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How to Prepare for the Demise of the Dollar

This article was written by in Economy. 11 comments.


Since the middle of the twentieth century, the U.S. dollar has been the currency that has dominated the world. Governments have held dollars in reserve, and borrowed dollars when necessary, because this currency can buy just about anything, anywhere. In particular, dollars can easily buy oil, a commodity currently necessary for the progress of developed societies.

Countries have attempted to reduce their dependence on the dollar. Iraq began pricing its oil in euros rather than dollars in November 2000. It wasn’t long after that the United States invaded the country and took control of oil production, adjusting the pricing back to the dollar. Iran announced it plans to hold its reserve currency in euro, and this might prove to be more successful.

There might be a coalition of countries ready to move away from using the dollar as their reserve currency. I’m not usually drawn into conspiracy theories, but I think, considering the state of the economy in the United States, the strength of the dollar, and the country’s massive governmental debt, there is a strong possibility that several decades in the future the United States will not be the economic superpower it once was.

Here are some details reported by the Independent, but since denied by governments:

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars… [This] augurs an extraordinary transition from dollar markets within nine years…

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil -– yet again turning the region’s conflicts into a battle for great power supremacy.

Amplifying the importance of the currencies used for trading oil is the idea that at some point in the future — and there have been many disagreements about when dating back to the 1970s — the earth will no longer provide new sources of oil. Supply will eventually begin to shrink and unless major reforms in energy gain momentum, competition for the commodity and its price will increase.

Prepare for the dollar’s demise

Let’s assume this is true for a moment. If the dollar continues to decline, what are options for individuals who would like their wealth to grow over the course of the next thirty years or more?

Ignore the problem. It is possible that despite these obstacles, the dollar may end up victorious. It would take a lot of political might, and I expect more wars, for this to happen. What would a war with China look like?

There is also a reasonable argument that most of us, confined to little exposure to the world outside of our own country, will continue to build wealth in dollars. The external value of a dollar to other currencies could be irrelevant. I do think that as societies continue to progress, globalization continues and it is more difficult to exist in isolation.

Buy gold. Gold has for a long time been considered “real” currency compared to money issued by governments. In the earlier days of the United States, the government issued paper currency backed by gold reserves, so you could theoretically trade in your dollars for gold. Gold may be used as an interim reserve currency while the world loses confidence in the dollar and governments make other plans.

Gold has already shot up in price compared to the dollar and it probably will continue to do so.

Buy euros. If governments are looking to the euro as the basis for their reserves, perhaps you should as well. One option may be to keep a portion of your savings in CDs denominated in euros. EverBank offers this service but I have not yet tried these products.

Invest in China. Another article from The Independent suggests that for most of the next decade, China’s economy will grow 10 percent a year while the United States’ will grow only 2 percent a year. If true, this might be a good time to invest in China. If you want to take this bet, Vanguard’s best option is their Emerging Markets Stock Index Fund (VEIEX) with an expense ratio of 0.39%. Four of the top ten holdings in this fund are based in China making China the fund’s biggest representative. Over the past year, the China-based holdings increased to account for 18.4% of the entire portfolio from 12.4%.

And since buying the fund in dollars pits the strength of that currency against the others, you’ll benefit from both the dollar’s decline and other currencies’ success.

This is probably one of the riskiest bets of the century, but it may pay off.

Much ado about nothing

Saudi Arabia has denied that there have been “secret meetings” as cited above. The United States might quickly recover from the recession and other countries might relent with a stronger dollar. Recent studies suggest the United States will still be the primary global economic superpower in 2020.

What do you think? Is this the time to start thinking about how you might prepare for an economy decades in the future in which the United States is not the most primary economic superpower in the world? And how do you prepare for this?

The Demise of the Dollar, Robert Fisk, The Independent, October 5, 2009

Updated March 22, 2011 and originally published October 6, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 11 comments… read them below or add one }

avatar Retirement Savior

I would suggest against buying gold or precious metals. They have a negative cost of carry, so you are paying to own it. It would be better to own foreign assets that would not hurt from dollar deflation. For instance, consider foreign treasuries instead of gold for safety, like ticker BWX. Then at least you would receive interest on your investment.

In addition, it might be late to panic out of dollar assets. The market rally and dollar decline are highly correlated. It makes sense to wait and diversify away from the dollar over time.

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avatar Mike Piper

I think it’s important to remember that it’s no secret that China is likely to continue to grow faster than the U.S. and that the dollar is likely to decline in value over coming years.

Both of those facts should already be priced into the market values of stocks (both Chinese and U.S. ones). In order to earn above-market returns, you need to have reason to think that the dollar is going to decline at a rate faster than the rest of the market expects it to, or to think that Chinese companies will grow faster than the rest of the market expects them to.

It’s not about “what’s going to happen.” It’s about how “what’s going to happen” compares to “what people expect to happen.”

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avatar Jim

The dollar still represents about 66% of world foreign reserves compared to 25% in the Euro. We were under 60% back in the mid 90′s. The dollar actually got stronger during the economic crisis since its a ‘safe haven’. I think the demise of the dollar is premature.

But on the other hand it is probably a good idea to be diversified somewhat in foreign holdings in some way or another.

I don’t think China will grow that fast for another decade. Just my opinion here, but they already grown 8-10% a year for a couple decades. They can’t continue to grow at such a fast rate forever, at some point they will plateau. Think about it… we can only buy so much stuff from them.

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avatar RJ Weiss

@ Mike Piper – Great comment, couldn’t agree more.

Gold has already shot up in price.

I just don’t see the advantage of diversification in gold compared to an international index fund.

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avatar Atlas

Gold = Wealth

We savers are never going to be negative or close to $0.00 we will always save money or create wealth. If you are a saver and have no debt what is the plan? It is t create wealth so you can give to charity or pass along to children etc…

Having a million dollars sitting in the bank is what? it is paper(that has lost value since 1913) that you are never going to see, so it really is just a number you can look at. Buying gold shouldn’t be looked at in my humble opinion as an investment. Gold it is a true measurement of your wealth and it always has since the beginning of time…

Alexander the Great, tutored by Aristotle, perhaps the richest and most powerful man in the world before the age of 33, was interred in a gold sarcophagus and solid gold casket filled with honey and transported by a solid gold chariot to a solid gold mausoleum in Memphis. It did not take long for various Ptolemy successors to steal the gold and move the body to Alexandria to put it on display under glass, with gold thefts every time it was moved or displayed.

Practically every war included the surreptitious movement of gold from the vanquished to the conquerors, providing stories of Chinese, Indian, Mesopotamian, Egyptian, Israel, Knights Templar, Arabic, Spanish, French, Revolutionary, Civil War, Philippines, Nazi, Korean, Vietnamese and Iraqi gold hoards accompanying inflation.

Since gold is ultimate money and power, is it any surprise Mercantilist Bankers and Treasurers tried for many thousands of years to get or control it?

I am just getting to the point where I will be dollar cost averaging Silver/Gold for about 5-10% of my portfolio has a hedge against the dollar and the creation of my wealth!

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avatar MoneyEnergy

One of the most important economic topics of our time – it is far from conspiracy and I would say that investing your money in international stocks and currencies is far from risky when you compare it with the actual wealth behind the USD. The Euro is not the only alternative currency, either. The Canadian and Australian currencies are great strong alternatives.

I’ve been reading a bit more lately on what’s happened to economic policies/trends in the U.S. since the 1980′s and it’s not pretty. In fact it has me pretty riled up. Want to remind people that there are many ways to practice capitalism and that the corporatist plutocracy (in U.S.) of the last 20 years isn’t the only form it has to come in.

Also, there are dangers that even under Obama, the powers that be will seek to spin the dollar’s devaluation and attendant economic problems domestically with stories blaming it on other countries – especially East Asia, middle east/Africa (all that Nigerian oil politics, you know….). I hope that doesn’t happen. There is already so much misinformation domestically about the real economic situation that it would be all too easy to pull another one over on the majority of the population. Keep a watch out on Geithner, too, continuing to publicly talk about a strong dollar. The worse the dollar gets, the more he’s gonna have to do this.

I am not broadly invested in U.S. securities and I would definitely stay out of U.S. bonds.
Just my two cents…

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avatar Kyle

This is all well and good, but what does it matter to Joe the plumber or other people who don’t/can’t invest. They are still going to get paid in the dollar and they are still only going to buy things with the dollar.

What everyone else thinks the dollar is worth means nothing to them, as long as they can buy food, beer, and diapers. He isn’t going to be out trading dollars for Euro’s.

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avatar ctreit

I think that the zenith of economic power has been reached in the US. Other nations have not only realized but they are also actively discussing ways to diversify their holdings out of the US$. In my view it is inevitable that the US$ will lose its importance during our lifetime. But this is the way the world is. It is a dynamic place and things change. Some things change faster than others. Only 50 years ago Sterling was still a major currency but it has become an also-run currency whose value dropped for a while until it found its new level. – My biggest concern is the lack of industrial production here in the US. We buy things from overseas, especially stuff that we consume every day. Check out the labels of the clothes you buy. How many garments do you find that say “Made in USA”? – But let’s not forget one thing. The USA is a heck of a resourceful place.

@Kyle. Having said all that, I have to disagree with you on one thing. A lower dollar will affect Joe the Plumber since many things will become a little pricier on a relative basis. He may still be able to buy beer, but he will be wearing old shirts and old pants. I agree on one thing. There is not much Joe can do about this.

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avatar kay

just browsing. I am not an investor. But “Joe the Plumber” can do something. Vote people into office that will promote a sane monetary policy, and not drive us into complete destruction and financial disaster. The current congress and Obama are creating the demise of this country with the growth of the federal bureacracy ,spending, printing of money , taxing and attempting to overtake our health care system. We will never get over this economically if they are not stopped. Republicans did not do a great job during the Bush years but they never tried to destroy our economy in this fashion. We are headed for disaster. I think that the reason the dollar is losing it’s value and also why countries around the world are threatening to use other reserve currencies is because they sense how weak Obama is and they also see that he is purposefully creating chaos and attempting to align himself with dictators and thugs. They do not trust him to get the U.S. back on track, thus they see they must start to fend for themselves. that is why all over Europe socialistic governments are moving to the right. They can’t depend on the U.S. to lead the way back to prosperity. I see a weakened U.S. dollar due to the incompetence and egotism of Obama and Pelosi and their minions.

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avatar ctreit

The Washington Post must be reading your blog. ;-) It published this article “Dollar’s Slide Gives Rise to Calls for New Reserve” http://www.washingtonpost.com/wp-dyn/content/article/2009/10/06/AR2009100603818.html?nav=hcmodule the day after you published your post. Copycats!

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avatar ZFarls

Fear, Fear, Fear

Gold is the Snuggie of investing. You can buy it on late night TV and it makes you look stupid. Really, look at gold’s track record. Also wouldn’t you buy gold BEFORE it shoots up and not after?

“You expect it to keep going up”
“China may be one of the riskiest bets of the century”

Stick to telling people to save money by cancelling there cable and bringing their lunch to work. I get that you get alot of hits by making a fancy title called the demise of the dollar but its nothing but FEAR.

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