom and will always fight to preserve the rights and freedoms for all nations.
    Yet, for all of her many virtues, she is now condemned by the very nations she has stretched her neck out to defend over all of these many years. It took thirteen European nations in 1999 to combine their currencies and develop the Euro. It appears that these multiple thousand years old nations had to come up with a single solid currency to compete, head on with the American dollar. Was this the act of world community? Was this what the USA deserved for her efforts on behalf of the world? As I recall, wasn’t it the entrance of the USA in both World Wars that quite possibly made the difference between living free or living under dictatorship and negatively alternate forms of government for all the nations of the earth? I know a lot of people will retort that all this happened so many years ago, but had it happened, what would they be saying, NOW?
    Perhaps, this is the time for all nations and of their peoples to put their best minds together and devise the correct methodologies to deal squarely with the problems, at hand. It’s easy to blame a nation like our United States of America for all the ills that no one else has the tenacity to take for their own responsibilities. Using the old expression, wake up and smell the coffee. It’s time for a major correction and a global unified and dignified response towards either a world community, or a complete dissolution of the concept of world community. Either we are all in this world together, or we peacefully separate and go our own ways. The idea of blaming and back biting are old and tired expressions and give no comfort or solace to a suffering world.

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