How long can the Dollar Last as the World’s Reserve Currency?
The big question is how long can the dollar last as the world’s reserve currency? Needless to say, that is not an easy question to answer. We recently called the top on the dollar at 89.50 on the USDX. The USDX is six currencies versus the dollar on a weighted basis. More than a year ago the dollar hit a low on the USDX at 71.18. A phenomenal rally ensued from that level expedited by de-leveraging and the closing out positions within the carry trade. A good example of the carry trade was when a bank in NYC borrowed yen. At ½% interest, sold the yen for dollars and bought dollar denominated securities.
All of that is now history as the dollar comes under increasing pressure. We believe the dollar could test 71.18 this year. We also believe the dollar could break down to 40 to 55 over the next few years. The collapse of the dollar is certain. The Treasury and the Fed have committed the American taxpayer to $13.8 trillion of debt and before the dollar goes where it is ultimately going that figure could reach $30 trillion.
In modern times such fiscal and monetary irresponsibility is unparalleled. This abdication of moral responsibility has already begun the process of dollar deterioration and rising interest rates. The result will soon be hyperinflation.
The collapse may be disastrous for all countries, but it is going to be equally disastrous for the corrupt who have brought us to this sad situation. Hopefully as painful as it will be it could create many new opportunities for some. One thing we see as certain is that the elitists will find themselves targets of civil and criminal charges and targets of contempt and derision. The new world order they so arrogantly and confidentially predicted with one world government will again have been a failure.
There is no question where China is headed in this currency war to dump the dollar. They continue to accumulate gold with the intention of having a gold backed currency - something America is, we believe, incapable of doing. Such an ongoing pressing event has to put continual downward pressure on the dollar. China is already by passing the dollar reserve system by settling in other currencies, using barter and through swap arrangements, major changes are in the process of taking place. We do not believe the yuan will be the reserve currency of the future. A better idea is to have a weighted basket of 10 major currencies as a world benchmark. China is heavily dependent on exports and as yet does not have domestic demand to relieve pressure when exports fall. They are also still a dictatorial, communist society in power by force. They also still have an enormous population and wages are still dreadful even though they have increased 10-fold over the past 15 years. Politically both China and the US face populations that are profoundly unhappy and if major changes are not made in both societies, both are ripe for revolution.
Wednesday’s 10-year Treasury auction wasn’t all it was cracked up to be. The yield was 3.99% with 46.8% allotted at the high bid. The bid/cover was 2.62 versus the average of the past ten auctions of 2.40. Indirect participation, of foreign central banks was 34.2% versus an average of the past ten auctions of 28.23%. The only reason the sale went well was that the note had to be lifted 13 bps to 3.99% in order to attract buyers. In addition the Fed had to buy $3.5 billion in longer term maturity bonds and prop up the auction. They cannot fool us. The system sinks into deeper trouble every day. All we can say is you had better own gold and silver. What the Fed did was buy 18.4% of the auction with money they created out of thin air – more monetization.
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