Time is running out for the dollar

Gold is linked to the US dollar and in a simple equation strong dollar = weaker gold, weak dollar higher gold price. The future strength of the dollar depends on the economic prospects for America and they are not good, therefore the dollar will weaken and gold strengthen. On top of these there are moves afoot to remover the dollar from its status of reserve currency which to date has been a factor supporting for the dollar.

Earlier I reported that Europe can no longer support its very expensive social welfare programs and the shrinking working population will not be able to support the growing pensioners with there over generous pensions and of course the ugly head of unemployment.

I also indicated that the US viewed the European situation with derision as its old fashioned ideas dictated that its time was over.  “Judge not lest you be judged” as written in Mathew 7.1 is very applicable to the American situation.

The prosperity of the USA after World War II led to an explosion of population  who were labeled the  baby boomers  and they total some 78 million. These now approach retirement and will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars.

The U.S. is bankrupt, tax, retirement benefits and health care are in a mess

Neither spending more nor taxing less will help the country pay its bills.  With a $4 trillion fiscal gap the US have three courses of action or a combination of the three – reduce significantly the benefits of the “baby boomers” – huge tax increases – print more money, which is the current policy.  Realistically printing money needs to be supported by the reduction of benefits and increases in taxes.

Additionally last month the IMF has effectively pronounced the U.S. bankrupt by stating  “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

Rather than be judgemental of Europe the U.S. should look at themselves and realize they are potentially in a worse financial state than Greece

For some time now both Russia and China have been pushing for an alternative to the dollar as the reserve currency. While the West has been forced to sell  off assets to compensate for loss or to pay off debt, cash rich China has been buying assets, in particular gold and using those assets as a form of currency to offset the increasing fragile dollar. This is all part of a long term strategy to boost their own currency the Yuan to become an internationally accepted currency.

If that was not enough in the last few weeks the United Nations report “World Economic and Social Survey 2010: Retooling Global Development” called for the creation of a new global reserve currency to replace the U.S. dollar as the single major reserve currency.
“The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency,” it said.
It suggested that the reserve should be based on  the existing  Special Drawing rights  (SDRs) created by the IMF to supplement member countries reserves: but with a new basket to reflect the changing weight of global economies  and include emerging countries currencies ( the Yuan) thus downgrading the importance of the dollar.
“To summarize, reducing dependence on the dollar through increased use of a created currency made up of a basket of currencies such as the SDR could be a significant step towards greater stability in the world economy,” the report concluded.

Compare the dollar to the British Empire, once the greatest the world has known, which  has now out lived its usefulness and faded into the memory of once what was. The dollar has not yet fallen that far but it is well on its way and gold will become more important and stronger as a result.

Maurice Hall

Tags: China, DOLLAR, Economy, European Union, Gold, Greece, USA

This entry was posted on Thursday, August 19th, 2010 at 5:10 pm and is filed under China, Economy, European Union, Gold, USA. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.