The Quiet Revolt

Tue, May 15, 2012 - 9:37am

The following is an excerpt from Richard Russell's Dow Theory Letters

I just received a large full-color pamphlet in the mail and in large letters it read, "The free ride is over. The dollar will soon be devalued and replaced." I thought the warning was interesting, but the operative word was "soon".

I've been writing about this same set of circumstances, but it's the timing that is unclear. When will the dollar be devalued -- in a month, six months two years? Actually, the dollar is being devalued each time the Fed comes up with another quantitative easing. But you don't know it unless you try to buy a car or a batch of food from Safeway. Whew!

We know that China has long been buying US debt by the billions of dollars. Writes one analyst, "China makes 1/2% on the dollar reserves that it holds. China then loses about 10% on the exchange rate, and in turn China suffers from a Chinese inflation rate of about 10%. This provides the Yuan with a total return of roughly - 15%. That's a huge loss of $270 billion dollars a year or an outrageous loss rate of 7.8% on their money.

Naturally, China and some other nations want to "get away" from the necessity of switching their currency into dollars in order to trade. The answer or escape from this is currency swaps. When China wants to trade with, say, Indonesia, they trade with Chinese Yuan, thereby side-stepping the dollar completely. China has arranged currency swaps with a number of Asian countries, but lately China has arranged currency swaps with Brazil, Argentina and other South American countries, thus avoiding the necessity of taking in dollars.

Russia, too, has climbed on the "avoid the dollar" bandwagon. What's happening is a quiet revolt against the world's reserve currency, the dollar. And why the revolt? Simple, the dollar has been losing purchasing power.

A nation like China is losing billions in purchasing power by collecting and holding dollars. It's more than the leaders of China are willing to suffer through.

Then the question -- why doesn't the US slow down on its fiat dollar printing? The answer is that the US wants to avoid the PAIN of deflation and slowing business. I don't want to make this site too long and complicated, but the fact is that the Fed's policy is for the US to sustain at least 2% inflation year after year.

Figure out what 2% inflation, compounded annually, does to the purchasing power of the dollar. The Fed's idea is that if it follows its inflationary policy, the current $15 trillion of Federal debt will be rendered feeble and insignificant in ten or twenty years, due to systematic inflation.

Furthermore, people like a "touch" of inflation each year. Business profits trend higher. People feel better when the price of everything they own increases. In other words, people like a LITTLE inflation, as long as it's manageable and not too insane.

The gradual decline of the dollar means that the world's other currencies must "come down" if they are to remain competitive in the world market.

Boil it down, and it means that the Fed's inflation policy is pushing the dollar towards eventual destruction. An increasing number of nations already consider the dollar "unfit" to be the world's reserve currency.

Some want a mix which includes a basket of commodities plus gold.

I'm thinking that the Chinese are on their way to backing their Yuan with part-gold, thus making the Yuan the most wanted currency on earth, and in due time the world's new reserve currency.

Below the dollar vs. the Yuan (as the line descends the Yuan is growing stronger against the dollar).

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