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In the past several days, the Dollar Index has resumed its swan-diving ways. This benchmark index, which tracks the performance of the U.S. dollar against six major global currencies, knifed through key technical support around 78.30. Then it took out a second level of support that dates back several months.
What’s more …
The euro just hit its highest level against the dollar since December.
Good news, no doubt, if you’re a U.S.-based investor in foreign equities. You can benefit from rising foreign stock prices … and benefit again from the falling dollar, which increases your dollar-based returns. But throwing the dollar overboard, as Washington appears wont to do, is a dangerous game.
Why you ask? Because …
We’re in Debt to the World to
The Tune of Trillions of Dollars!
When you’re a creditor, you control the purse strings. If your borrower’s credit quality deteriorates … if your borrower takes on too much debt … if your borrower loses his job … or if your borrower keeps trying to find squirrely ways to avoid paying you the full amount he owes you, you can cut him off.
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| As Washington piles on more debt, you and I will pay more to get mortgages … and companies looking to expand will have to shell out more in interest. |
Unfortunately, in today’s global economy, America is the biggest borrower on the block. Our country’s debt load at the end of July totaled $11,669,251,349,504.65. That’s $11.7 trillion, or roughly $38,000 for every man, woman, and child in the country.
If our political leaders were attempting to get our borrowing binge under control, maybe I could be more optimistic about America’s financial future. But they’re not! In fact, the Congressional Budget Office recently warned of “an explosive fiscal situation.” It projected that the U.S. debt load could hit 100 percent of GDP by 2023 and a whopping 200 percent of GDP by the mid-2030s!
We’re counting on foreign creditors to finance that debt explosion. But those creditors ALREADY own about 53 percent of our marketable debt, the highest percentage share in history. And they’re starting to rebel.
Case in point: Both Russia and China have made noises about wanting to diversify the allocation of their reserves. They’re talking about buying fewer dollar assets, and more assets denominated in other currencies.
These guys aren’t small beer, either … Russia’s reserves are a staggering $402 billion, the third-biggest in the world behind Japan. China is at the top of the reserve heap — with a mindboggling cash hoard of $2.13 trillion!
Why would these guys want to move their money out of dollars? Simple.
As the dollar loses value on the global currency market, our foreign creditors lose money. That’s because every dollar worth of bonds they own translates into fewer pounds, euros, yen, and so on when those dollars are exchanged into the owners’ home currencies.
We’ve already seen the dollar’s share of global reserves shrink to 64 percent at year-end 2008 from 73 percent in 2001, according to the International Monetary Fund. If that figure continues to decline, U.S. interest rates will simply have to rise.
That means Uncle Sam will pay more to sell Treasuries … you and I will pay more to get mortgages … and companies looking to expand will have to shell out more in interest.
How to Protect Yourself …
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| You can protect your wealth with contra-dollar investments that are meant to go up in value when the dollar goes down. |
Look, you and I can’t control what Washington does. But we can control our own portfolios. We can buy protective investments that are designed to RISE in value as bond prices FALL. And we can buy contra-dollar investments that are meant to go UP in value when the dollar goes DOWN.
In short, we don’t have to just grin and bear it. We can build a moat of protection around ourselves — and go on the offense with investments that can build wealth in this environment. And that’s exactly what I’m doing in my services, including Safe Money. If you’d like to join, we’d love to have you — and it’ll cost you less than a buck a day.
Not ready yet? Then just remember my more generalized advice: Consider locking in long-term borrowing rates now, before they go up. Stay away from long-term bonds. And definitely build up your savings by pinching as many pennies as you can.
Until next time,
Mike
P.S. Good news! You can now get instant, short-term updates on the markets I follow by using Twitter. Just go to http://www.twitter.com/realmikelarson and subscribe.
If you don’t have a Twitter account, sign up today at http://www.twitter.com/signup and then click on the ‘Follow’ button from http://www.twitter.com/realmikelarson to receive updates on either your cell phone or Twitter page.
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