The Future of the U.S. Dollar

This fresh study discusses weak fundamentals of the U.S. economy, lack of confidence, diversification out of the dollar, and a way out. It comes to a conclusion that the future of the dollar is in jeopardy now.

The World is concerned that the dollar cannot play the role of the main reserve currency any longer after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since the 1930s.

Although there is still no significant inflation data in the United States international stock and commodity markets grew abnormally within the last eleven months. Analysts called it the "flight from the dollar" or "diversifying risks."

There are many factors evidencing against the future of the dollar as a global reserve currency. Due to the limited space, in the present article futureofdollar.com pays attention just to several crucial points of analysis after conducting an extensive research on the topic.

WEAK FUNDAMENTALS OF THE U.S. ECONOMY

Nobel Prize winner Paul Krugman states that "a country whose fundamentals are persistently and predictably deteriorating will necessarily have a [currency] crisis at some point." (1)

1. National Debt

In the middle of February 2010, President Obama signed into law the bill increasing the public debt ceiling from $12.394 trillion to $14.294 trillion. This is a second increase in the upper limit on the national debt in less than two months.

Last time, in December, House Majority Leader Steny Hoyer commented that the Congress simply had no other choice: otherwise the United States would have to default on their debt obligations what would be another catastrophe for financial markets. (2)

"The Financial Management Services of the U.S. Treasury estimated that the total obligations of the U.S. government exceeded $90 trillion," David Ross from Radiant Asset Management indicated in his research. (3) They include hospital insurance, supplementary medical insurance, and social security. "[T]he collected money (which Treasury has borrowed and Congress spent) falls far short of what is required to fulfill the long-term obligations of those programs, even if it had not already been spent. Almost all of the $90 trillion are promised obligations with no established method of payment." (4)

"Including unfunded obligations, the U.S. moves to 1st, well above Taiwan and Zimbabwe, for the highest debt to GDP ratio... U.S. total debt plus unfunded obligations total 625% of GDP." (5)

The Peterson-Pew Commission on Budget Reform stated that "the United States would almost certainly experience a debt driven crisis," that "could unfold gradually or it could happen suddenly, but with great costs either way." (6)

2. Unemployment

This past February, the economy lost 36,000 jobs after losing 26,000 jobs in January and 109,000 jobs in December, and the unemployment rate held at 9.7%. (7)

In January, the unemployment rate fell from 10.0 to 9.7% in January. According to Reuters "a sharp increase in the number of people giving up looking for work helped to depress the jobless rate. The number of 'discouraged job seekers' rose to 1.1 million in January from 734,000 a year ago." (8) The number of discouraged workers rose to 1.2 million in February. (9)

Gallup reported in the end of February 2010 that "19.9% of the U.S. workforce was underemployed during the month of January, translating to close to 30 million Americans who are working less than their desired capacity." (10)

3. Budget deficit

The United States reached a record budget deficit of $1.415 trillion in fiscal year 2009 that ended in September. (11) The deficit will probably again exceed one trillion dollars in the current fiscal year as it is already over $651 billion.

The excess of spending over revenue in the U.S. was $220.9 billion in February 2010, as opposed to a deficit of $193.9 billion in February 2009, the Treasury Department announced in its monthly budget statement. It was the 17th straight month in which the government posted a deficit, CNNMoney.com said. (12)

In the beginning of February 2010 Obama transmitted a $3.8 trillion budget for 2011 to the Congress with a record $1.6 trillion deficit. (13)

During the debate on the national debt the Senate "rejected a proposed bipartisan commission to recommend ways to reduce the U.S. budget deficit," Bloomberg reported. "The legislation would have required that the panel's recommendations be voted on by Congress without being amended." (14) Instead of the initial idea of the commission discussed by Congress, President Obama is trying to establish a government-based deficit commission that would lack any requirement for Congress to act on its advice. Specialists consider it a symbolic rather than a concrete step.

4. Economic impact of U.S. international military operations

The cost of conducting wars in Iraq and Afghanistan pushed the budget into the red during the presidency of George W. Bush. The situation deteriorated after the beginning of the financial crisis when the government adopted measures such as stimulus packages, financial bailouts, the need to support liquidity in Treasuries, etc. Moreover, early in December 2009 it has increased its nonproductive expenses by approving 30,000 troops to be sent to fight in Afghanistan.

All economists agree that one of the basic non-monetary reasons of inflation is the existence of significant nonproductive government expenses such as military expenses.

However important goals of the war could be, military operations are, undoubtedly, very costly for U.S. citizens especially at the time of the financial crisis and growing deficits. Moreover, the situation is not getting better considering that around 40 percent of the war financing has been borrowed from abroad, Joseph Stiglitz, the Nobel Prize Winner, shows in his research "The Three Trillion Dollar War: The Real Cost of the Iraq Conflict."

"The Obama administration has just asked Congress for a defense budget of more than $700bn... - almost 5% of GDP - for next year," Guardian.co.uk reported in the end of February 2010. This is exactly 1/3 of total budget receipts for the FY 2009.

"If we try to stay the course, we are going to spend more and more money," Stiglitz stresses. "The fact that we financed the war totally by deficits means that when 10 years from now we decide we want to repay that, which I don't know if we will, the amount that we will have to raise our taxes will be that much larger because the debt will be that much larger."

LACK OF CONFIDENCE

Defining major reasons of currency crises Paul Krugman states that the most important is a lack of confidence. The "investor lack of confidence - is a defining feature of a currency crisis," he argues. (15)

Below are opinions of a number of people from different parts of the world whom many of us know quite well. Their opinions concern the U.S. dollar and the U.S. economy.

Nouriel Roubini, the New York University professor who predicted the financial crisis, said that the greenback may weaken for the next three years. (16)

Warren Buffett, a successful international investor: "There is the likelihood of significant inflation down the road." (17)

Robert B. Zoellick, the World Bank President: "There is little the United States can do about the sinking value of the dollar except restore growth in its economy." (18)

George Soros, a successful international investor: "Irrespective of the situation in the stock markets or condition of the economy we shall see further shift from the dollar into real assets in a long run." (19)

Jim Rogers, a successful international investor: "Printing money to help the U.S. economy will weaken the greenback and Treasuries in a long run." (20)

Joseph Stiglitz, Nobel Laureate in Economics: The greenback will continue to head downward for the time being, given the huge U.S. trade deficit and global trade imbalance. (21)

Read full text of the study here: futureofdollar.com/index.phpoption=com_content&view=article&id=226

Futureofdollar.com is a group of people who, just like billions of other people around the World, will have to live with the future consequences of the current global crisis provoked by short-sighted politicians. We wish as many people as possible were aware of such consequences.

(1) Paul Krugman, Currency Crises, 1997;
(2) Reuters, December 17, 2009;
(3) David Justin Ross, The Future of the Dollar and China: The Threat of Collapse and the Move Towards a New Reserve Currency, October 27, 2009, Radiant Asset Management, LLC;
(4) Ibid.;
(5) Ibid.;
(6) budgetreform.org, December 14, 2009;
(7) U.S. Department of Labor, May 7, 2010;
(8) Los Angeles Times, April 2, 2010;
(9) Ibid.;
(10) ETFGuide, April 2, 2010;
(11) Gallup.com, May 4, 2010. Gallup classifies respondents as underemployed if they are unemployed or working part-time but wanting full-time work;
(12) The ADP National Employment Report, April, 2010;
(13) The Beige Book, April 14, 2010;
(14) Ibid.;
(15) Market Watch, March 10, 2010;
(16) Principles of Macroeconomics by N. Gregory Mankiw, fifth edition, 2008, p. 321;
(17) Ibid.;
(18) IMF, January 31, 2010;
(19) The Department of the Treasury;
(20) BBC News, March 10, 2010;
(21) Bloomberg, February 1, 2010;