The Future of the Dollar
OK, so we have an ongoing debate about the price of a barrel of oil and if (or when) it will break the $100 dollar barrier. If you haven’t already placed your bet, here’s where you can do so.
One of the other really BIG questions is what will the dollar do? The currency has enjoyed a long history of guaranteed utilization around the world as the standard currency of trade in commodities such as oil (see the petrodollar ) – which has served as a veritable escape valve for the currency. Nevertheless the dollar continues to struggle – hovering at or near $1.50 per EURO for the last few months. The recent dramatic run up of gold prices is actually more a reflection of the continued weakening of the dollar, than of a strengthening of the metal itself. In fact many would argue that the 1971 Nixon Shock (decision to move away from the gold standard) marked the beginning of the currency’s decline and that since then the US has arbitrarily printed huge excesses of dollars in detriment to its ultimate value. Moreover, there is a very real possibility that additional oil producing nations will join Iran’s decision to shift away from the dollar as the standard currency of pricing/trade. This would have a devastating effect on the dollar.
Without getting into a discussion about whether or not we’re fans of Peter Schiff (a lone visionary of the current crisis, foreseer of a much darker future for the economy and CEO of Euro Pacific Capital), he has advocated to his clients a complete disassociation from the dollar before its imminent collapse. Like all future events, it is difficult to prove it with 100% certainty. So as part of our ongoing learning exercise on this blog, I recommend you have a look at a few of the videos below. But also seek out sources that refute his ideas so as to come to your own conclusions. What I would stress is that we should do all we can to avoid being blindsided by our own ignorance.
So, what do you think? Will the dollar continue to hobble along? Will it strengthen and regain true stability? Or will it experience a significant devaluation or even collapse? Without steering you in any particular direction I will share some advice that someone offered a group of us not too long ago. He said “Since the long term is looking awfully strange indeed, I would use the short and medium term to prepare for it and what I would do is : buy ETFs like USOil, buy silver & gold (physical coin/bullion) and convert my mortgage from euros to dollars.”
December 28, 2009 at 7:41 pm
This is a good post. I recently read a very interesting article that reflected the same predicament ( http://www.oil-price.net/en/articles/China_could_displace_US_Dollar_dominance.php )
Here is the main excerpt of the article titled: “China Could Displace US Dollar Dominance”
Last month Marconi’s article here in oil-price.net broke the news of how China was building its crude oil reserves, completing 102 million storage facilities and how the country had a big devaluating pile of dollars.
Well, trusted sources say that China has taken the next step to woo the Arab countries and establish closer relations.
Until now, the US dollar has been used as the sole oil trading currency around the globe. But last weeks rumors started to surface that a secret meeting took place between Gulf Arab oil producers and some oil importing states trying to decide on an alternative currency to dollar for transactions. Spearheaded by China, the meeting has proposed to trade oil in a basket of currency including, the Euro, Chinese Yuan, Japanese Yen, gold and a new currency to be planned by the GCC (The Gulf Cooperation Council-Saudi Arabia, Kuwait which already went off the US dollar two years ago, Qatar, and Abu Dhabi).
But why are Arab countries lending a kind ear to China? Look no further than the U.S, invasion of Iraq. With an estimated one million Arab deaths resulting from the US invasion, anger is simmering throughout the Arab world, not just Iraq. The bad publicity gained has helped an enthusiastic China in a big way. China is in need of huge amounts of oil and the Gulf States are happy to comply with China in exchange cheap imports, military technology transfer. This pushes the US further aside from the bargaining table and reduces its influence in the Middle-East.
This scenario is far removed from the Nixon Shock of 1971, if one were to walk the lanes of history. In 1971 the then U.S. President, Nixon, cancelled the direct convertibility of the dollar to gold. During the same period Oil production in the US peaked and the country ran out of capacity to increase the production. OPEC (The Organization of the Petroleum Exporting Countries) thus steps into the picture. Nixon’s move helped the US to print more dollars- as much as they needed- to buy oil from OPEC establishing direct nexus between the dollar and oil.
So, here’s the bigger picture: When this dollar dominance ends, as efforts are already visible, it could well be the last shoe to drop from the US economy.
I feel that things a slowly but surely coming to a boil. Does anyone else share that same feeling? Thanks for you blog, I think its interesting. Oilman Jack.
December 28, 2009 at 9:09 pm
Thanks Oilman Jack for your comment and for sharing the article with us. Its another sobering reaffirmation I’m afraid. I have been asking around for people’s take on why the US has not been more dominant in the tenders for oil fields in Iraq (given the “investment” made by going to war there…)
Look forward to hearing from you again here.
December 29, 2009 at 2:56 pm
Some of this blog’s readers prefer to email me their thoughts & comments and I appreciate all the input. I recently received a note from a reader in the Western part of the US who forwarded a few interesting articles about Washington’s recent 11th hour voting which is likely to exacerbate the situation:
U.S. Promises Unlimited Financial Assistance To Fannie Mae, Freddie Mac
http://www.washingtonpost.com/wp-dyn/content/article/2009/12/24/AR2009122401588.html?hpid=topnews
Congress Raises Debt Ceiling To Allow Borrowing Through February
http://online.wsj.com/article/SB126166163113304249.html?mod=WSJ_hpp_sections_news
Thanks for the input.
January 18, 2010 at 3:17 pm
I have heard and read of this for the last year, or year and a half. Yet the dollar continues to hold and sometimes even gain strength. Surely there are other factors that are not being considered by Mr. Schiff in his argument, which would allow the dollar to once again leverage strength and remain dominant. What are the other readers thinking? hearing?
January 18, 2010 at 3:26 pm
I am hearing that there are an increasing number of factors building up against the fate of the dollar – too many to list, though this post touches a few of them: debt to try and stay afloat continues to rise dramatically every day & compound on itself while the world is just about unable to sustain us much longer; the government intervention to save the sinking ship is ironically flooding the decks (with cash) which going to push us down more definitively by literally washing away the purchasing power of the dollar; and yes oil trade will surely be moving away from the crippled currency dealing it a final blow.
January 20, 2010 at 6:58 pm
Thanks Kaspar and Neil, you seemed to have summed up what’s being said out there. In many ways its similar to the peak oil story (and of course not unrelated) – there is significant consensus on the poor shape of the dollar for all the reasons you summed up in your comment Neil, so the question for many is WHEN (not if) will there will be a significant buckling of the currency.
October 14, 2010 at 8:13 pm
[...] to weaken…perhaps even drastically. On several occasions in this blog I have referred to Peter Schiff’s distressing expectations for the dollar. Without getting overly dramatic, it would seem we are in the midst of a squeeze play with oil [...]
October 15, 2010 at 12:29 am
[...] … tal vez incluso drásticamente. En varias ocasiones en este blog me he referido a las nefastas expectativas que tiene Peter Schiff para el dólar. Sin ánimo de dramátizar, parece que estamos en medio de un doble apretón: Por un [...]