The dying dollar

CNBC alerts us to something we should probably start freaking out over:

The U.S dollar is shrinking as a percentage of the world’s currency supply, raising concerns that the greenback is about to see its long run as the world’s premier denomination come to an end.

When compared to its peers, the dollar has drifted to a 15-year low, according to the International Monetary Fund, indicating that more countries are willing to use other currencies to do business.

While the American currency still reigns supreme — it constitutes $3.72 trillion, or 62 percent, of the $6 trillion in allocated foreign exchange holdings by the world’s central banks — the Japanese yen, Swiss franc and what the IMF classifies as “other currencies” such as the Chinese yuan are gaining.

In the long run, I suspect the smart money is on the yuan, since the folks in charge of printing them would really like to be the world’s reserve currency, and unlike Japan, they’re not in the middle of a demographic implosion with dire ramifications for their economic future.

“Generally speaking, it is not believed by the vast majority that the American dollar will be overthrown,” Dick Bove, vice president of equity research at Rafferty Capital Markets, said in a note. “But it will be, and this defrocking may occur in as short a period as five to 10 years.

Bove uses several metrics to make his point, focusing on the dollar as a percentage of total world money supply.That total has plunged from nearly 90 percent in 1952 to closer to 15 percent now. He also notes that the Chinese yuan, the yen and the euro each have a greater share of that total.

“To the degree that China succeeds in increasing its market share of the world’s currency market, the United States is the loser,” Bove said. “For years, I have been arguing that the move of the Chinese makes perfect sense from their point-of-view but no sense for the Americans.”

Well, then our government must be getting along great with the Chinese, because a lot of what Washington does also makes perfect sense from the Chinese point of view, but no sense for Americans.

So, what’s the big deal about losing pride of place as the world’s reserve currency?  We still love our dollars, right?  It’s not like we have to sell huge piles of them to foreign investors so we can finance our debt.  Oh, no, wait.  It is like that.

“If the dollar loses status as the world’s most reliable currency the United States will lose the right to print money to pay its debt. It will be forced to pay this debt,” Bove said. “The ratings agencies are already arguing that the government’s debt may be too highly rated. Plus, the United States Congress, in both its houses, as well as the president are demonstrating a total lack of fiscal credibility.”

Another U.S. credit downgrade or two should do wonders for the currency market.  Nothing spooks foreign investors like the idea of a government deciding to wave its debts away.  Maybe that will bring a currency meltdown in less than five or ten years.  How’s 2015 grab you?

“The No. 1 security issue we have as a nation is the preservation of the U.S. dollar as the world’s reserve currency,” said Michael Pento, president of Pento Portfolio Strategies. “It’s a thousand times more important than a nuclear bomb being tested by North Korea. It’s a thousand times more important that we keep the dollar as the world’s reserve currency, and yet we are doing everything to abuse that status.”

The dollar’s seemingly precarious status is why Pento remains bullish on gold and believes the dollar’s demise as the premier reserve currency could end even sooner than Bove predicts — perhaps by 2015.

“Five to 10 years — that would be an outlier,” he said. “I would say 2015, 2016, that would be the time when it becomes a particularly salient issue. When we’re spending 30 to 50 percent of our revenue on debt service payments, we enter into a bond market crisis. The dollar starts to drop along with bond prices. That would set off the whole thing.”

ZeroHedge took a look at what might happen when this “whole thing” gets set off, back in March when Australia moved towards embracing the yuan:

Why is this so very critical? For the simple reason that the free lunch the US has enjoyed ever since the advent of the US dollar as world reserve currency, may be coming to an end as other, more aggressive alternatives – both fiat, and hard-asset based – to the USD appear. And since there is no such thing as a free lunch, all the deferred pain the US Treasury Department has been able to offset thanks to its global currency monopoly status will come crashing down the second the world starts getting doubts about the true nature of just who the real reserve currency will be in the future.

In a 2011 Wall Street Journal article, UCLA-Berkley economics professor Barry Eichengreen anticipated some specific consequences, including the loss of a competitive advantage for American businesses obliged to begin converting their dollars into foreign currency on a large scale, to do business in global markets.  (As if U.S. businesses needed any more disadvantages against foreign competitors!)  The dead-dollar future doesn’t sound very appealing, but at least it won’t be boring.  And just imagine how much fun it will be to explain all this to the Low-Information Voters!