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Why I'm a Long-Term Dollar Bear

If you've been reading my blog for a while you've probably noticed that I'm one of those wacky commodity money advocates. (You can recognize us in the wild because we snicker whenever the phrase "barbarous relic" comes up in ordinary conversation.) I'm predisposed to pointing out unsettling facts such as the U.S. dollar losing half its value over the past 20 years.

There are many reasons why a commodity money, and especially a money backed by precious metals, is economically superior to fiat money. But those reasons don't matter here; I don't invest in precious metals because of my economic preferences. I invest in precious metals because I think the U.S. dollar is going to be under a lot of pressure for a long time. Why?

Globalization.

This is not a bad thing — I love globalization. But I do think this economic megatrend has some interesting implications for the U.S. dollar, and I've shaped my investments accordingly. (#insert <std.disclaimer>)

The U.S. dollar is often described as "the world's reserve currency" because for the several decades after World War II this country had the most attractive economy around — large, strong, and growing. Everyone used dollars, and even today important commodities like oil are still primarily traded on dollar terms even when the trading partners don't use dollars in their domestic economies. The use of dollars in exchange, and as central bank reserves (the origin of the phrase "world's reserve currency"), are felt on the market as a demand for dollars and boost their value.

I'm a dollar bear because rapid growth in developing countries is leading those countries to represent a greater fraction of the total world economy. Ipso facto, the fraction represented by the United States will fall. As a simple matter of diversification it is a reasonable move for other countries to shift some portion of their central bank reserves to other currencies, such as the euro, which has become a credible alternative to the dollar. Simultaneously, the use of non-dollar currencies in international trade also becomes more attractive. (For example, Iran has been planning to open a euro-denominated oil bourse.)

As the United States' dominance of the world economy wanes, the dollar will become relatively less attractive both for holding and for trade, so its value will fall. That's it — simple and inexorable.

Oh yeah, and all those stereotypical gold-bug reasons in favor of investing in precious metals are true too. :)


I considered adding some charts to this article, but charts take a lot of extra effort, and I'm lazy. Let me know if you'd strongly like to see some charts so I know it would be worth the effort.


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