Investment Contrarians

Federal Reserve Official Warns U.S. Dollar Reserve Status Might be Challenged

By for Investment Contrarians |

I have worried for a long time about the decline of the U.S. dollar. This decline is seen in several metrics, including the price of gold and the standard of living of the average American citizen. This devaluation in the U.S. dollar has been relatively subtle. Ask most Americans and they will tell you that they’re working harder for less, but they don’t realize why. The other factor is that the U.S. dollar remains the reserve currency of the world, which has helped policymakers bend the rules by allowing them to make easy decisions, kicking the can down the road for the difficult, structural reforms that are needed.

The new worry for me and many other people is the rise of the Chinese yuan as a possible alternative for sovereign investments around the world. On June 7, 2012, Federal Reserve Bank of Dallas President Richard Fisher commented that America faces the risk that the U.S. dollar might lose its reserve currency status. This as the Chinese government is laying the foundation to internationalize its currency, in addition to the possibility that if Europe gets its act together, the euro might also become a viable alternative. Fisher called on America’s fiscal authorities to realize that one day there will be a viable alternative to the U.S. dollar and American investments.

This type of stark warning from one of the Federal Reserve Bank presidents regarding the U.S. dollar should have policymakers standing up and taking note. This is a very real threat that must be dealt with through difficult structural reforms if the U.S. dollar is to remain the reserve currency of the world. The Chinese have taken many measures over the last several years to begin the process of developing a stable and strong currency that is starting to become an alternative to the U.S. dollar. This includes buying large amounts of gold and silver in addition to preventing any gold and silver from leaving their nation. As a large producer of commodities, China is now stockpiling these precious metals to back its own currency. In addition, the Chinese have struck many deals with other nations to use their currency as the standard rather than the U.S. dollar.

These are just the beginning steps of a long process. The advantage the Chinese authorities have had over other nations is that they are willing to look out five, 10, 15 years and make difficult structural reforms to build a solid foundation to achieve these targets. In America, essentially a four-year term is really two years, because one governs the first two years and then has to run for reelection the last two. Nobody wants to make the difficult choices. As a result, over the last decade, we’ve seen the U.S. dollar continuing to decline in purchasing power and the standard of living of the average American citizen also declining.

Unless American citizens decide to stand up and demand accountability on the part of their representatives, regardless of the party, then we stand to lose the U.S. dollar as the reserve currency of the world over the next 20 years.

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