We predicted the US Dollar would lose value in real terms in 2012 to start this series, and this is already showing itself to be true. Inflation is running higher and higher so that even the government numbers show inflation far above what a person can earn on risk free cash.
The reality is much worse than this with real inflation being around 10%. Some areas of the economy are rising in price much faster than this as you’ve probably noticed. The trick about valueing the US Dollar is deciding what to value it against. It is commonly valued against only the few other biggest currencies in the world. Currencies like, the Euro, the Japanese Yen, & the Brittish Pound. The problem is that all of these countries (or region in the case of the Euro) have very similar problems to the US.
The USD has been in a tug of war with the Euro for the world’s least favored media currency. All the USD has needed for a pick me up is for Europe to have a debt problem…and there are plenty of those to go around.
Meanwhile, the world is taking very serious steps away from the USD to transact it’s business in. This is a very serious issue. As soon as the world gets to the point where it doesn’t have to have the USD to transact business (and it could possibly happen before this time), it will leave the USD centric model permanently. And the world is very quickly moving towards this.
China is quickly making arrangements with all major trading partners to do business in the Yuan. It’s a very big deal that the 2nd and 3rd biggest economies in the world (China & Japan) have made a deal to deal directly with each other instead of using the USD.
Perhaps the stupidest economic move of our time was the US forcing the SWIFT system to cut off the Iranian Central Bank from world finance. The US might see this simply as an attack against one country. Many countries in the rest of the world which are wary of US hegemony sees it as a potential way in which the US will try to attack them next. This only hurries their move away from the USD system. It’s hard to see a path where this system doesn’t end at some point as so many of the up and coming world powers want nothing to do with the current corrupt system.
Of course, it would be a stretch to say the world will completely move away from this system in 2012. The world is not ready to do so quite yet although it will be within only a few short years.
In the meantime, the Fed is holding interest rates so low that cash can’t earn anything. In fact, this is one of the reasons they’re keeping rates so low. Also, Federal Debt continues to mushroom. Anyone who makes an honest appraisal of the situation can see that holding dollars for the long term is a fool’s errand. However, it’ still quite popular in the short term when people get scared of unforeseen economic events. When people are scared of taking a big loss, they’ll choose to take a small one instead, which is often what holding USD cash means today. Of course, if you expect everyone else to follow you into that short term trade, you might make a small quick profit in Treasuries.
For those of us holding cash this year, we’ll continue to see the value of our dollars drop as we hope for a better entry point into a sustainable appreciating asset.
This is the 21st post in a series. You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here. Here are the rest of the posts: 3) Ben Bernanke’s Dollar Devaluation Plan, 4) The Coming US Dollar Devaluation, 5) Stock Market Volatility, & 6) Stocks to Fall in 2012, 7) The European Crises, & European Options, 9) European Prediction, 10) Recession in Japan, 11) Japanese Yen Crash,12) War with Iran, 13) Jewish Perspective on Iran, 14) Commodities to End 2012 Lower, 15) Where Will Gold Go Next?, 16) Gold, Should you Wait?, 17) Will Silver Move Higher?, & 18) Why Buy Silver Now?, 19) Oil Prices to Explode Higher, 20) Bonds Will Fall, 21) US Dollar, 22) European Recession, 23) Sovereign Default in Europe, 24) China’s Slowing, & 25) US Recession.