There was a time that people all over the world would trade in their local currency for good ol' American Dollars just as fast as they could. Those days are gone.
Antique store owners in lower Manhattan, ticket vendors at India's Taj Mahal and Brazilian business executives heading to China all have one thing in common these days: They don't want U.S. dollars.
Negative dollar sentiment is growing in nations where the dollar was historically accepted as equal or better than local currency — and dollar aversion is even extending to some quarters in the United States.
To be a "reserve currency" means that people have faith in the value and durability of the currency. They believe that it will buy as many goods next week that it does today.
To achieve reserve currency status has all sorts of benefits, such as the ability to borrow at much lower rates and purchase commodities at a slightly cheaper rate.
But 7 years of Bushonomics has shaken the world's faith in the American economy and currency.
"If the dollar's going down ... save it in Euros!!!"
- billboard in Bolivia
For the first time ever, the market has priced in more risk to U.S. Government Treasury notes than German Government Bonds. That is a direct reflection on how the free market views the ability of the American government to pay its mounting debts, and coincides with the Federal Reserve's plan to swap its Treasuries for dubious mortgage-backed securities.
Even Moody's is considering downgrading our sovereign debt.
"Gone are the days when we used to run after dollars, holding onto them for rainy days," said Vijay Narain, a tour operator in the city of Agra where the Taj Mahal is located. "Now we prefer the euro. It gives us more riches."
[...]
"Whip out dollars at the French flea market now, and they'll shoo you away," he said at his store near apartment buildings where Europeans are snapping up units because they've become dirt cheap. "Before it was like the second coming of Christ, but now they don't want it or if they do take dollars, they're going to take their pound of flesh."
"The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency. Now the rest of the world is increasingly unwilling to accumulate dollars."
- George Soros
It isn't just places like India and Brazil. The Chinese no longer want our dollars either.
Then an elderly couple, each clutching a handbag, sidled up to the man and asked if he would change their U.S. dollars into Chinese yuan.
"No, I don't want dollars," he snapped, shooing them away with a wave of his pudgy hands.
Nobody here wants the lowly American dollar anymore. Not businessmen, not bankers, not even the "yellow bulls" like this man, who has been a black-market trader for years and whose presence in the lobby of a large state-owned bank is tolerated, oddly, by its managers.
[...]
"It's meaningless to buy U.S. dollars," said another Chinese black-market trader whose turf is in front of the Citibank branch in Shanghai's riverfront area known as the Bund. The currency has lost its luster, he said.
"Even the government doesn't want it."
The Chinese government no longer wants our dollars because it already has too many of them and it broke its currency peg to the dollar in 2005. Last year Kuwait also broke their currency peg to the dollar. And now Dubai is considering breaking the currency peg to the dollar.
The falling dollar is reeking havoc on the economies of our allies that have retained currency pegs to the dollar (these include most of the oil exporters in the world).
Indeed, some analysts believe that the Fed’s aggressive policy-easing to stabilise the US economy may end up destabilising those emerging-market economies with fixed or quasi-fixed dollar pegs.[...]
"The last thing these economies need is an aggressive Fed easing imposed on them at a time when commodity prices are going through the roof spurred by a falling dollar," he adds.
Thus, the prospect that surging prices, particularly food prices, could lead to social unrest and political instability, is growing. "By failing to recognise the external dimension to the credit crunch, the Fed could introduce a new source of instability," says Mr Bowers.
OPEC is very unhappy with how the Bush Administration has "mismanaged" our currency and economy. While you would never hear it on Fox News, they lay the blame for high oil prices squarely on our leaders in Washington.
"OPEC is angry that President Bush wants them to increase production while the dollar is sinking and the administration is doing nothing about that," said Fadel Gheit, an oil analyst at Oppenheimer. in New York. "It's really not surprising that they have ignored him."
If that wasn't enough disrespect for our aging greenback, some NY City merchants are now saying "Euros Only".
"I need euros," said Garba Bar¿, a street vendor who sells cellphone covers and iPod cases from a table on Broadway in SoHo. He explained that he is from Niger, which he visits frequently and where the euro is commonly used.
"The dollar's going down," he said. "I don't want to change it before I go home."
While many of you are aware of, Iran is already selling its oil in currencies other than dollars. But you may not have heard that Russia, the 2nd largest oil exporter in the world, is about to do the same.
The dollar crisis has gotten so bad that major investors have said the Fed's handling of the currency will "destroy the U.S. dollar".
You would think that this would be chicken little talk, until you consider the warning that the IMF gave the other day.
The International Monetary Fund today warned authorities worldwide to "think the unthinkable" in planning to cope with a mounting crisis in the global financial system.
On this day, when the dollar hit new all-time lows, and gold hit $1,000 an ounce for the first time ever, we should examine the idea of what is a currency.
The more things change...
For all but the last two centuries of civilization's history there was no such thing as a "reserve currency". People traded in assets, not liabilities. In primitive civilizations you traded in cows, or baskets of grain, or wives and children. In more advanced civilizations they used money - gold or silver and sometimes copper. (Speaking of copper, Congress is considering issuing pennies made of steel because our currency has been debased so much that it now costs 2 cents to make a penny.)
But whether it was a primitive or advanced civilization you always exchanged an asset, not a liability. It made absolutely no difference whether a gold or silver coin was minted in Persia or Rome, or even if the country that minted that coin still existed. The metal itself retained its value irregardless.
Only in the past century have liabilities taken the role of money.
"This is just the start of things, and if the government continues to give away money and torpedo the dollar, gold will do nothing but move higher."
— Zachary Oxman, Wisdom Financial
What I mean by "liabilities" is debt.
For instance, how do you think the dollars in your pocket were created? What gives them value?
The answer to both of those questions is: debt.
The U.S. Dollar, and any paper currency for that matter, is as only as valuable as the ability of other parties to pay interest on the debt they have taken on. Debt was issued when each dollar is created.
"The weakening, in reality, is a reflection on how the world is measuring the U.S."
- Thomas Sowanick, CEO of Clearbrook Financial LLC
The problem with this system is obvious - what if a large segment of society can't pay interest on their debt?
That is exactly what we are experiencing today as the subprime meltdown leaks out into every facet of the financial economy, and the reason why a declining dollar problem has morphed into a declining dollar crisis.
Financial Genocide
Seven years ago the dollar was strong, the economy was strong, and America was respected around the world.
What happened? Bush happened.
In the current issue of Manufacturing & Technology News, Washington economist Charles McMillion observes that seven years of Bush has seen the federal debt increase by two-thirds while US household debt doubled.
This massive Keynesian stimulus produced pitiful economic results. Median real income has declined. The labor force participation rate has declined. Job growth has been pathetic, with 28 percent of the new jobs being in the government sector. All the new private sector jobs are accounted for by private education and health care bureaucracies, bars and restaurants. Three and a quarter million manufacturing jobs and a half-million supervisory jobs were lost. The number of manufacturing jobs has fallen to the level of 65 years ago.
This is the profile of a Third World economy.
The "new economy" has been running a trade deficit in advanced technology products since 2002. The US trade deficit in manufactured goods dwarfs the US trade deficit in oil. The US does not earn enough to pay its import bill, and it doesn't save enough to finance the government's budget deficit.
To finance its deficits, America looks to the kindness of foreigners to continue to accept the outpouring of dollars and dollar-denominated debt.
The kindness of foreigners is beginning to run dry. But that's not the first stage of a dollar meltdown, that's the second, and most dramatic stage. The first stage was when Bush decided to pay for expensive wars by cutting tax revenue.
Nobel Prize-winning economist Joseph Stiglitz laid the blame squarely on President Bush and his Iraq War.
THE Iraq war has cost the US 50-60 times more than the Bush administration predicted and was a central cause of the sub-prime banking crisis threatening the world economy.
[...]
The spending on Iraq was a hidden cause of the current credit crunch because the US central bank responded to the massive financial drain of the war by flooding the American economy with cheap credit.
"The regulators were looking the other way and money was being lent to anybody this side of a life-support system," he said.
That led to a housing bubble and a consumption boom, and the fallout was plunging the US economy into recession and saddling the next US president with the biggest budget deficit in history, he said.
All the "pump-priming" the Fed and Congress are doing is beginning to cause more damage than good. The "real economy" is gasping for breath. The weak and pathetic economic growth we've seen since 2003 has been largely economic stimulus, and not healthy growth. We've become addicting to cheap credit like an addict becomes addicted to a quick fix.
More cheap money may feel good for a short time (increasingly short time), but it only makes the economy sicker.
It is my opinion that too many people are ignorant and in denial about the economy. Economists, politicians, media pundits all prescribe the same quick fix that we've seen for the last seven years. Those quick shots of cheap money may have boosted economic numbers through speculation, but they have only done damage to the real economy.
We are way too far along for any solution that doesn't involve pain. The only question now is how much pain.