Dollar is Dead! Move Ahead
Date: Friday , September 02, 2011
‘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.
The World is drifting away from U.S. and its Dollar
The saying that, ‘When America sneezes the World catches a cold’ is very true, and the world has learned this the hard way, from the last two recessions. Actually, one of the best things that the Great Recession has done is that it taught rest of the world that they cannot always depend on the U.S. for their daily bread. Many corporations in countries like India and China have started looking outside the U.S. for opportunities. In India, most of the companies have realized the presence of the huge untapped domestic market only after the U.S. market expired. Now these companies in the country are concentrating more on this huge domestic market and building their roots here. Similarly, China and other emerging countries are also now concentrating on domestic market rather than the U.S. or the European markets. None of these remedies which the rest of the world is using to undo the damage done to their economy and the global economy is going to help the U.S. or its dollar. In reality this will cripple the U.S. even more and will damage its economy further.
Furthermore, the world has started to adopt other currencies as mediums for international trade. The rising value of Euro, Australian Dollar and Yuen are actually making them a better choice as trade currencies. The European Union finally seems to have gained its stability, Germany is growing at an enormous pace, the situation in Greece is finally settling down, and surveys are predicting that all the European banks will survive another immediate recession. All these constitute to the increasing value of Euro and based on the present situation it can be assumed that there is no immediate threat to Euro. As a result of all these the world countries are shifting part of their foreign exchange reserves from dollars and into other currencies. The world is moving away from the U.S. dollar.
China is Outgrowing U.S.
The U.S. is experiencing a lukewarm growth, while on the other end of the world China is growing in hypersonic pace and is expected to outgrow the U.S. economy in the next 4 – 5 years. According to a report of International Monitory Fund (IMF) the Chinese economy would grow from $11.2 trillion in 2011 to $19 trillion in 2016. However, during the same period, the U.S. economy will rise but at a slower pace and reach a mere $18.8 trillion from its $15.2 trillion in 2011. If we calculate GDP, China will not out grow the U.S. in 2016, yet no matter how hard the likes of Donald Trump deny this, it is only a matter of time before China overtakes the U.S. to be the biggest economy in the world.
When we add all these together things do not look rosy for the dollar. It seems the reign of the dollar is about to come to an end. The world has started to move away from the U.S. and the dollar trade. This might just be the beginning of the end of the world of trade as we know it and in the near future we can expect to see global trades happening in local currencies of the countries involved rather than in U.S. dollars. The U.S. dollar is dying and investing in it will be a mistake. The world has now come into terms with this reality and is moving on.