Over the past several decades, the U.S. dollar and other major currencies around the globe have been continually devalued, but they have still remained stable enough for trade to flourish and for the world to enjoy an unprecedented era of prosperity
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However, that all may now be changing. Many analysts now fear that the new $600 billion program of quantitative easing by the U.S. Federal Reserve may set off a round of “competitive devaluations” across the globe that could precipitate a global currency crisis.
If that happens, it might not just be the death of the dollar that we are talking about. Instead, we could potentially see the death of fiat currencies worldwide in the coming years.
Under the current system, nations have a built-in incentive to devalue their national currencies because it gives them a competitive advantage in world trade. In fact, quite a few countries have been doing this for years, but in 2010 currency devaluations have become a “hot button” issue and the extreme actions taken recently by the U.S. Federal Reserve and other global central banks have pushed us to the brink of a global currency war.
The U.S. dollar was the first fiat currency to ever be used as a true reserve currency literally all over the globe. For decades, nearly the entire world has had a tremendous amount of faith in the U.S. dollar and in U.S. government debt. If the world was to lose faith in the U.S. dollar and in U.S. government debt, the entire global financial system would crumble. Unfortunately, thanks to the foolish actions of the Federal Reserve, it looks like that is exactly what is starting to happen.
Top finance officials from China, Russia, Germany, Brazil and many other countries all over the globe are expressing anger over the decision by the Federal Reserve to initiate another round of quantitative easing. A number of key exporting nations are now evaluating whether or not they should devalue their own currencies in retaliation.
Alarmingly high sovereign debt levels in Ireland, Portugal and Spain are raising fears that the euro is set for another significant tumble
Investors are flocking to precious metals as they become disillusioned with paper currencies. On Tuesday, gold closed at $1,409.80 an ounce on the New York Mercantile Exchange, and silver soared to a 30-year high of $28.46 an ounce before moving back down a bit.
It isn't just precious metals that are exploding in price. Virtually every major commodity has been skyrocketing in price in 2010, and things only accelerated once the Federal Reserve announced this new round of quantitative easing. Some analysts fear that this commodity bubble could put significant inflationary pressure on economies across the globe.
The head of the Federal Reserve Bank of Dallas is admitting that for at least the next eight months, the Federal Reserve is going to be monetizing U.S. government debt
One top Citibank official has publicly declared that he believes that central banks around the globe are going to start dumping U.S. dollars in the coming weeks
Japan's stunning 12 billion dollar move to push down the value of the yen made headlines all over the world.
Even economies that are on a relatively solid footing are openly attempting to manipulate currency rates in 2010.
Things have gotten so desperate that World Bank President Robert Zoellick is actually proposing that the world's biggest economies should consider using gold as an indicator to help set foreign exchange rates
Unfortunately, the financial problems of the U.S. government look like they are only going to get worse...
According to the Wall Street Journal, in order to repay maturing bonds and finance the budget deficit, the U.S. government will have to borrow 4.2 trillion dollars over the next year. If other nations decide that they are tired of the games and that they are going to stop lending so much money to the U.S. government, where will all that money come from? Would the Federal Reserve step in and monetise most of it?
The truth is that the United States financial system is starting to come apart at the seams. America simply cannot run a half trillion dollar trade deficit and a trillion dollar federal government budget deficit each year indefinitely. There is no way in the world that those twin deficits are sustainable.
If the Federal Reserve thinks that it can solve these problems by printing up a bunch of money and throwing it on to the table they are sadly mistaken. The main thing that is going to do is cause a dramatic drop in the faith that other nations have in the U.S. dollar and in U.S. government debt.
But without faith in the U.S. dollar and in U.S. government debt, the world financial system is headed for a world of hurt. If the rest of the world starts rejecting U.S. dollars and U.S. Treasuries, the fallout will be horrifying.
Not only that, but if we do start to see a full-out currency war with nation after nation 'competitively devaluing' their currencies, we might see faith being lost in all paper currencies. If that happens it will create a financial horror of unprecedented proportions.
So let us hope that cooler heads prevail and that we don't see a full-fledged currency war break out. Let us hope that faith in the U.S. dollar and other major currencies remains high for as long as possible.
Because once the 'tipping point' comes, there will simply be no putting the toothpaste back into the tube.