What Happens if Foreigners Don’t Want our Dollars Anymore?

by Wes Bridel on November 12, 2009

in Stewardship

The US is playing a dicey game with its Dollars

The US is playing a dicey game with its Dollars

Even with the devaluation of our currency over the decades, the US Dollar is still the world’s reserve currency today.  People have felt for many years that it’s a safe place to hold their wealth.  Foreign governments hold their wealth in US Dollars.  Financiers the world over have done the same.  Even most commodities are settled in US Dollars.  Meaning you need dollars to buy oil (for instance) and you must accept dollars to sell oil.  The whole world runs on the dollar standard.  But what if no one wants them anymore?

Foreign Banks

There are many signs that the Dollar standard is in fact changing.  At the recent G20 meetings US Treasury Secretary Timothy Geithner had to defend the US’s Dollar policy as the twenty largest and strongest countries in the world expressed concern over it.  Some at the United Nations have called for a new world reserve currency.  China called for the IMF’s quasi-currency (SDR) to replace the Dollar in March.  Many other countries have as well, including Russia and India, but China should make you stand up and take notice.  They have more to lose than anyone if the Dollar collapses since they hold a high percentage of their $2Trillion of reserves in Dollars, primarily our debt, which would drastically be reduced in value if the Dollar were no longer the world reserve currency.

China clearly sees the writing on the wall for the US Dollar, because instead of simply keeping their money in Dollars as they have been doing for decades, they are actively buying anything they can get their hands on which is commodity based.  One of their officials admitted that they wanted to buy more gold but that the market was so small, the price begins rising every time they buy it, so they can only buy so much at a time.

Commodities

China has begun exchanging goods with Brazil using their own currencies instead of dollars.  China and Russia are considering exchanging oil and other goods using the Yuan and Ruble instead of Dollars.  There was a report in the Independent of Britain with sources claiming that the Arab states along with China, Russia, France, Brazil, and Japan were discussing exchanging a basket of currencies instead of the Dollar for their oil dealings.  What would happen if none of these countries need Dollars anymore?

Bankers/Financiers

Did you know that Wegelin, a Swiss bank around since 1741 (older than the US), will no longer hold US assets?  The US government has used some extremely questionable tactics and Wegelin has advised their clients to exit the US with their money.

John Paulson has been the most brilliant money manager in recent memory.  He made $3.7 Billion by understanding and profiting from the collapse of the mortgage backed security market.  He’s made similar investments which profited brilliantly – proving that he understood what was happening in our economy better than others.  He has decided no longer to settle his accounts in Dollars or to hold them, opting instead for gold.  He sees the US banking system beginning to actually lend the Dollars created by the government between 6 and 24 months from now and 2-3 years after this point for inflation to hit 12%.  He recently said at Grant’s Fall Investment Conference:

Once the Fed began directly buying Treasuries and mortgages, I lost faith in the Dollar as a reserve currency for my assets… What I’m looking at is not where gold is going to be tomorrow, one week from now, one month from now, three months from now. What I’m looking at is where is gold going to be vis-a-vis the Dollar one year from now, three years from now, five years from now.

And I think with a high probability at each of those points, gold will be higher than it is relative to the Dollar today. That probability increases the further out you go, and the magnitude of that difference also increases the further out you go. So when I look at what the risk is, the risk to me is far more staying in Dollars than it is in gold at this point.

This quote came to me through Porter Stansberry (www.stansberryresearch.com)  I get a tremendous amount of information from them as well as www.caseyresearch.com.    Although I should say that they very definitely aren’t believers and I am occasionally assaulted by this fact.

You should take note of this quote for a couple reasons.  One is that it comes from, perhaps, the most successful investor today.  Where he thinks the economy and the Dollar are going is more valuable to know than what CNN pundits think.

Also, if this is how money managers are beginning to think, we’re back to our original question, “What happens if people don’t want Dollars anymore?”  If the smartest of them all has decided not to hold dollars, how long till the others decide this?

If everyone in the world is selling Dollars instead of buying them as they have been doing for many decades, what would happen to the value of the Dollar?  It would collapse.

What would happen to interest rates?  Where would the US Government get the money they borrow every year?  Right now, they hardly pay anything in interest rates (a massive amount of money, but at very low rates).  What would lenders require if the Dollar was no longer a very attractive place to keep money?  A much higher interest rate.  What would this do to our economy?  To interest rates that you must pay for things?

You’re invited to a free event this November 18th in Austin to discuss these things in greater detail.  If you would like more ideas on how to prepare for this coming storm, please sign up for our free newsletter here.  If you’d like to read more about the spiritual realities behind what’s happening, read the series we just finished on Daniel.

This post is Part 6 in the series Financial Outlook of the United States. To continue with this series, click on Pt 7. To gain more insight, you can read about the coming storm here, in Pt 1, Pt 2, Pt 3, Pt 4 and Pt 5.

Photo credit: ChupaLoL360

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