(OroyFinanzas.com) – As the dollar leaves behind the support in the 84 – 85 area on the index, the rate of decline is accelerating. The big questions now, ofcourse, are “How far will it drop?” and “Are we in for a full-blown dollar crisis?” The simple answer to these questions is “a very long way” and “yes”, respectively.

Various factors are coming together topropel the dollar into a decline of seismic proportions that is expectedto destroy its status as the world reserve currency and createconditions of economic crisis in the United States.

The United States is a country that has been living way beyond its meansfor a long, long time, and has been able to get away with it until nowbecause of the dollar’s reserve currency status, and also because of thecurious appetite of foreigners for US assets and securities. The massiveinflows of capital from the rest of the world, currently running atabout $1.5 – $2 billion a day, have enabled US consumers to go onconsuming in a low interest rate environment as the deficits havesnowballed to massive levels. This is clearly a game that can onlycontinue as long as confidence is maintained, confidence in the dollar,and confidence in the US.

Vast quantities of US debt and dollarfinancial assets have been created and ingeniously packaged and marketedto foreigners who are right now waking up to the harsh reality that theyhave been played for suckers and are about to get stuck with thisatrophying junk. They have delivered goods and services in theexpectation of eventual fair payment, and are right now being defraudedout of a sizeable percentage of their earnings by the falling dollar.

Inthis sense, the US government is laughing up its sleeve as the gullibleforeigners learn about the sophistications of high finance the hard way.While these foreigners may be a bit slow, they are not completely stupid- the writing is on the wall and the race is on to offload dollars anddollar assets to whatever clowns will buy them, while there’s still achance.
Due to the staggering quantity of these assets worldwide, thereis clearly an acute risk of a vicious circle of forced liquidationcreating a downward spiral, possibly of biblical proportions.

There is another dimension to the dollar crisis now almost upon us thatshould not be overlooked or underestimated, and that is the effect ofthe  tremendous loss of esteem and respect from the rest of the worldthat the United States once enjoyed, until just four years ago. It seemslike an age ago that Bill Clinton was President in the relativelytrouble-free times of the 90’s. Bill Clinton was a very likeablepersonality and was very popular around the world.
His reputation wasbesmirched by the affair with the intern, but many people largelyforgave him for it, especially as the economy was apparently doing well.

Unfortunately, the global reputation of the US has plummeted since thattime, for reasons that are well-documented elsewhere, with the resultthat attitudes towards the US are hardening, so that consideration ofthe impact on the US of heavy selling of dollars and dollar assets willbe much less of a factor in the decision to liquidate than wouldotherwise have been the case, and there are some countries, of course,that would be pleased to see the damage wrought on the US by a dollarcrisis.

The rest of the world are the US’ creditors and therefore have a lot ofpower. The rest of the world hold a lot of US dollars and US dollardenominated assets, and might just decide to sell them, fast. This is, Ibelieve, a potent factor that will greatly exacerbate the dollar’sdecline and lead to a much more serious dollar crisis.

Clive Maund

Source: www.clivemaund.com

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