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Does the 'buck' stop here?
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Many are concerned about the value of their US dollar (USD). Those who travel the globe are now seeing the cost of a Big Mac in Paris to be more expensive than it was 2 years ago. The US dollar since has been the hallmark of stability in global currency for the last two or three generations. There seem to be two divergent sides being taken on the future of the dollar.
Those who say the dollar will remain the global currency and those who say now is the time to focus on finding another currency for stability. Those who feel safe in the dollar have a strong fundamental argument. The dollar strengthened against other currency at the peak of the crisis in 2008. Nobody knew what to buy, so they bought US Treasuries, which created demand on the dollar and temporarily strengthened the value relative to other currencies.
Also, several trading platforms rely on the value of the dollar for settlement; gold, oil, and other commodities. The US dollar is the largest percentage of foreign governments reserve accounts, historically around 60% globally. The dollar can also be used outside of the US, in countries such as the British Virgin Islands, Panama, and El Salvador. This all creates a stable environment across the globe with large barriers to cross if it is decided to change.
The naysayers hear rumors abound. Leaders in across the globe have stated the USD cannot maintain its current trend without damaging its ability to be the international currency. These include the leaders from China, the United Nations, and International Monetary Fund (IMF). There is no doubt these are powerful institutions that carry a dramatic amount of weight in their comments.
They also, have a strong set of fundamental arguments. The largest argument is the federal deficit. The US issues Treasury bonds to other countries to fund our deficit. The stimulus and bailout frenzy in the past year has made us all realize how large the next deficits are going to be. The federal deficit counter in New York City had to shut down temporarily in 2008 to add more digits, as it approached $10 trillion, yes, with a ‘t’. The deficit, just in 2009 is expected to reach approximately $1.4 trillion, again with a ‘t’. The United States, for example, has rescued its banking sector with an amazing 81.1% of GDP. Only the United Kingdom had them beat by offering up 81.7% of GDP. Other nations such as Sweden, Netherlands, and Japan ring in at 70.2%, 46.5% and 22.3% respectively. ldquo;Developing” nations like Chile, Brazil, Taiwan, Philippines, and Thailand? 0.0%.
They also argue the increase in commodity prices is not because of supply and demand, but because of a devaluation of the dollar that started in early 2008. The strengthening mentioned at the height of the crisis above was only temporary in a continued downward trend. The speculation is that countries such as China and Russia are teaming with the likes of OPEC and the IMF to develop a new reserve base and trading settlement system. If this happens, there will likely be a slow selloff and continued devaluation of the dollar.
All this comes down to some difficult decisions which face the US government. The demand is to reduce the deficit, while not crippling our nation in the middle of a deep recession. All the while, they need to balance the events and demands of the global politicians if they plan to keep the dollar as the international currency. There is no doubt in anyone’s mind that our language will retain its place in international business, now we just have to see if the USD can retain its place.
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