In June of 1897 an American named Clemens was lying ill in London. As his sickness progressed, many people were certain he would die. The New York Journal prematurely reported his death and identified him as Samuel Langhorne Clemens, better known as Mark Twain.
Unfortunately, the man who lay ill in London was not the famous writer, but instead was his cousin, James Ross Clemens. The newspaper’s mistake led to the famous Twain quote: “The report of my death was an exaggeration.”
At this point, the same can be said of the U.S. dollar.
The Federal Reserve’s continued money printing has caused wild distortions in financial markets, including unbelievably low interest rates and a surge in equities.
What it has not caused is the much-anticipated death of the U.S. dollar. Nor has it caused gold to zoom to $5,000, but that’s a different story..
No matter how much the naysayers protest, there is simply no evidence that the U.S. dollar is at death’s door, much less already across the transom. In fact, a recent Bank of International Settlements (BIS) report suggests the opposite, even though the dollar’s demise made so much sense.
The best way to ruin a country’s economy is to sap the confidence out of its currency. There are a zillion historical examples of this, where a country runs into financial difficulties – usually a result of financing a war – and then proceeds to print a bunch of new currency.
As the new units (marks, dollars, shekels, whatever) hit the street, everyone holding the old units suffers devaluation. At some point, no one wants to hold the currency and they refuse to conduct trade based on that currency.
This trend makes the government’s problems worse because the currency’s value will fall on the international markets, making trade and foreign financing more expensive. So the government will try to halt black market trading by imposing stiff penalties and going to extreme measures to ensure compliance, which explains why Argentina, a country seemingly set on ruining its currency, now employs dogs to sniff out U.S. dollars being illegally transported over its borders.
Eventually the whole thing breaks down and a new currency is put in place, restarting the process.
As many people have pointed out to me at presentations, eventually all fiat currencies will fail because the governments behind them will, at some point, choose to print their way out of a financial mess and so start the downward spiral.
Knowing that fiat currencies eventually fail, and knowing that the Federal Reserve has printed almost $3 trillion in the last five years, the death of the U.S. dollar would seem quite logical.
But don’t buy the coffin just yet.
The 2013 BIS report shows that the U.S. dollar was part of 87% of all foreign currency transactions during April 2013. This is an increase of more than 2% from 2010, and reverses a slide that began in 2001.
If the U.S. dollar is in such bad shape then why are more people using it?
As I often tell people in those same presentations where I am schooled on fiat currencies, it all comes down to choices.
I understand the issues with the Fed. I don’t approve of its actions. My personal pocketbook is the worse for wear given the ongoing theft from savers.
But I still have to eat, pay the mortgage, buy gasoline and continue to function in this society. All of that takes currency. I can’t pay for daily living with gold coins.
Then there’s my saving and investing. While I can certainly buy gold coins, it ends there. I can’t buy a bond with gold coins, or buy a stock with gold coins, or buy raw land with gold coins. Not directly, at least. I must still use a currency.
And my situation is basically the same as that of large corporations and funds, only theirs’ is writ large.
Ultimately, every person and every company leader across the globe has to determine the basic units of their own trade.
Those who remain within one country or block of countries don’t have much of a choice, but those who often cross borders, like big companies, banks and funds, get to choose.
What should they use?
That’s not much of a choice.
When it comes to international trade and holding large quantities of currency, the U.S. dollar is still king. Not because we have done such a fine job of managing our currency, but because others have screwed up – or look likely to screw up – much worse than we have.
For years our view has been that the U.S. dollar would remain strong. And it has. At this point, it’s possible the U.S. dollar will grow even stronger.
The euro zone countries have not fixed their banking mess, the Japanese have promised to print more yen until the country falls into oblivion, and the other choices are so far behind as to be not much more than afterthoughts.
With the Fed set to taper, no matter how slow, while others are bent on even more easing, the U.S. dollar is once again emerging as the king of currencies.
For all of those who predicted – and invested – on the notion of a dying dollar, the next several months and years could be exceptionally painful.
Ahead of the Curve with Adam O’Dell
Now, in good faith, I can’t give full credit to technical analysis or myself for calling the turn so precisely. The Fed’s “no taper” announcement surely had an effect, with Wednesday’s advance marking the strongest day in the last two weeks. But my analysis gets some of the credit, too.
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