You remember all those people who were wrong about hyperinflation and spiking interest rates and a dollar collapse and all the supposed Fed money printing? Not to mention their warnings about a US debt downgrade (that I correctly called, along with the subsequent falling, not rising, bond yields) and about the catastrophe that would happen to America when "creditors stopped lending." (The latter isn't even applicable.)
Well, those very same people, having been so disastrously wrong (interesting, though, how the media keeps asking for their opinions) are now drumming up a new catastrophe intended to make you join the Doomsday Prepper movement.
Their new disaster? The loss of the US dollar's reserve status. I've written about this before and in a second I'll get into why this is not something to fear (even though I do believe it is going to happen) and why you should hang on to your savings (in dollars) rather than ordering that underground bunker you've had your eye on.
First off, I do believe the dollar will lose its reserve status; not because the world will stop accepting dollars or seek, in any significant way, an alternative reserve currency, or basket, or gold, but because we are going to make it happen ourselves by proactively turning the US economy into an export-driven one, thus making dollars very hard to get.
Let's be clear on the fundamentals. In order for a currency to be the world's reserve currency two conditions must exist: first, the rest of the world must desire to "net save" in that currency. In fact, they must desire it so badly that they are willing to trade scarce resources and huge quantities of value-added finished goods in exchange for the currency. In some cases, this even leaves their own citizens without the very products they will need to enjoy a decent standard of living. That's what I call wanting it bad.
The second condition that must exist is that the nation whose currency is the reserve currency must be willing to run trade deficits because that is the only way the rest of the world can get that currency. Simply put, the nation must import more than it exports.
These two conditions have existed for the past forty years with respect to the US and the dollar. The US has run consistent trade deficits and the rest of the world have been net savers of dollars on balance. This has been a positive for the US in real terms as we got the goods and everyone else got the paper money, which costs us nothing to produce.
Even since the supposed massive "money printing" exercise by the Fed (all wrong on the part of those who believe this), the amount of dollars held in reserve by the rest of the world has gone up, not down.
But here's the problem. As a nation we believe it is better to be an exporter, even though it's not. All of our policy makers believe that, including the president. He is constantly talking about growing exports and being competitive (with whom, and for what?) and pushing trade deals.
The results are obvious. Exports are at record levels and the nation's current account deficit (the broadest measure of the trade deficit) has narrowed sharply and will continue to narrow.
What does this mean? It means that slowly, but surely, we are making the dollar harder to get for the rest of the world. Over time, the difficulty in getting dollars will necessarily drive countries to trade for other currencies. What currency that will be, I have no idea, but I am sure it will happen. In addition, it's going to take a very, very, long time, because I simply do not see other countries willing to sustain massive trade deficits any time soon. Who? Japan? Germany? China? Fuhgeddaboudit.
Moreover, in the end it is not really up to a particular nation whether it wants to run trade deficits or not; it's really up to the rest of the world's desire to save. If people want to save in euros, for example, they will find ways to export to the eurozone even if it means keeping wages in their own country suppressed vis-à-vis those in Europe. It may be happening already.
If you ask me to guess, my guess would be that the next title holder of global reserve currency will be the euro. There is already strong evidence of the world's desire to hold it and, with the exception of Germany, most of the rest of the eurozone is already running trade deficits.
