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While the stock market has been rising, the U.S. dollar has been sinking.
It’s on the verge of breaking major 13-month lows.
It’s not far from reversing everything it gained against a sinking euro during the recent European debt crisis.
And once those barriers are breached, it could crash to its lowest level in history.
But Washington doesn’t care, and few investors seem to give a damn.
They celebrate the fact that, in the near term, a falling dollar helps make U.S. exports more competitive overseas.
Plus, they like the fact that a dollar decline temporarily drives global investors away from safety and into risky investments, including U.S. stocks.
What they don’t seem to realize is that the precipitous fall of the U.S. currency can set off a chain reaction of consequences that can spiral beyond the control of any government …
Consequence #1. Surging interest rates: As the U.S. dollar falls, U.S. borrowers must pay more interest to foreign lenders in order to offset their risk of holding a falling currency.
U.S. consumers must pay more dollars for imports — especially oil and automobiles, driving up inflation (and interest rates).
And when the dollar collapse gains momentum, the Fed may have no choice but to jack up U.S. interest rates to persuade foreign investors to stop dumping the greenback.
Result: Higher interest rates overall.
Consequence #2. A half trillion dollars more in interest costs: Americans are buried in a mountain of interest-bearing debts.
In fact, according to the latest Fed data, U.S. individuals, corporations and governments have now accumulated debts of $57.6 trillion.
With just one percentage point rise in their interest rate costs, they’d suddenly have to pay $576 billion — more than a half trillion dollars — more than they pay now.
Consequence #3. A big hit to large U.S. banks: According to the Office of the Comptroller of the Currency (OCC), U.S. banks currently hold $233.9 trillion in high-risk bets called derivatives, with the overwhelming bulk of those (81%) tied to interest rates.
If interest rates surge unexpectedly — whether due to a falling dollar or any other factor — big banks that are betting on stable interest rates could be caught flat-footed and suffer huge losses.
Consequence #4. Massive investor dumping of U.S. assets: As long as the dollar decline is moderate and contained, global investors are typically content to hold on — in the hope that their interest and/or capital appreciation will cover their currency losses.
But once the dollar decline gathers momentum, all hell can break loose as investors dump their U.S. dollar-denominated investments in panic — not only stocks and bonds, but also real estate and even business properties.
How big is this threat? The biggest of all time!
According to the U.S. Treasury Department and the Federal Reserve, foreign investors hold over $13 trillion in U.S. securities (excluding real estate and other assets).
That’s more than double the size of our vulnerability to foreign selling compared to 2004 … nearly quadruple compared to 2000 … over 10 times worse than 1994 … and almost 200 times worse than 1974!
As the dollar has declined over the years, a small pimple of a problem has now grown into a massive mountain of securities that overhang our financial markets.
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Some so-called “experts” would have you believe that major holders of U.S. securities — such as China or Japan — would never dump because “they’d merely be shooting themselves in the foot.”
But that represents a gross misunderstanding of how global financial markets work.
The $13 trillion in U.S. securities held abroad are controlled not just by China or Japan, but also by scores of other foreign governments, thousands of institutions and millions of individuals … each acting in their own self-interest … each driven by their own fears … and, when the dollar collapses, each anxious to be among the first to get the heck out.
Consequence #5. The long-term decline of U.S. global influence and power: As the dollar has fallen over the years, so has U.S. hegemony overseas.
The U.S. has fallen far behind China in its trade with Latin America, Africa and Southeast Asia. It has lost control over the course of events at the United Nations and on the global scene. Even its European allies are turning East and South.
What’s most alarming, however, is not how far we’ve declined in recent years, but rather the steep downside risk that still looms in years ahead.
Bottom line: Don’t count on the dollar’s decline to continue on its benign path. Prepare for each of the consequences of a more precipitous fall.
Good luck and God bless!
Martin
Dr. Weiss founded Weiss Research in 1971 and has dedicated his entire career to helping millions of average investors find truly safe havens and investments. He is Chairman of the Weiss Group, which includes Weiss Research and Weiss Ratings, the nation’s leading independent rating agency accepting no fees from rated companies. His last three books have all been New York Times Bestsellers and his most recent title is The Ultimate Money Guide for Bubbles, Busts, Recession and Depression.
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Great article.I believe that all,our govts problems,are ultimately dumped on the Dollar.They can't get away with that forever.Forget this debt limit nonsense.A major Dollar decline,is what we should be watching.Real money,gold,should benefit,as the Dollar declines.