Tuesday, June 23, 2009

Fading dollar reserve status brings opportunity?

The US dollar's status as the world's reserve currency seems to be quickly fading, as our creditors become intensely worried about the nation's finances and move to diversify out of their huge dollar holdings.

Puru Saxena (hat tip to Bear Mountain Bull) notes that the profligate spending and propping up of failing industries (banking, in particular) with debt-financed bailouts is by no means limited to the US. In fact, it's become a global phenomenon as governments spend trillions of dollars, effectively implementing a worldwide transfer of wealth from savers to debtors.

"...After decades of excess credit and over-consumption, the developed world is finally being forced to deal with private-sector deleveraging. However, the governments seem to have other plans and they’ve decided to fight these deflationary forces tooth and nail. Their solution – even more credit and even more consumption!

Rather than accept a painful adjustment period, policymakers are desperately trying to revive the party. And in the process, they are making the situation much worse. All over the world, governments are spending trillions of dollars in order to clean up the mess. Unfortunately, the stark reality is that these governments have no money. So, in most instances, these glorious state-sponsored spending programs are being financed by borrowing and money-printing.

Most people seem to forget that these fiscal spending programs aren’t creating any real wealth and are simply transferring wealth from the savers to the debtors. Essentially, governments are taking money from the solvent and re-distributing these funds amongst the insolvent!

Needless to say, by bailing out the incompetent and buying their toxic assets, the governments are cleaning up the private-sector balance sheets but at a huge cost. In the process of saving a few ‘too big to fail’ corporations and their bond holders, policymakers are greatly increasing the risk of sovereign defaults. In a nutshell, policymakers are erroneously transferring private-sector risk to the state... "

Saxena goes on to say that he expects sovereign (national) bankruptcies to follow, and that the reckless money printing and stream of bailouts ensure the die is cast for (over the medium-term) "massive inflation".

Now where is the possible opportunity in this scenario?

Against this backdrop, Tony Allison (also writing for FSO) suggests that America should take advantage of this small window of opportunity and "build a productive infrastructure before the currency is destroyed":

"...The clock is ticking on the U.S. dollar, and there is no time to waste. If we are as determined to destroy our currency as it appears, let’s at least build a productive infrastructure while we still can. We cannot afford to blow the stimulus money on political patronage and transfer payments. Those are the traditional political remedies to insure re-election. However, this time re-election may just mean taking the blame for a rapidly-declining empire.

Reserve currency status at risk

Time is critical and common sense is essential. If the U.S. loses its tremendous advantage of having the world’s reserve currency, we will not be able to simply print money and force the world to accept it to service our massive foreign debt. We will be forced to build up our savings and pay down our debts, which will greatly slow our growth rate. With an aging, inefficient infrastructure, this will make the process of revamping and restructuring our economy extremely difficult.

We need to rebuild the infrastructure of this country quickly (very difficult) and intelligently (even more difficult). Mindlessly dumping hundreds of billions into roads and bridges is not thinking strategically. We need a full-court press, all-out national effort to re-build intelligently and focus on areas with the most benefit..."

What do you think? Would an all out effort to spend money
(while the getting is good) developing infrastructure and alternative energy help America rebuild for the future? Or is it simply another (seemingly practical) debt-financed scheme to throw money at our problems?