The Changing Face of Economic Power

It is our ongoing opinion that the financial hegemony of the United States Government is firmly on the wane. Between two costly and unwinable wars, massive bailouts, and grossly distended off-balance-sheet liabilities, we don't see anything other than a collapse of the U.S. Dollar at some point in the future. We can't say when, though... we are only certain that such a collapse will happen.

An interesting sign of the change in monetary power is the news that Brazil, Russia, India, and China (known as the BRIC) are holding their first-ever economic summit together. According to this article, the BRIC group together represents around 15% of the world's economy, and hold approximately 40% of the world's currency reserves. Such numbers make the BRIC group, if the member nations can act in concert, an economic force to be reckoned with.

Considering that the BRIC group is apparently weathering the Depression better than most nations - at least so far - that suggests the group will become a larger force in deciding the landscape of the world's economy. Specifically, we suspect the group will be taking a long, hard look at the U.S. Dollar's hegemony, and whether or not those little pieces of paper will have any value as a reserve currency for the future.

Frankly, we suspect not. The United States is going down a fiscal and monetary path blazed by Japan and Zimbabwe, among others. However, the meltdown of Zimbabwe and the constant doldrums of Japan weren't such a big problem, as those nations did not enjoy having the world's major reserve currency. The United States, on the other hand, does. Whether it goes the way of Japan or of Zimbabwe, will make it extremely painful for any nation to hold Dollars as a currency reserve.

It may take awhile for the collapse of the U.S. Dollar to sink into the collective minds of the BRIC group, as well as the European nations. But we expect that, sooner or later, it will; that will signal the end of the United States' credit line from the BRIC group, as well as the eventual collapse of the Federal Government's ability to grossly deficit-spend like mad.

When Governments fail, the currency need not. However, when a currency fails, the Government which issues said currency does fail. In the short term, we really can't say what will happen to the Dollar, nor of its status as reserve currency. Perhaps the world economy likes the abuse, and will therefore keep the Dollar around for awhile longer... or perhaps not. Whatever the case, though, we suspect the U.S. Dollar has a long-standing date with repudiation. The only question, in our mind, is when.