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The Dollar Will Die by a Thousand Cuts
Back in January I wrote an article, ¨China, 14 Currency Swap Agreements and Counting¨. Since then China has added two more agreements and have started actively trading with Japan using the Renminbi and the Yen. You may think that this is no big deal. If you are one of the people on the planet that relies on the stability of the US Dollar, this should be alarming news.
China does not want US treasuries any longer. The US government has shown that it has no intention of protecting the value of the US Dollar. The Chinese hold about $3000 Billion or $3 Trillion of US Treasuries or simply put debt. This puts China in a very dangerous position. They must slowly take the US debt off their balance sheets. China and the world recognize that the US Dollar is slowly fading as the world reserve currency. The BRICS are pushing for a new IMF currency. This would benefit countries holding US debt. They would be able to transfer the treasuries to the IMF.
Quietly Indonesia has announced that they will issue sovereign debt or bonds in Chinese Renminbi similar to their, ¨Samurai Bonds¨, which were issued in Yen. The ASEAN, group of nations have decided to finance each other. This partnership was formed to strengthen the regional ties and to help support sustainable growth in the region. For many years the US has had the luxury of borrowing from China and Japan to pay for its debt. The days of cheap international money for Washington are coming to an end. The US Treasury and the Federal Reserve will be forced to buy more of its own treasuries.
Iran is now trading oil for gold. The US and EU led embargo against Iran has resulted in an unintended trade. Prior to the embargo the US Dollar, ¨PetroDollar¨, was the medium of trade for all oil transactions. India has decided that its reliance on Iranian oil was more important than following the US and EU. China and Russia are also in talks with Tehran to find alternative ways to trade. In February there was news of Iran buying wheat using gold in order to bypass the US and EU sanctions. Recently China and Saudi Arabia signed a deal to build a huge oil refinery to be up and running by 2014. Is this a sign that the PetroDollar days are numbered? When Saudi Arabia moves away from the PetroDollar system this will spell doom for the US Dollar.
At home the US Federal Reserve has decided that it will continue its policy of low interest rates. This action will keep the country and the world awash in US Dollars. Ben Bernanke has said that he would like to devalue the US Dollar by 33%. This is a disaster for the people who have savings. It is a great deal for the US government. They get to pay back their debts with cheaper currency. The consequences are increased costs at the gas pump, grocery store, homes, education costs and everything else. This is called inflation, which would be fine if wages kept pace. The sad part is that the people will suffer. We are seeing a shift in the USA and it is not pleasant. I do believe we will see instability in the USA over the next decade.
How does one protect themselves from the inevitable demise of the US Dollar and its reserve currency status? Buy precious metals. Buy hard assets that you own like a house or a farm. Start growing your own vegetables and learn to can, this alone can save you thousands per year. Shop at your local farmers markets where the produce is sourced locally. Invest in sustainable energy for your home or business. Debt can be enticing in this kind of market but for the average person I would not recommend it. For an investor debt could be a great option if you borrow at fixed rates.
Expatriation could be an option for the adventurous. I left the US over a year ago and moved to sunny Panama. This option is not for everyone, but it could be a great way for you to hedge against the demise of the US Dollar. Currently the Dollar is experiencing a period of, ¨Safe Haven¨, status due to the instability in Europe. This period may last a few months or a few years. Take advantage of this situation while you still can. Buy property or convert your Dollars into another currency internationally. The key is to do something. To think that the Dollar can continue in its current role indefinitely is madness. The Dollar will die by a thousand cuts.