The World is concerned that the dollar cannot play the role of the main reserve currency any longer after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since the 1930s. The Government’s stimulus packages, financial bailouts, the need to support liquidity in Treasuries, keeping interest rates at the lowest level under the circumstances of low economic growth, high unemployment and low tax collection make it print more dollars. This leads to a high risk of substantial inflation, or hyperinflation in a long-run.
With a $12.3 trillion national debt and $55 trillion in unfunded obligations for programs such as Social Security, Medicare and Medicaid, with total Federal Reserve and Treasury bailout commitments now at $11.8 trillion, of which $3.6 trillion has already been spent the U.S. need to take steps immediately to protect themselves from the potential loss of the purchasing power of their U.S. Dollars, inflation.us warns.
Although there is still no significant inflation data in the United States international stock and commodity markets grew abnormally within the last eleven months. Analysts called it the “flight from the dollar” or “diversifying risks.”
There are many factors evidencing against the future of the dollar as a global reserve currency. In the present article futureofdollar.com pays attention to the crucial points of analysis after conducting an extensive research on the topic.
Part I
Weak Fundamentals of the U.S. Economy
Nobel Prize winner Paul Krugman states that “a country whose fundamentals are persistently and predictably deteriorating will necessarily have a [currency] crisis at some point.” (1)
1. National Debt
In the middle of February 2010, President Obama signed into law the bill increasing the public debt ceiling from $12.394 trillion to $14.294 trillion. This is a second increase in the upper limit on the national debt in less than two months.
Last time, in December, House Majority Leader Steny Hoyer commented that the Congress simply had no other choice: otherwise the United States would have to default on their debt obligations what would be another catastrophe for financial markets. (2)
The Peterson-Pew Commission on Budget Reform stated that “the United States would almost certainly experience a debt driven crisis,” that “could unfold gradually or it could happen suddenly, but with great costs either way.” “The excessive debt would. . . affect citizens in their everyday lives by harming the American standard of living through slower economic growth and dampening wages, and shrinking the government’s ability to reduce taxes, invest, or provide a safety net.” (3)
2. Unemployment
This past January, the economy lost 20,000 jobs after loosing 150,000 jobs in December, and the unemployment rate was 9.7 percent. (4)
The unemployment rate fell from 10.0 to 9.7 percent in January. According to Reuters “a sharp increase in the number of people giving up looking for work helped to depress the jobless rate. The number of 'discouraged job seekers' rose to 1.1 million in January from 734,000 a year ago.”
3. Budget deficit
IMF’s Managing Director Dominique Strauss-Kahn noted at the 10th Annual Herzliya Conference in Tel Aviv that the global crisis had created a problem of fiscal sustainability for many countries that could take decades to fix because of the huge debts built up during the crisis, especially in developed countries. (5)
The United States reached a record budget deficit of $1.415 trillion in fiscal year 2009 that ended in September. (6) The deficit will probably again exceed one trillion dollars in the current fiscal year as it is already over $400 billion.
The excess of spending over revenue in the United States rose to $91.9 billion in December 2009, as opposed to a deficit of $51.8 billion in December 2008, the Treasury Department announced in its monthly budget statement. The U.S. has posted a record 15 straight monthly deficits. (7)
In the beginning of February 2010 Obama transmitted a $3.8 trillion budget for 2011 to the Congress with a record $1.6 trillion deficit. (8)
During the debate on the national debt the Senate “rejected a proposed bipartisan commission to recommend ways to reduce the U.S. budget deficit,” Bloomberg reported. “The legislation would have required that the panel’s recommendations be voted on by Congress without being amended.” (9)
4. Financial sector
Recent Bank of America’s and Citigroup’s losses for the fourth quarter of 2009 and inability to repay the bailout funds without additional stock offering, Morgan Stanley’s low profits, and J.P. Morgan Chase's retail division loss confirm a suspicion that the U.S. banks’ economic conditions are not very strong putting in doubt health of the financial sector as a whole.
“Loan demand continued to decline or remained weak in most Districts.” (10)
“A number of Districts reported that credit quality continued to deteriorate.” (11)
