Continuing Fallout From the Declining U.S. Dollar

by Chris Anderson

The IMF announced today that the dollar is “overvalued” and encouraged currency traders to keep selling the dollar. At the same time the IMF also said the Chinese renmimbi and the Japanese yen are undervalued. The IMF is now verbally trashing the dollar in an open attempt to destroy the U.S. currency and economy.

The IMF’s comments come in the wake of a US dollar that has already been steadily declining for the last 5-6 years. Despite what other economic indicators (stock market, interest rates, etc.) might show, this is not good news for Americans.

One of the biggest fears right now regarding the dollar is China’s extreme amount of control over it. Part of China’s control of the U.S. dollar stems from its large holdings of U.S Treasury Securities. If China should decide to dump a large portion of these holdings the U.S. economy would certainly feel the effects, and the IMF announcement today only encourages this.

China has also held back their own currency’s value in order to maintain itself as the factory for US companies’ goods. This has allowed the U.S. to export manufacturing to the less expensive Chinese market. But now as the Chinese currency increases they will need to pass on the price increases to U.S. companies. The IMF’s declaration of an undervalued renmimbi may now cause China to permit an accelerated increase of the currency’s value. This will also significantly hurt the U.S. economy.

Adam Kritzer explains the scenario that would unfold from a Chinese currency revaluation:

Now, if China was to suddenly revalue its currency by the 25%-30% that western policy-makers are demanding, prices on a whole host of Chinese products would jump up overnight. This would adversely affect American purchasing power and limit consumption to such an extent that the US would be in danger of slipping into recession. While the trade deficit that is the bane of American politicians’ existence might decrease in the long-term, it would skyrocket in the short-term. Besides, as many analysts have been quick to point out, there is not much overlap between Chinese and American production. Thus, a more expensive Yuan would send production to other parts of Asia, rather than back to America. While the US-China trade deficit might narrow, it would be offset by increased imbalance with the rest of Asia.

The bottom line here is that China has the power to manipulate the U.S. dollar (and therefore the US economy) at their will and pleasure, and with the recent announcement from the IMF, the world’s economic policy-setter, China has the go-ahead to do it.

My previous post regarding the U.S. dollar noted how a weak dollar has led to a string of foreign buyouts of US companies. This is a scary proposition given that the only real economic power of the U.S. comes from U.S. companies, not the government. If the companies are sold to foreign entities, our national strength and sovereignty is diminished.

Now with foreign countries like Vietnam, Qatar, Kuwait, and possibly China and Japan dumping our dollar as the standard behind their own currency, the dollar decline will only accelerate.

Charlies Blaine details What the falling dollar means for you in his recent article. Among these effects are increased prices at the pump, more expensive international travel, higher interest rates and more expensive foreign imports.

The dollar has steadily lost value compared with other major currencies since the end of 2002. Result: The euro has risen more than 70% against the dollar. The Canadian dollar, affectionately known as the loonie, is up more than 60% — to parity for the first time in more than 30 years. The yen is up about 16%.

The dollar is falling partly because Americans import way more goods than they sell abroad — especially oil — and must borrow to close the gap. Another factor:

Higher interest rates in Europe and elsewhere make those countries’ currencies more valuable.

In contrast, the falling dollar is giving U.S. stocks and exports a boost. These rises are very deceptive however, given that the boost in the stock market is merely a reflection of the inflated dollar and the rise in exports will most likely do little to benefit the rest of us (the middle class) with the dollar’s decreased buying power.

Ultimately questions are now being asked about whether the sad state of the dollar will help usher in a North American currency, the Amero, which will be touted as the only alternative to return to stability and to compete in overseas markets.

Dan Gabriel talks about how the dollar’s weakness is all part of Setting The Stage For a North American Union Currency.

A single North American currency is nothing new as the idea has been floated around for some time. In 1999 , economist and former Canadian Member of Parliament Herbert G. Grubel published his paper, “The Case for the Amero: The Economics and Politics of a North American Monetary Union.” It is interesting that he gives 2010 as the possible timetable for the introduction of the amero. This happens to coincide with the Council on Foreign Relations (CFR) task force’s report, “Building a North American Community,” which also states the target year of 2010 for the implementation of their recommendations in matters of economics, politics and security.

Here’s an excerpt from an article detailing the history of why the dollar is collapsing.

(written in 2002)

Why is there going to be an implosion in the US dollar? For the past 31 years, since the USA closed the “gold window” and the world embarked upon a worldwide experiment in fiat currencies (money created by Government decree), the world has existed on a US dollar standard. Every prior experiment with fiat currencies throughout history has ended in disaster because Governments could not resist creating ever-increasing quantities of their fiat currencies, to the point where citizens lost confidence in those currencies.

In this, the world’s first ever experiment in worldwide fiat currencies, the US Dollar has been the lynch-pin. It has been the currency that other countries have been prepared to accept as a “standard”, as a store of value. The result of this universal acceptance is that the USA has been exempt from the disciplines that are automatically imposed upon other countries. If country “X” runs a trade deficit, it has to somehow achieve a capital inflow to counter balance the trade deficit outflow. It generally does this by a combination of currency depreciation (which gradually assists in eliminating the trade deficit), higher interest rates or foreign borrowings.

View USD charts here:

USD vs CAD — beyond parity, USD vs EUR, USD vs GBP, USD vs CNY (CHINA)