The Decline of the Dollar

One year on, and the Credit Crunch could prove to do more damage to both US and UK economies than first thought. Despite much of the world beginning to show signs of economic growth, both the Dollar and the Great British Pound have hit 5 year lows against the Euro and the Yen.

The Dollar has always been regarded as a “safe haven” for investors over the past decades. America boasts the biggest economy in the world and the biggest bank, The Federal Reserve. But the credit crunch and the following recession have set in motion the inevitable decline of the once powerful green-back. Investors have turned to more reliable and sustainable means of investing their money. Gold has just hit an all time high of over $1000 per ounce. Commodity backed currencies like the Australian dollar are now soaring.

$12 Trillion

We all know by now why some of America’s biggest banks failed this time last year, and how some of them were saved. The Tax payer had to pay the price so these banks and the economy could live to fight another day. 1$ Trillion later and the quick fix to the failing banking sector has left a permanent scar on the dollar bill. America is now an astonishing $12 Trillion in debt.

But the guys at the Federal Reserve are using some dangerous tactics to save themselves. Because a weak currency is not all bad news. Firstly it boosts exports, as more foreign importers rush to snap up cheaper goods. A weaker dollar also lowers the value of America’s debt. This seems to be the Federal Reserves plan of choice for solving the massive economic issues they face at the moment. They have even been accelerating the decline of the Dollar themselves, on purpose, with excessive ‘quantitative easing’. Don’t know what that is? It’s because they coined a name that the average person wont understand. Quantitative Easing is literally printing new money and feeding it into the economy.

‘Quantitative Easing’ (printing new money)

It’s not uncommon in times of financial difficulty. It has been used by quite a few nations during this recession, including the UK, to help supply the demand for loans as banks ran out of cash. But again, at best it is a quick fix. Long term it pushes up inflation, loan interest rates and reduces the worth of the currency. The huge issue now is that the reputation of the Dollar has been weakened so much by the credit crunch, that further weakening it’s worth could lead it’s steady and inevitable decline into a nosedive. The British Pound is not looking too good either, sinking to lows against the Dollar, Euro and Yen. They too are also facing massive debt, resorting to selling off assets to try to claw back some of the £175 Billion shortfall in public spending they face this year alone. Not to mention the £1 Trillion in national debt they face after years of wasteful spending. The BBC’s Robert Preston provides perhaps the best insight on British financial fiasco’s.

Last week Asian central banks were forced to prop up the dollar to limit the damage that the currency’s weakness could cause to their export industries. Central banks in Hong Kong, Taiwan, South Korea, the Philippines and Thailand intervened by buying dollars after the currency came under pressure, in an attempt to safeguard their own exports.

The Inevitable Shift

The decline of the Dollar is inevitable for several reasons. Economic power has been shifting from the west to the east for many years and is showing only signs of accelerating. The American financial system is unsustainable and failing. Smart investors know it and have been moving their investments East. The only people who don’t seem to realize it are Americans themselves. Economies are built on businesses and industries and the resources they have at their disposal. America is running out of the latter. The price of oil is directly linked to the wealth of the dollar. High oil prices further push down the value of the Dollar as the US has to import 80% of its oil demand from foreign suppliers. America as a whole is unsustainable. Over-consumption and wasteful spending are almost built into the way of life for many Americans after years of being the richest nation on earth. America is in debt, big debt, and printing money is not going to fix that.

Meanwhile the resource rich Middle East is reaping the benefits of the higher price of oil, and China thrives from loaning massive amounts of stockpiled cash failing economies in the west with interest. The truth is America really has nothing to offer compared to the rising economic powerhouses of China, India, the United Arab Eremites and even the European Union. It could be less than a year until the Euro passes parity with the Pound for the first time. From then on it will probably be only a matter of time before Britain becomes one of the last European nations take take on the Euro. What then for the failing Dollar? Perhaps the Amero will be a last ditch resort to save the west from economic gloom.

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