The Perfect Storm In The American Economy--What The Dollar's Decline Really Means To Your Pocketbook

A single bad event, by itself, is rarely a cause for worry. But put that single bad event together with another seemingly unrelated bad event and, well, there could be serious trouble ahead.

Take the steady, troublesome decline of the value of the American dollar. (See “The Incredible Shrinking Dollar” at www.collectivewizdom.com) That now well-established decline has turned into what appears eerily like a nosedive. The dollar has now lost about 46% of its value against this newly-created Frankenstein of Old-World Eouropean currencies. It makes some of us who like to travel every now and again nostalgic for the good old days of French francs and German marks.

The greenback’s decline means all of us Americans now have less purchasing power versus almost every other major currency ---the European euro, the Japanese yean, the Chinese yuan and so on. In a real sense, we’re just not as rich as we used to be.

Less purchasing power means we can’t bring home as much of that Bordeaux as we used to or eat as much Kobe beef if we happen to be in Tokyo. Maybe that’s a loss we can live with.

But here’s one downside to the shrinking greenback that’s even more ominous. Around the world, there’s growing nervousness about the value of the greenback as a “reserve”. What does that mean? Well, you and I bank at the retail level, so to speak. When we have an extra buck or two we march it into Citibank or some other bank nearby.

When a whole country has extra cash, it has a slightly different choice to make. It can keep its extra cash in the form of its own currency or—and here’s the rub—it can keep it in the form of somebody else’s currency.

So, over the years, when a country like Saudi Arabia made an extra billion or so in oil money, it could convert those billions into another currency and hold them in its central bank. Throughout the last century, the decision Saudi Arabia and most any country with extra dough made was simple –put the extra dough into good ol’ American greenbacks.

That choice worked for them. And it worked for us. It worked for them because the dollar was the strongest, safest currency in the world. No risk the money would be worthless overnight. It worked for us because if all the big central banks are holding dollars, that stabilizes our greenback’s value around the world—it kind of makes us the “House” in casino terms. The world is playing on our currency terms, so everyone around the table has a vested interest in keeping our greenbacks ---and us—strong.

But now, all that may be changing.

With the decline of the greenback, central bankers around the world are starting to get nervous. Afterall, who wants to convert a billion in oil to greenbacks only to wake up the next morning and find you only have a measley $300 million. Now, of course the decline is not that steep that quickly but you get the point.

On January 12, 2005, the head of Saudi Arabia's central bank made the first of what became over the last two years, a steady drumbeat of negative statements about the dollar’s future as the world’s reserve currency. Hamad Saud Al Sayyari, governor of the Saudi Arabian Monetary Agency,, stated that he “expects the euro to play a greater role in global currency reserves in the future, although there has been no shift so far from dollars to euros.” So far?

Not exactly a vote of confidence.

Here’s the problem. If nervous heads become nervous feet, leading to a stampede out of the dollar by the central bankers, that in and of itself will hammer the dollar’s value. And where will that exodus of dollars go? Into stronger currencies—euros, Chinese yuan, whereever there the values are holding steady.

All this might be not be so alarming if our general economy were not itself in an no-one’s-saying-it recession, with the spiraling costs of war and the mortgage meltdown. So there’s no economic engine to drive the dollar back up.

Do the foreign central bankers know something we ordinary Americans don’t? Or is now a good time to start learning how much that doggie in the window costs in Chinese yuan? Can we put our retirement nest eggs in euros?

Kids, board up the barn, this one looks like a perfect storm.