Friday, February 29, 2008

Could the Dollar Be On The Way Out?

The dollar has been the world's reserve currency for more than 60 years. What happens if people no longer want to hold dollars? - MT

Beaten down by fears of a U.S. recession, the dollar is falling with new speed -- creating severe challenges not just for the U.S., but also for sugar traders in Brazil, central bankers in the Persian Gulf and a host of others.The greenback's biggest detractors -- a small but growing group -- say the currency is in danger of eventually losing its place as the world's dominant currency. Jim Rogers, a well-known commodity investor and a former partner of famed currency trader George Soros, has a particularly bleak assessment: "The dollar is a terribly flawed currency and its days are numbered," he said in a recent interview. He cited the U.S.'s huge foreign-held debt as the biggest cause.


Kim said...

The first problem for the U.S. economy would be a possible selling off of our stocks by foreign investors who would rather put their money into markets with a better rate of return. American investors might do the same. The falling dollar would also make it more expensive for the U.S. to purchase gasoline. Gasoline is priced in dollars and the U.S. may not be able to buy enough from OPEC to satisfy the country. Many countries will stop comparing their currency to the dollar and may stop accepting the dollar in regular stores. When I was in Japan, you could use dollars as currency, even though I was getting ripped off in yen. I doubt Japan would still accept dollars. People would need to exchange their money for the foreign currency immediately. Also, foreign countries may want their debts paid early in order to stop the loss of value in that loan. The prices of imports would also skyrocket. The U.S. would lose clout or leverage in many trade situations.

I don’t think wages would rise fast enough to keep up with the inflation. That would hurt the purchasing power of Americans and send consumer confidence and spending to much lower levels.

Trusso Cafarello said...

If the dollar is no longer the preferred currency this would cause people and countries to sell their dollar reserves and would further weaken the dollar. The larger supply of the dollar, without demand, will cause a rise in inflation. Prices will increase. This is a huge risk because the United States is deeply in debt and has a huge trade deficit. The only positive thing from the drop in the dollar is that goods will be cheaper for foreigners. Maybe this would cause more manufacturing plants to open in the U.S., but this is not good news for United States citizens, cost of living would be high and poverty would increase.

GERBER said...

If the dollar is no longer the global currency, then oil will no longer be priced in U.S. dollars but probably the Euro. This means that the price of gas in the United States is bound to increase dramatically.

Likewise the dollar will no longer be the currency of business transactions and will have to continually be exchanged. This once again would result in increased pricing in the United States.

While prices of imports will rise, more Americans will feel the pressure to turn to American made products. This might spark increase in production and help stabilize the economy.

If the dollar plummets to the point where it is no longer the global currency means will result in a sky rocking of inflation. This would force many Americans who are currently already living well beyond their means, to reconsider how they live their lives and make some major adjustments.

Annah said...

Is it possible that the exit of the dollar dynasty could be a good thing for America? If all these things happen, and as Melissa predicts, force Americans to reconsider how they live their lives, maybe we will be reminded of what's important. I know I speak from a pedestal, and have never truly known what it means to need like other people in the world. But I have lived among those people and have seen how true happiness is not contingent on consumer goods. I almost feel like we are getting what we deserve. We have lived off credit for so long, both the government and the people. It's time we wake up and smell the debt. Isn't this a natural effect of the cause? Did we really think that our choice to "charge now and pay later" wouldn't have major ramifications down the road? Increasing the price of fuel is causing and upheaval in the constructs of our social and economic system--so be it! Americans have paid far less for fuel for decades. Europe has always paid nearly three times as much. That's why they've invested in smaller, fuel-efficient cars while we keep ballooning our SUVs to gargantuan proportions. I hope the price of gasoline continues to rise. Perhaps then we will build smaller cars, drive shorter distances to work, invest in some much-needed train travel, and start energizing our world with the sun.

Arman said...

If the dollar is no longer the preferred currency than the United States is no longer the greatest power in the world. This is the main consequences. World economy, stocks and markets, despite their global nature are mainly based on the US economy and market.

It is America who decides what to change and how to change the currency, which underlies all economic system of the world. If it were Euro, than European leaders will mainly decide the future of US economy, which is not only economical but also political question.

However, I think it will not happen in the next years. The question is not the value of dollar but also the prestige and power of the United States on the world arena. Today USA still remains and will remain for the next years the main economic, political and military power in the world, which means that USD will underlie world economy.

Danielle N said...

Money = power. If the United States loses its reign on the main form of currency then it also loses its reign on being the world's most powerful nation. The decrease in the dollar's intrinsic value would lead to a rise in inflation and therefore a rise in prices.
Foreign investment would obviously decrease and debts could be called in, further damaging the United State's economic structure.
Lets not forget the obvious problem of an increase in gas prices. The surge in price may make the United States unable to afford its large consumption of gas.

Andy Heger said...

The United States has seen itself as the dominant power in the world for some time, and one of those reasons is because the dollar has been the reserve currency for 60 years. If that changes, it could signal a shift in global power and the acceptance of the dollar worldwide would be lessened.

Also, this weakened dollar has caused oil and other raw materials, as well as inflation, to rise sharply as of late. Investment in the US would decline and Asian investment in stronger currencies like the Euro for higher return rates would bruise the US economy more than it already is. The global tendency to finance America and allow it to spend beyond its means would be halted. Trade status would also be seriously affected as imported goods would cost more.

Bee Anne said...

If the US Dollar is 'on the way out' and is soon not going to be the reserve currency for nations around the world, there are serious economic and political consequences for the US and the other powers in the global system. Today the USD, Euro, Yen, and to some extent the CHF are considered reserve currencies, which LDCs hold as a form of security that they know they can always transfer regardless of the situation of their own currency, and DCs hold to affect their own situation and as a backup form of security. If one of the other currencies, at this moment most probably the Euro, were to become the dominant reserve currency for the rest of the world, it is unlikely that the USD would fall out of that basket completely, though there would definitely be consequences.

For example, the currency would be further devalued in relation to the other strong currencies, and therefore exports would continue to increase as countries could buy our goods even cheaper, however we would also be able to import less and less, maybe even to the point where we could not purchase all the things we wanted. Capital might also flee the country, investing instead in places where development is more certain. Commodities such as oil and austrian crystal would become even more expensive and more difficult to buy. On top of that, inflation would rise and the Fed would have its hands full.

On the political side of the coin (I feel like I'm back in IPE class) the decline of the dollar from the world's dominant reserve currency to an untrusted form of storing wealth would have enormous implications. While it can be ascertained by a simple glance at history that the dollar will probably not be around forever, such a significant decline over a short time would probably spell instability for the international system. The oil-rich countries, NIEs, established nations (or groups thereof) such as Japan and the EU, and rapidly developing ones like China and India would vie for positions of power. The United States would likely be relegated to a lower position on the international political scale as well. I'm not sure it is possible to overstate the implications this would mean. Leaders of this nation would have to think, prepare, and react to things completely differently than they do today, not to mention the changes that would likely occur within the business world.

Like others who have written here and elsewhere on the subject, I am not sure that this is coming in the immediate future. It does, however, paint a vivid picture of the ways in which this nation and its people may be unprepared for drastic change which is nearly certain to happen at some point, however direct or gradual the change may be. Changes in the status of America affect the international system, and that includes changes that occur in the status of the currency that commands the most important economy in the world.

Amanda Teuscher said...

The United States has grown accustomed to being the world hegemon, both militarily and economically. But if the dollar is in fact "on the way out," then the country's place in the world becomes precarious. Because without economic might, how can we finance our enormous military? And without our enormous military, or even the possibility of increased defense spending should the next president choose to limit it, how can we maintain our supposed place as world leader. A decline in the U.S. dollar, for many years taken for granted as the reserve currency, would obviously have very serious political consequences.

But the effects on the American economy, and also the world economy, would be serious as well. Already we are experiencing the unwelcome effects of high gas prices. How would our country adapt if gasoline prices were to increase even more? Gasoline prices have been much higher in Europe, but in the United States we have much greater distances, and we do not have the public transportation infrastructure to accommodate this.

As Bernanke warned the other day, many small banks will probably fail because of the current situation. And foreclosure rates are already high (especially in Northeast Ohio, where I'm from). If the dollar continues to decline in value, imports will begin to cost more. Just a few days ago, I heard a segment on NPR that was discussing the increasing number of stores in places like New York City that were accepting Euros and pounds sterling instead of U.S. dollars from European customers doing their shopping in America.

vincent said...

Nearly 60% of the public thinks there should be more controls on the press.
Polls like these are just what people who hate the press love to read. Generals, politicians and CEOs often remind reporters that the public doesn't like them - mostly as rationale for not being cooperative. There doesn't seem to be much support for aggressive reporting these days. What are your thoughts about this? Why has the establishment gotten the upper hand and what has happened in the ensuing decades since WoodStein (Woodward and Bernstein) broke the Watergate scandal? How do you think the press plays into the establishment's hands and what are the implications for reporters who want to do their jobs?

I think what generals , politicians and CEO’s all say is pretty much crap any way to save/promote/vindicate/cover up the personal interests of relevant parties. I don’t think there seems to be much support for aggressive reporting because of all the times the public had been misinformed or outright tricked. Examples include but aren’t limited to Fidel Castro, Cuba, and the missile crisis; Veitnam; the Black Panther Party and others alike during the civil rights era; the latest era of fear under President Bush

I think the establishment has gotten the upper hand because it has found a way to keep certain/selected things confidential /secret within an organization, therefore making it extremely difficult for reporters to investigate. The head of each department in an organization is told his specific job duties to carry out in order to benefit the organization as a whole. They are not told the duties of the heads of other departments which gives them a limited view of what’s going on in that organization. They only know the ins and outs of their own respective departments. This theory can be applied to the context of military officials, politicians/government officials, and a corporate organization.

Another factor is how corporations own a great percentage of the media. Therefore corporate interest can have a big effect on the reporting making it one sided/biased. Five corporations own about 90% of our country’s media; one of those corporations being General Electric who owns NBC; another being FOX News Corp. who owns several media outlets from TV channels to many journalistic publications.

Reporters don't write for readers, they write for editors - or so the saying goes. What are some of the problems with editors as gatekeepers, especially when that gatekeeper is thousands of miles away and plays a major role in what gets published?

Editors may not understand the process/details of of getting access to interviews of military, government or political officials and the possible danger involved in obtaining this access.

Editors may not fully know the context of the event/situation that the reporter is assigned to investigate. By omitting key points the reporter is left to find them out by themselves possibly putting them in dangerous circumstances.

Editors don’t necessarily know how much control the government/corporations have in controlling/censoring the media of their respective countries; therefore, limiting/skewing the information that is obtained by the reporter.

A reporter may have a solid angle to a story that reveals pertinent information but cannot pursue that angle due to orders given to the editor by higher ranking employees to take the original angle assigned.

Reporters are on the frontlines, but they seldom make an impact on how Washington views an issue. Why is this s? What factors contribute to Beltway Blindness and do you think needs to be done to overcome such myopia?

The reason for this is because the media tells us what to believe is important/newsworthy. As a result the general public knows only what it is told (from TV, newspapers, radio, etc.) and remains ignorant to any information outside that spectrum. Corporations own the media and dictate what the general public knows not so much because they think they know what we want to see, but because they make us believe what we see is what we want. A perfect example is the abundance of entertainment news whose sole purpose is to cover the lives of celebrities and report every detail. There are constant ads telling us how we should look, feel, act, fear and do – all distractions from important issues in our country. Things reported to the public that are of any significance are put into expert terms/jargon that make it difficult for the general public to comprehend. Then we are reassured that our government is taking care of it, and the public accepts this.

Heather said...

America has benefited greatly from its world power. But because of the increasingly weaker dollar, many foreign companies are considering the pros and cons of changing to the euro.

If this happens it will change America's place in the world. America is in extreme debt and the change to the euro would not help. The low prices that we are used to would not be possible because the price of imports would increase.

Also Americans would have to learn to live within their means.

shutts said...

I agree with a lot of what’s already been said here. If the world switches away from the dollar, American influence will take a blow (although some would argue that is already occurring as the dollar slowly weakens, and has been for several years), prices of good will increase, putting pressure on American consumers and changing spending habits which could lead to more saving and a subsequent recession, investors will be hesitant, though foreign investors could increase their holds in the country. Another point to consider is the effect this would have on the countries pegged to the U.S. dollar, like Jamaica.
This is all a doomsday prediction. I'm not an economist, so my analysis is heavily based on reporters and economists, but is the situation as dire as analysts are painting it or is there possibly some over-anxiety?
It reminds me of a book I read a couple summers ago called The Long Emergency, by James Howard Kunstler. I didn't have a sophisticated enough grasp on the oil industry to counter his arguments, but slowly some of his predictions are coming to fruition.

Sanford said...

I would have to agree with many of the other blogs posted. Money is power and if the United States loses the dollar as the main currency, then we lose our standing as one of the most powerful countires in the world. I'm not a big economy buff, but I can definitely see this being a problem for travelers, and exporters/importers. The dollar in some cases is more expensive than other currency used. Does that mean people with more valuable currency will not want to do busness with americans because they feel they are not geting their fair share?

Overall this could pose nothing but a negative impact on our economy, I'm not sure what it will do for the rest of the world.

Bethany said...

If the dollar no longer is used as the world’s standard currency, a major impact would be symbolic. By setting the standard, the United States keeps maintains a sense of power as a key economic player that would be lost if we switched to the euro or another currency.

In addition to symbolic changes, a switch in standard currency would have other impacts. How would a more weakened dollar affect inflation, exchange rates and buying power? Mostly negatively. I’m not sure if Americans will feel the pressure to return to American-made goods. If poverty increases, I think peoples’ focus will be on providing for their families, not doing their part to stabilize the economy. On the other hand, buying American-made products might be cheaper than buying imports because of weakened exchange rates. The U.S. government might step in with some program to spur the economy, but with already being in extreme debt and if the war is still going on by then, resources to fix the economy will be limited.

I agree with other posters that Americans will have to reevaluate their lives, but I also recognize that I really have no idea what it means to go without. I know many others share this perspective, and while it would certainly be helpful to be less wasteful, I wonder if the truly wealthy will have to face the facts. Instead, will it be those Americans already living in poverty that continue to feel the effects first and hardest?

Kirsten Brownrigg said...

If the dollar loses its value to the point that the euro replaces the dollar as the international currency, there is the potentiality that people in other countries, investors for example, might sell the dollars for euros, and that might dump the dollar back into the market, which would only increase inflation back at home. Consequently, we would simply have to enact policies to fight inflation by either raising salaries massively to keep up with costs or destroying money -- reducing the amount of cash that's available -- managing the money supply, so to speak. We would essentially lose our influence in the global marke; we would lose the influx of money we receive from other nations -- and it might encourage almost an international version of "White flight" -- where the wealthier fled the cities for suburbs, except in my scenario, major international corporations would decide their headquarters would be better based in Europe. Obviously, homegrown corporations might stay in the U.S., but newer ones could decide that they would be better-placed in a foreign country.

A great deal of our national debt is owned by China and other nations in Asia and if they were to decide the dollar was depreciating too much and they determined to cash in on our debt, we would likely default. If it got to that point -- as bad as it could be -- the U.S. might have to borrow even more money to pay off its debt, or declare the international version of bankruptcy. Investor confidence would plummet, the stock market would take an even bigger hit. At the very least, we would face the worst recession yet ... and that's a best-case scenario.

At worst? A full-blown depression.

Tina* said...

Of course, the change from the dollar as preferred currency would reflect a major change in the world wide economy.
From a European perspective, however, this change is not as dramatic as from an American perspective.
With the Euro getting stronger, the political and economic influence of Europe does so, too.
The weak dollar makes a lot of foreigners come to the United States, even if it is just for Christmas shopping. That means the United States are probably becoming an even more attractive travel destination for tourists.
The export business, is another economic branch which takes advantage from the weak dollar rate. Maybe the U.S. economy should focus more on their export industry in the future.
The bottom line remains, that days of the United States as the world's greatest economy are numbered.
But even if the Euro should become a new preferred currency, I don't think this is going to stay for the next hundred years. There are other industries and economies that raise much faster than the European one. Who know's maybe someday the preferred currency will be the Chinese Yuan?

Jourdan said...

I don't know about anyone else, but I could only open one of the story links for this post. I'm not terribly well-educated about the economy (the required macro and micro courses excluded), but I do have a brother who is a businessman for a U.S. company in eastern Europe. According to him, the most prevelant economic discussion is when the United States is going to burst. He says we take it for granted over here, or at least that we see things in little hiccups of recessions or growths. But abroad, he says the people are much more cynical about the economy. They liken us to Rome perhaps even more than we'd like and they know (allegedly) that a great Falling Out is inevitable.

But this is not foreigners wishing ill on Americans. According to my brother (and probably anyone else who knows), they depend on our economy. The entire world depends on our economy and hate us they may or may not (depends on where you are, I guess), they do not want our economy destroyed. I would be hesitant to think the Europeans are rushing to topple the dollar with the Euro. In the most naive way I can put it, it appears they are...not satisfied, but comfortable with the way things are. That is, they realize a huge shake-up will hurt them long before it helps anyone. So I don't know if the whole world is watching in giddy anticipation for the great US$ crash, but fearing for it. All of the products they manufacture, where do they go? Here. Same with China, same with the service sector. I do not think it will be destroyed. I wasn't alive then, but I'm under the impression that the economics of the early, then late seventies was more drastic than this. Of course, there are many factors that make them hard to compare, but I think we'll pull through this. At least, I don't think we'll be paying for things in pesos or Euros anytime soon.

PS - sorry this is tardy; I couldn't remember my password and had to do an email verification.

Jennifer said...

If the dollar lost value to the euro or other rising currencies, there would first have to be a change in our foreign diplomacy. For many decades the dollar represented the U.S. power and decision making. If it changes to a weak amount, negotiations may not always favor for our position. I think the U.S. would become a player in the world rather than the leading decision maker.
This may not necessarily be a bad thing. I think it's time for the U.S. to limit where they put their hand.
A negative result of a weak dollar will be the amount of jobs and opportunities available. Immigrants will be less likely to come to America seeking fortune and they'll be more apt to migrate to Europe. This will further change the economy based on shifting demographics and patterns.

Karen said...

I think it is telling that the dollar is not the dominant currency on the world stage any longer. (For years the United States has been losing power in other areas, it is not surprising that the dollar is falling.)

Topics in the other blogs touch on some interesting topics such as the loss of the dollar meaning America is losing power on the world stage. Very interesting--us losing power would require a change in everything, especially foreign policies. We might have to actually negotiate with other leaders and other countries, rather than order them around.

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