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Dollar is Dead! Move Ahead

Hari Anil
Thursday, September 8, 2011
Hari Anil
‘The feast in the neighbor’s house is good, but it will not last forever.’ This applies to the global economies and companies who relied way too much on the U.S. dollar and got their fingers burnt. But now, most economies having realized this mistake are coming back to the reality and are in search for new markets and new business scopes.

In the last decade and a half, the dollar was on a rise. We have seen the exchange rate rising from Rs. 31 in the January of 1995 and peaking around Rs. 51 in March 2009. But from the looks of it we can see the scenario is changing, the fire seems to be on the verge of going off and dollar is not that hot any more. So, is dollar losing its charm? Is it dying?

The U.S. as a whole is struggling in every aspects of the economy. The debt is mounting sky high, the job market remains low, growth rate is low, and while the government has about $74 billion in its reserve, it has over $14.6 trillion in debt. Hence, it comes as no surprise that it lost its ‘AAA’ status for the first time in its history. The U.S. Government has tried to fix the mess they created in their and the global economy by deploying an age old model that failed over and over again. They decreased the interest rates; which should increase the money supply which in turn should help the government to increase deficit spending and to redistribute more wealth to where it is needed, well in theory at least. In the real world this never is that simple. Once this cycle starts it will just create another bubble which will burst sooner or later and the situation will go back to worse than before. This is exactly what is happening even as you read this. There are just too many things that points that the future might not be that pleasant for the U.S. and its dollar.

Dollar is no longer Fool Proof Investment

The U.S. government kept on increasing the debt ceiling and the debt kept piling up like and came to a situation where no one, including banks, has a dime to spare. Then the government tried to fix this through quantitative easing, which did not work as they expected it to. Further, the spending on economic recovery is putting additional burden on the government and is increasing its federal deficit. Countries like China, Japan, UK and some rich Middle-Eastern countries are unhappy about this situation as they have huge investments in dollars. As of now the U.S. government owes about $4.5 trillion to foreign countries. But in a short term there is nothing much the foreign countries can do to counter this and protect their investment; the dollar is losing value and they are losing money but they cannot withdraw their money as a whole. The countries can withdraw only a part of their investment at one time after which the remaining is going to get downgraded even further. So, this is not a very financially viable solution. But this technicality does not seem to be stopping China. China has U.S. Treasury Bonds worth $1152.5 billion. The country has started to pull out their resources from dollars and invest it in other hard resources like oil fields and mineral deposits in Africa, Australia and Latin America. It might just be a matter of time before other countries start following their pattern.

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