Recently the US credit rating was lowered from AAA to AA+ by several credit rating agencies. It is a little difficult to relate to this cut if you are not familiar with ratings, but perhaps thinking of school grades would be helpful. In that perspective the US was cut from an A to a B.
The US dollar is the reserve currency of the world and has had this status since the end of WW II. Most people in the US do not understand what this means or that it exists. If you are a citizen of another country like China, to purchase oil which is priced in US dollars, your currency, the Yuan must first be converted (traded) for US dollars and then US dollars used to purchase the oil.
What this reserve currency status has done is to keep the cost of a gallon of gasoline low for Americans and high for everyone else. When Americans are paying $3.50 for a gallon of gasoline, Australians pay about $5.50, Chinese pay $4.50, French pay $8.21, Japanese pay $6.60, Canadians pay $5.50 and citizens of Turkey pay almost $10.00. There is another benefit of being the world’s reserve currency, the US can literally print more money which it has been doing.
The Federal Reserve Bank tried Quantative Easing I to stimulate the economy and rescue failed banks. QE1 failed miserably at stimulating the economy, because the banks that were rescued did not lend the money. So they tried QE2, and now are strongly considering QE3 for Jun 2012. That suggests that QE2 failed as did QE1. This continual pumping of dollars into the economy lowers the purchasing power of the dollar. Are we going to find at some point in the future it is QE5000, to coin the term from the news reporter commentary in ‘ Mel Brook’s Spaceballs’ about Rocky.
Yu Yongding, a former adviser to the Central Bank of China and big banks like Goldman Sachs are predicting a slow and steady decline of the dollar. Yu believes that from 1929 to 2009 the purchasing power of the greenback has declined by 94 percent. Goldman Sachs forecasts it will lose 15 percent of its value against the British pound over the next 12 months alone.
If the US dollar were to loose its status as the world’s reserve currency, prices in the US would escalate dramatically. There is a group of countries promoting the idea of a currency basket instead of the US dollar. Countries are increasingly concerned about a US debt default and the erosion of the purchasing power of the US dollar. This concern is partially founded on the bailouts from the banking system collapse wherein all of the bad debts were absorbed by the world’s governments.
The International Monetary Fund’s new Chinese deputy chief Zhu Min is known by many in the financial capitals in the West for warning as early as 2007 about the dangers of the U.S. sub-prime mortgage market and its dire consequences for the global economy.
“There is money everywhere,” Zhu said in a 2007 speech. “You can get liquidity from the market every second, for anything. So people are investing in assets with no idea of the risks they are taking.”
The Xinhua news agency said “Washington’s political elites” need to have the courage to defuse the debt issue and show the “wisdom and determination not to further jeopardize the fragile global economic recovery.”
The news agency said U.S. politicians “have never shied” from lecturing other countries about their global responsibilities, but “now it is high time” the U.S. “showed a sense of true global leadership.”
Chinese Premier Wen Jiabao urged developed countries at the World Economic Forum in Dalian, China to handle their debt problems in a responsible way that sustain the confidence of global investors. Wen said his government will do its part to help ease the global debt crisis by maintaining economic stability and boosting domestic consumption. China is the largest foreign creditor of the United States, and is offering new investments to help prop up Europe.
Countries around the world trying to assess the impact of the US credit downgrade on the global economy are starting to speak out.
China issued a stern warning to the United States, criticizing the country’s “debt addiction” and saying the United States needs to understand it can no longer borrow its way out of economic problems. A commentary by China’s official Xinhua news agency said the world needs a new, stable global reserve currency.
India, one of the world’s top emerging economies, called America’s downgraded credit rating a “grave” situation.
How can you protect yourself, your family and your wealth? There are several ways, but mostly they require diversifying your assets out of the US dollar into investments like Japanese Government bonds which has announced a new type of earthquake reconstruction bond that offers gold and silver commemorative coins for retail investors, starting next March. Plus, Tsutomu Fujita, vice chairman of Citigroup Global Markets Japan Inc., states investors will need to think globally about currencies for the time when a dollar buys Y50.
Or, you could coattail Chinese investments around the world or better yet invest in the Chinese Yuan through purchases of ‘dim sum’ bonds which are yuan-denominated debts sold in Hong Kong since 2009 and named after a tasty appetizer loved in China.
Professor de Silva said foreign and domestic investors in the debt tolerate yields as low as 1.7 percent in the belief they will make more gains as the yuan continues to appreciate. “If we look over the past year, RMB appreciation to the U.S. dollar is around six percent. And, the forecast over the next five years is about four percent per year. So if you take the 1.7 percent yield, plus that four percent yield, it starts to look quite attractive,” said de Silva.
If you are in the denial camp as it relates to this information, please do yourself and your family a great sertvice and read the article titled ‘Global Economic Crisis: The U.S. An Insolvent and Ungovernable Country’ referenced at this link as well as this one.
Copyright ? 2011 JD Durham
JD Durham is a World Class Technician, an Automotive Hall of Fame honoree with 45 years experience in the automotive service and repair industry and a staff writer. Visit Straight Talk Automotive for scan tool obd2 diagnostic, and obd2 scan tool software at fantastic pricing.
