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September 16, 2015

World Holds Breath for the Death of Dollar

Dismantling the dollar hegemony one yuan at a time.

I’ve been asked many times about the impending “death of the dollar.” I know some folks who expect the dang thing to die. They’re already envisioning the spectacle. An entire industry has sprung up to prepare and equip people for the moment when the dollar dies. It’s like insurance, the theme goes: hopefully you’ll never need it.
But the dollar is a human creation, a fiat currency. It doesn’t have a life of its own. It’s managed, rigged, and manipulated. It’s an accounting entity, a (lousy) store of value, and a means of handling transactions so you don’t have to barter your first-born for a Lexus.
As longs as it’s useful, the powers that be are going to keep it around. But over the long term, the dollar will do what it has done since the Fed was put in charge of it 100 years ago: it will lose value.

And the “strong dollar” these days? Ah, the irony!

It’s causing mayhem in the emerging markets where governments, corporations, and even consumers borrowed in dollars to save on interest. Now that their currencies are collapsing against the dollar, it’s getting very expensive to service these dollar debts, and they’re going to explode, and the holders of these debts are going to eat some big losses, unless they get bailed out again.
This “strong dollar” dents US exports and boosts imports. US corporations use it liberally as an excuse for their sorry revenues and earnings.
This is the value of the dollar in relationship to other currencies. These relationships are rigged to the nth degree. They go up and down and react to a million things, including central bank jawboning and monetary policies.

The actual value of the dollar? Don’t look!

It’s expressed in what the dollar can still buy in the US. And it’s terrible.
In terms of consumer goods and services, a single dollar isn’t buying much anymore. It used to buy a night in a hotel. After decades of inflation, Motel 6 came along and offered standard rooms for $6 a night. That was in the seventies. Now people don’t even remember where the name came from.
In my entire life, there were only three quarters – during the Financial Crisis – when the published data indicated that the dollar actually gained value in terms of consumer goods and services. The rest of my life, the dollar lost value, sometimes at a breath-taking pace, other times more leisurely.
In terms of assets, the dollar is more quixotic. It can lose value even faster. It now takes $1.2 million to buy a median home in San Francisco, likely a two-bedroom apartment in a so-so neighborhood. In 1993, the same median home in the same neighborhood cost around $250,000. It’s not that apartments have gotten bigger or better. It’s that the dollar has plunged in value against other assets.
Same thing happened in stocks, bonds, classic cars, art: the dollar buys hardly anything anymore.

Courtesy Wolf Richter www.wolfstreet.com

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