Dollar ECONOMIC COLLAPSE: Central Banks Losing Confidence in the U.S. Dollar? - financialanalysis


Popular Posts

Tuesday, January 14, 2020

Dollar ECONOMIC COLLAPSE: Central Banks Losing Confidence in the U.S. Dollar?

Central Banks Losing Confidence in the U.S. Dollar?
Whether you like to hear it or not, this is reality: the U.S. dollar is losing its popularity. This could be very bad for the value of the greenback in the coming years.
You see, central banks around the world hold a lot of American dollars.
Recently, however, they have been reducing their exposure to the dollar. If you hold U.S. dollars and dollar-denominated assets, you shouldn’t ignore this phenomenon whatsoever. It could have dire consequences.
Consider this: according to the International Monetary Fund’s (IMF) Currency Composition of Official Foreign Exchange Reserves (COFER) data, in the fourth quarter of 2015, central banks allocated 65.7% of their allocated reserves to American dollars. (Source: “Currency Composition of Official Foreign Exchange Reserves,” International Monetary Fund, last accessed January 9, 2020.)
In the third quarter of 2019, this figure was 61.8% Looking at the difference over the past few years, central banks have reduced their exposure toward the the greenback by about six percent.
This may not seem like a big difference, but in the grand scheme of things, it says there’s a loss of confidence in the U.S. dollar.
Here’s the thing: while their allocation to the American dollar has declined, the overall allocated reserves at central banks around the world have actually increased by about 47%!
Will Central Banks Continue to Buy More U.S. Dollars?
With this, you must ask: will central banks continue to reduce their exposure to the American dollar? It’s very possible.
Keep in mind, central banks are supposedly the wealth protectors of countries. Think of them as conservative investors who want stability in their currencies.
Sadly, as it stands, the fundamentals of the U.S. dollar don’t seem that great these days.
The U.S. government has been addicted to spending without remorse. It continues to incur huge budget deficits. In fiscal-year 2019, the U.S. government reported a budget deficit of close to $1.0 trillion.
Looking ahead, there is no sign of balanced budgets.
Know this: budget deficits lead to a higher national debt. Currently, the U.S. national debt stands at over $23.0 trillion, and it could go a lot higher in the coming years.
National debt isn’t necessarily a big problem in the near term, but in the long term it does damage to the currency.
With this in mind, will central banks prefer to hold the greenback in their reserves? It’s very unlikely.
Slow Decline at First, Panic Comes Later
Dear reader, the future of the U.S. dollar doesn’t look that bright.
Will we see an outright dollar collapse? I believe we won’t see an outright collapse as some predict. Instead, I think we will see a slow and gradual decline in value at first and massive panic later.
Why should you be bothered about all this?
If the value of the American dollar tumbles, it will have an immense impact across the board.
Let me leave you with some food for thought: global trade is primarily done in U.S. dollars. How will companies hedge their businesses from a falling dollar? Major commodities are also priced in American dollars; how will producers and end users be impacted?Fundamentals of the U.S. Dollar Seem Tormented
The dominance of the U.S. dollar in the world may not remain too long, and it won’t end well for anyone.
Before going into any details, let’s get one thing straight: currencies these days are not backed by gold. We ditched that system a while back. Gone are the days when there was some accountability and money wasn’t created out of thin air.
Now one could ask: “How do you assess a currency?”
Well, you look at the currency’s fundamentals. You look at things like how the government is doing, the country’s debt, and economic performance. You ask if there any other rival currencies, and so on and so forth.
Sadly, when you do the analysis of the U.S. dollar, you quickly find that the fundamentals that could drive the greenback are tormented.
Here’s some perspective.
U.S. Government Is Spending Without Remorse
Budget deficits and the national debt hurt currencies a lot over the long term. If a country is spending without any remorse—reporting massive deficits and borrowing money with two hands—in the long term, it doesn’t end well.
There comes a point when the creditors to the country say, “We want our money back.” And we have seen some recent examples of this happening, countries failing to pay their debt and their currencies falling off a cliff.
Know this: the U.S. government is the most indebted nation in the world. At the time of writing, the U.S. national debt stood at over $23.0 trillion. (Source: “The Daily History of the Debt Results,” Treasury Direct, last accessed November 18, 2019.)
The kicker: if you think that $23.0 trillion is a lot, don’t be shocked if you see it surge to $30.0 trillion within a decade.
The U.S. government is spending immense amounts of money. In its fiscal-year 2019, which ended in September, the U.S. government incurred a budget deficit of almost $1.0 trillion. (Source: “Final Monthly Treasury Statement,” U.S. Department Of The Treasury, last accessed November 18, 2019.)
The last time the budget deficit was this big, the U.S. economy was trying to get out of a severe financial crisis. Right now, the U.S. government is spending like it’s in crisis times, even though everything is actually great. That’s throwing more gas on the fire.
There’s no budget surplus in sight. Now, imagine this: there’s a slowdown in the U.S. economy. What will the U.S. government do? It might be forced to spend a lot more than it already has been doing. So, you could expect the debt to grow much faster.
Here’s something that should bother you: the U.S. national debt doubled in less than a decade. In the third quarter of 2008, the U.S. national debt stood at $10.0 trillion. It reached $20.0 trillion in the third quarter of 2017. (Source: “Federal Debt: Total Public Debt,” Federal Reserve Bank of St. Louis, last accessed November 18, 2019.)
This time around, the debt is on track to double much quicker.
This Won’t End Well
Dear reader, all of this should make you nervous.
Massive deficits and the soaring national debt could be bringing that “We want our money back” moment sooner. This will not be good for the U.S. dollar.
I will end with what I said earlier: the end of the U.S. dollar as the dominant currency could be nearing. If you own a lot of U.S. dollars and U.S. dollar-dominated assets, it may be a time to pause and reflect.

No comments:

Post a Comment