Theory on what will happen in relation to the US Dollar

This is based on discussions I've had with some friends of mine who trade currency and do investing and I am currently learning how to do that. The following is my amateur opinion and is backed up by no degrees of any kind. That said, here it is:

First, to understand the basis of this, you must understand the nature of the US currency.

The two main kinds of currencies that exist in the world today are commodity-based and fiat-based.

Commodity-based currencies are ones based on the value of a valuable commodity, usually gold. Up until 1933, the US Dollar was a gold-based currency. Currently, the British Pound is still on the gold standard.

Fiat-based currencies are ones that base their value on the full faith and credit of the government issuing them. Put simply, the curreny is worth what it is because the government issuing it says so. In international trading, the value of a fiat-based currency is based on the financial soundness of the government issuing it, interest rates of the national bank in question, defecit or surplus, and the existence and size of debt. The US Dollar, like most currencies now, is fiat-based.

Up until now, two major factors have held up the value of the US dollar:

The fact that oil is traded on the dollar and that until Bush came into office, and for some time during the first year or so, there was reasonable interest rates and no massive deficits.

Those factors are in great danger of ceasing to be, with disastrous results.

The massive deficit spending, coupled with runaway oil prices and an overall poor opinion of the US, have caused the dollar to decline recently. Because the value of the dollar isn't based on a commodity, like the Pound, but on the full faith and credit of the US federal government. This makes it much more vulnerable to the effects of international opinion as well as deficit spending than if it were based on gold or silver.

In week following Bush's re-selection the dollar hit record ten-year lows, and continued to drop. Today Greenspan spoke at a conference of bankers and mentioned the dangers of deficit, both in the budget and our trade deficit, and that caused the dollar to take a sharp drop across the board.

Now the danger of a declining dollar is considerable, the decline in the value of any currency causes inflation of prices in the country of use. It makes imports more expensive as the currency in question loses buying power.

This kind of increased inflation by itself is not the danger.

The problem is that when you couple that with rumours of OPEC switching the currency they trade oil on to the Euro as well as the massive trade deficit in the US, you get a VERY bad picture indeed.

A declining dollar loses buying power overseas, causing increased inflation, which is only made worse by the trade deficit. This decline is increased in speed by the deficit spending of the Bush Administration and their reckless foreign policy. Those two factors alone would cause a very swift fall in the value of the dollar as faith and credibility in the US government is lost. Things are made worse by the trade deficit, as because so much of our goods come from overseas this causes hyperinflation of the dollar as the dollar loses buying power, prices of imports increase, forcing us to spend more, and so on. At some point it is likely that due to this rapid decline as well as other reasons OPEC will choose to trade on the Euro. This will change a rapid decline into a freefall as one of the key supports for the dollar is suddenly no more. The value of the dollar will plummet, imports will skyrocket, the price of oil will shoot through the ceiling and very effectively within most likely six months, the dollar will be for all intents and purposes worth nothing.

This creates another problem, a far worse one. With money no longer being worth what it says it is and with inflation wiping out not only the life savings of many individuals as well as the net worth of most American companies, the economy won't just crash, it will burn and flameout in a rather spectacular fashion. The total crash of the economy based on the total loss of worth of the dollar will gut revenues, both public and private, to non-existent levels, making jobs worth nothing to hold onto. This will force government on all levels as well as companies to make drastic cutbacks, accelerating the downward spiral. Policemen and firemen will no longer be able to be paid, soldiers will be in the same boat. That will remove the means of keeping the public order.

In such circumstances, it would be safe to say that the United States of America, as it once existed and was known, would no longer exist in any way, shape, or form.

http://www.truthout.org/docs_04/112004J.shtml We might end up fighting tooth an nail for our next meal.

We are completely fucked. Hosed. Buggered. That's not to say that I won't continue actively to oppose the hideous policies of the Bush Regime, but it does seem that I should take the money I have now and just spend it; live it up, have a good time while I still can. I'll go on a cruise, cavort, party, eat and drink what I want. Because, if within a few years my money won't be worth toilet paper and either Al Qaeda is gonna nuke our asses or Bush will enslave us all, well, what the hell. Eat, drink and be merry, for tomorrow we die. Go on; buy that new Mazda Miata or that iMac G-5 or that $200 cashmere sweater you always wanted. Watch porn. Go to wild parties and drink expensive champagne til you hurl. Have fun now; I'm not sure fun will be an available commodity for much longer.

Without going into details, I plan on consolidating what I do have to end up with less debt. I am also toying with the idea of moving to another country. I would stay and fight, but I fear there won't be anything left to fight FOR.
Oh, and I will LOVE hearing Repukes complain about what is happening to them.

Humans seem to have the unique ability to plunge to the bottom of the barrel, only to rebound over and over again. We've been doing it for hundreds of thousands of years.

Buy some gold to secure yourself, the metal has kept its value solid for the last 5,000 years or so, you can't go wrong.

Britain is not on the gold standard and hasn't been since the 1930's.

The US abandoned it in the 1970's.

We won't be going back to it.

precisely what a friend and I have been discussing for about 2 years now. The US economy is teetering on the edge, and it appears that whether it recovers or not is going to be the decision of a non-American. My personal opinion is that the only reason OPEC hasn't switched yet is because the loss of the dollar would have widespread repercussions globally. Most European countries are not in a position to weather such a fallout. But they're moving in that direction, with new treaties being signed with states like Iran, and their adamant refusal to throw their money into Iraq. I think * is counting on the occupation of oil states to both bolster the dollar, and punish Europe. But he is quickly running out of army to do it with. The EU recognizes this--which is why they're starting to target goods from particular US states, rather than levying tit-for-tat tariffs.

The world is getting ready for the fall of the US economy.

When things get bad people will still want to play Monoply.

the world doesn't want to see the US economy collapse. If we weren't in the position to buy all their products, countries like Japan and China would suffer considerably. This is especially true for China, because their currency is (for now) tied to ours.

If we go down, everyone else goes down with us. In 1998 Russia started a chain reaction that caused a worldwide stir and cost a lot of people a lot of money. We have an economy that is much larger and more integrated into the world system than Russia. If we tank, everyone else will too. At least there will still be a level playing field for our country on the other side of the crash.

I'm not sure a crash will happen, but I'm thinking about what might happen, and I can't rule it out. Only time will tell. I just wish we could fast forward through the next 4 years. I'm ready to tackle what comes our way, but I'm tired of worrying about what it will be. While I have no confidence in Bush, I have full faith in the American people. 70% of us did NOT vote for Bush. Those who were in his corner but not motivated enough to vote will leave his side once the proverbial shit hits the fan. That means that we'll have allies and confidants in 70% of the population. We'll pull through.

(First let me say that all hope is not lost, many countries are dependant on the survival of the U.S.)

I do believe that were heading into major depression, which will facilitate the fall of the U.S. economy leading us to become a 2nd world country. You can’t speculate on exactly what will cause the most damage to our economy, however several disturbing factors stand out:

• Weak economic fundamentals, dependence on specific markets to carry U.S. economic (i.e. housing).
• The fall of the dollar facilitated by the deficit.
• Peak oil, which will greatly hinder any economic growth.
• War, which polarizes the classes by weakening the working class and strengthening the rich.
• General anti-American sentiment worldwide, which means no one will come to help, they will laugh.

Let’s face it people, what do we do in America that other countries can’t do? We’ve outsourced and sold off so much of what makes America and invaluable resource. Were just going to have to live through this thing, it won’t be easy but I know this country is still worth saving after we hit the bottom. The light comes after the dark.