Dateline: Tokyo, Japan
Many people have been talking about the end of the dollar for years. In fact, I really first heard the argument against the dollar about 1971. I read a remarkable book by Harry Browne called How To Profit From the Coming Devaluation. The book was well written and prescient. The US dollar did devalue and a lot of money could be made.
What I most often hear is that the Chinese will dump the dollar thus causing a crash in then value of the dollar. This will not happen. Let me tell you what will happen.
The dollar will slowly decline in value over the coming years and decades. All reserve currencies must decline in value because all reserve currencies must run trade deficits so that more, in this case, dollars are pumped overseas so that other countries can use them to grow their domestic money supply.
Other central banks could use gold but gold costs money to store and insure while US dollars pay interest. (You would here a lot less cries for a new world currency order if the US dollar was paying 7%!)
This decline will exacerbated by a slow movement away from US dollars in trade. A major change here has been the increased convertibility of the Chinese currency. About 7% of China’s trade is now being settled in their own currency. My adopted home of Singapore just announced that they are going to be the second hub for settlements after being appointed that by the Chinese government.
But it is not only the Chinese that will slowly diversify but other main trading blocs. Look for the Europeans and Japanese to also not convert into dollars.
However, this ending of US dollar hegemony will come slowly. Nobody is going to dump their dollars overnight. The US dollar still has some vey strong fundamentals behind it.
It is the deepest and most liquid currency by far. 95% of all currency trades have the code USD in their name!
What is the replacement currency right now?
The euro? It might not exist tomorrow. The yen? That country is slowly going down the tubes. China? The yuan is not convertible and there is no way that the ruling party will allow a bunch of foreign speculators change the value of the currency
The market share of the US dollar as a reserve currency actually went up during the recent financial crisis due to the idea that the US dollar is a safe haven.
Oe of the hidden argument against the US dollar came from my friend Dennis Gartman of the Gartman Letter. He pointed out that there was a correlation between military power and the strength if the reserve currency. The dominance of the British Pound declined as Great Britain’s power on the global stage declined. Athough the US is the world’s only superpower now, it’s power and influence are declining.
Look for the US dollar to slowly reduce it’s share of global reserves and to slowly lose it’s status as a reserve currency. But there is no need to worry about a midnight savaging of the value of the dollar. There are too many bullish underlying considerations to think of anything more dramatic than a slow sliding into the sunset.