Yesterday the Canadian dollar topped out at 1.06 cents US. Five years ago if you went to Canada you could swap each dollar for more than $1.50 of Canadian money. Today if you go you only get about 95 cents...not even a full Loonie!
So what? Well it is a sign, amongst many others (record gold, oil, wheat, etc. prices) that the US dollar is losing its status as the "world's currency", a status that has allowed America to live beyond its means for so long. Here is a lovely analogy (below the fold):
Imagine if five people were washed up on a desert island: four Asians and an American. In splitting up their duties, one Asian says he’ll fish; another will hunt, another will look for firewood, and another will cook. The American assigns himself the job of eating.
"The modern economist looks at this situation and says the American is key to the whole thing," says Schiff. "Because without him to eat, the four Asians would be unemployed." The alternative: Without the American, the Asians might eat a little more themselves and even spend some time building a boat. This is happening as we speak: With the rise of the Chinese consumer class, the local citizenry is now spending, and the country is no longer totally dependent on exports. Which means they’re no longer totally dependent on us.
There are really two points to be made here.
- The US dollar is losing its status as world currency, a status that has allowed the US to avoid normal economic laws for some time now.
- The rise of other nations and currencies that is going to change how America relates to the world. Although America remains the only military superpower (hey if you spend 50% of the world's spending on the military you had better be a superpower), its role as the predominant economic superpower is being usurped, just as Britain's was in the early 1900's.
To highlight these changes let's look at a few recent stories from the media.
1. Who is the richest man in the world? If you said gates or Buffet, you'd be wrong.
A record-breaking performance by India's stock markets has put the industrialist Mukesh Ambani at the top of a list of the world's richest people.
Buoyed by unprecedented inflows from US and European investors, the benchmark Mumbai Sensex stock index topped 20,000 for the first time yesterday – having almost doubled in value in the last two years.
One of the results of the surge in share prices has been a boost for Mr Ambani's Reliance Industries, a powerhouse of the country's industrial strength and its most valuable firm. Its excellent performance, along with that of two other of the group's companies, saw the net worth of its chairman and managing director rise to $63.2bn (£30.6bn) yesterday.
The Press Trust of India reported that the increase placed Mr Ambani above such figures as Microsoft's Bill Gates and Mexico's Carlos Slim Helu, who are each worth just over $62bn.
2. The US dollar's role as a local currency may be ending
In many countries around the world the US dollar serves as the unofficial number 2 and sometimes number 1 currency. Go to places like Cambodia or Burma, or...and you can use dollars pretty easily. This means that there is a stack of US dollars floating around the world creating a demand that keeps the dollar value higher than it would be. That may be changing.
Bargaining while buying some trinkets in the Maldivian capital, Male, recently, I heard most unexpected words: "You can keep your dollars."
The tiny nation of 1,200 islands has long accepted the US currency out of convenience for visitors and financial sobriety. The dollar tended to do better in global markets than the local monetary unit, the rufiyaa. That may be changing and it is a bad omen for the world's reserve currency.
These things start out slowly, and in recent months I have had similar experiences from Mexico to Vietnam. In restaurants, taxis and shops that long accepted dollars, many are opting for local currency. The reason: concerns the dollar plunge that analysts have predicted for years is afoot and that the United States is not interested in halting it.
There is also a realization that something transformational may be happening in global markets. Some states that long pegged their currencies to the dollar are scrapping the policy while others are considering it. A survey by HSBC Holdings found that twice as many Gulf businesses see benefits from dropping currency pegs to the dollar as those that see negative consequences.
3. The US influence on the world economy is declining.
Okay so this is not a direct relationship...China's economy will take some time to reach the size of America's...but China has already overtaken the US as the world's biggest emitter of CO2. The US can't even claim to be the world's biggest polluter and more. Is nothing sacred <snark>
China has overtaken the United States as the world's biggest producer of carbon dioxide, the chief greenhouse gas, figures released today show.
The surprising announcement will increase anxiety about China's growing role in driving man-made global warming and will pile pressure onto world politicians to agree a new global agreement on climate change that includes the booming Chinese economy. China's emissions had not been expected to overtake those from the US, formerly the world's biggest polluter, for several years, although some reports predicted it could happen as early as next year.
When the US dollar is used worldwide and used to price commodities traded worldwide other countries need to hold US dollars. This "extra" demand works to the US's advantage. For example China, Japan, etc lend their extra US dollars back to the US government at very low interest rates.
In the past every country that has run a current account deficit (basically spending more than you are making as a nation) of more than 5% of GDP has run into currency devaluation issues. Think Argentina if you will. The current US current account deficit is now in the 5.5% -6.5% range and finally we are starting to see the "impact" as the dollar, day after day, falls to record lows against other currencies.
The fall of the dollar may not seem important to many people and it barely registers on the nightly news, but it will eventually make all imports more expensive, it will make US assets cheaper for foreigners to buy, and it will reduce the US standard of living. In other words it is a big deal.
Unfortunately there is no easy way out. For now the Fed has decided to NOT face the music and has decided to bail out the economy (Wall Street) first. As a result expect more inflation and an even lower dollar. To really fix the problem we need to save more and spend less. Its that simple and that difficult.