No, i’m not talking about our Glorious and Supreme Leader and Decider, George W. Bush, i’m talking about George Washington, our president who happens to grace our unit of currency, the dollar bill!
The dollar has been steadily losing value when measured against other major world currencies. Today, the best of our Arab allies(?) , the United Arab Emirates started moving out of the dollar and restructuring their foreign reserve holdings. This is an ominous sign, because the main news story that started this was the circulation of the Euro is about to surpass the dollar. The dollar’s value has been eroding against the Euro for some time.
I have mentioned this danger in the past, but it looks like the sinking opinion of our country in the eyes of other nations because of the Iraq quagmire is a large factor affecting the exodus from the dollar by the other countries.
Nations that produce oil that we import are starting to make noise that they would prefer being paid in Euros instead of dollars. This is the point of no return I have been warning about! The only factor that keeps America’s debt financed, engine of growth running is that the dollar is the world’s reserve currency. That gives our currency the highest degree of safety and liquidity in foreign exchange markets. If the dollar becomes second to the Euro, look forward to major economic changes, like;
1. The cost of foreign goods will go higher, because of higher transaction cost. Yes, that will also include the cost of crude oil, the “heroin” that our energy dependent nation needs to sustain our standard of living.
2. Interest rates will move higher and the times of a 5% mortgage will be history, or not seen for a very long time. Our national debt is held 44% by foreign nations. The sinking value of the dollar leaves those investors with the decision to dump the dollar and liquidate these debt securities, or hold their investments. If a corporate bond loses its value and the secuirty is perceived to be less that then at issue, the holder would require a higher interest rate to continue holding the debt. If we want the foreign entities to continue financing the American lifestyle of excess, they will want a large increase in the return they are receiving on their debt…i.e. a higher interest rate for the increased risk to them. And who pays the extra interest…mom and pop taxpaying America, thats who!
3. Consumer debt is already at a record high level. There are credit card companies, like Citibank that are currently charging up to 30% interest to consumers. The “plastic card loan sharks” are limited in raising rates and if “real” interest rates go up, they will be sending armies of lobbyist with bags of cash to Washington to buy some legislative relief. Mortgage foreclosure rates have been on a steady rise for months, but if rates start moving up there are many people in the last few years that bought nice new homes on adjustable rate mortgages whose payments will be going up!
4. Even federal regulators have started sounding the warning bell. Professor Laurence Kotlikoff states that the U.S. economy is heading towards bankruptcy, and is heading into problems that can only be helped by major belt tightening.
All together, we as a country really need to get our financial house in order before the American story becomes a blues ballad of bankruptcy!