U.S. Currency - Our Dollar's Value - TROUBLE!!! (Repost . . .)

U.S. Dollar Depreciation Ahead

Jul. 26, 2020 5:38 PM ET|89 comments 

WWS Swiss Financial Consulting SA

Debt, long-term horizon, contrarian, investment advisor

WWS SFC SA

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Summary

US Government spending is out of control.

US federal debt, federal budget deficit and trade deficit are not sustainable.

Signs of depreciation.

The Chinese are going digital.

The gold price is breaking out.

Loss of Control

The wretched condition of US government finances has already has been noted in earlier articles of this writer and is widely discussed in the literature. The federal debt of $25.6 trillion, the annual budget deficit of $3.4 trillion and the $600 billion trade deficit show that the Administration has lost control of spending. More spending to relieve economic distress caused by the Coronavirus lockdowns is likely soon and is almost certain before the November 2020 elections. This is not sustainable. $30 trillion of federal debt by 2022 is going to undermine faith in the US dollar as a safe haven currency. The federal government lost its AAA rating in 2011.

United States loses prized AAA credit rating from S&P

Signs of Depreciation

One of the most obvious signs of US dollar depreciation would be a drop in the US dollar index, which measures the value of the US dollar in relation to a basket of currencies among which the euro has the most weight. Investopedia provides basic information about the index:

Currency Basket Definition

“The U.S. dollar index started in 1973, and today is a basket of six currencies - the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. The euro is, by far, the largest component of the index, making up almost 58 percent (officially 57.6%) of the basket. The weights of the rest of the currencies in the index are - JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), CHF (3.6%). During the 21st century the index has reached a high of 121 during the tech boom and a low of 71 just prior to the Great Recession.”

China

Of course the exchange rate with the renminbi is also important:

The USD has strengthened against the CNY and is currently trading at about 7 yuan for one dollar. In 2018 a dollar bought only 6.4 yuan. It should be clear that the PBoC does not want the renminbi to appreciate very much against the US dollar since that would mean that Chinese exports to the US and to other countries would become more expensive. One can therefore assume that Beijing would follow a policy of gradual US dollar weakening so as not to endanger its competitive edge thanks to lower prices for its goods.

However, given that the US has been provoking China with an aggressive Hong Kong policy and rights of navigation fleet movements in the South China Sea in addition to support for Taiwan and sanctions against Chinese personalities, the possibility that the PBoC has a plan “B” in case the global advance of the Chinese currency has to be accelerated should be taken into account.

The large amounts of Treasury paper in Chinese possession could be a weapon against the US dollar, but then it would not serve Beijing’s interest to have its dollar bonds lose substantial value due to rapid US dollar depreciation. This writer does not know what strategy the PBoC has worked out, but assuredly there are alternative plans.

The Digital Yuan

The most significant development that might undermine the US dollar’s current dominant position as a global reserve currency is the new national Chinese digital currency that employs blockchain. There have been several articles about the Chinese digital currency. Forbes (China Will Use Its Digital Currency To Compete With The USD) and the Guardian (China starts major trial of state-run digital currency) have both published detailed articles about the new Chinese digital currency as well as Bloomberg. They all consider that the new digital currency could cause disruption to US dollar supremacy.

So far it does not seem that the new digital currency is linked in some way to physical gold, but that remains to be seen. In any case the digital payment system is already well-established in China, and it will not take long for smart phone users to start using the national digital currency.

It is when China begins demanding payment in yuan for its exports that there will be a significant depreciation of the US dollar as demand for the dollar will lessen due to the demand for yuan for payment. Exactly how the PBoC plans to inaugurate obligatory payment in yuan for Chinese exports is not known at this time.

Tectonic Shifts

Investors should keep a close eye on developments of the new Chinese digital currency as it will quickly start competing with Bitcoin and other Cryptocurrencies as the digital yuan becomes widely used internationally. This writer has already noted in earlier articles that the greatest threat to the global dominance of the US dollar will come from China. In fact the Asian markets are growing swiftly and overtaking the US and European nations. It is to be expected that there will be a tectonic shift in economic activity in the next few years. This has been clearly pointed out in a Zero Hedge article (Continental Shift: The World's Biggest Economies Over Time) .

Instead of preparing for tougher global competition, US corporations have gone deeper into debt to finance share buyback programs. The Administration via the Treasury and the Fed counters the corporate bond debacle with yet more liquidity and outright purchase of corporate bonds. One can ask how such a policy is going to help the US dollar resist the Chinese currency onslaught.

Ant IPO

Jack Ma’s Ant IPO has been widely reported in the financial media. It is symptomatic of the dedollarization process that Shanghai and Hong Kong will be where the funds are raised. In this case it is not government that is furthering the cause of the renminbi but private entrepreneurs. The importance of Asian financial markets will only increase in the future.

Warning

Investors have been warned of approaching dollar depreciation. Things move faster in the digital age, and it will not be years before the dollar weakens. The time for investors to position their portfolios for dollar depreciation is now before it is too late.

Readers may have observed that this writer has repeatedly warned of disturbing developments that will affect the US dollar, which is the basis of American prosperity due to the dollar’s role as the main global reserve currency. The purpose is to warn investors of what is coming. The fact is repetitio iuvat, which is Latin for “Repetition helps”.

Gold Price Shines Again

The gold price has gone over $1,800.00 an ounce. The financial news is full of discussions about gold and the depreciation of fiat currency. It is clear that the question of the role of gold as an investment and the accompanying fall in the value of fiat currencies are going to be the subject of scores of articles. The connections between gold and the value of fiat currencies constitute a topic that this writer will deal with in coming articles.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Data from third-party sources may have been used in the preparation of this material and WWS Swiss Financial Consulting SA (WWW SFC SA) has not independently verified, validated or audited such data. WWS SFC SA accepts no liability whatsoever for any loss arising from use of this information, and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Please consult your own professional adviser before taking investment decisions.

The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

All investments involve risk, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Data from third-party sources may have been used in the preparation of this material and WWS Swiss Financial Consulting SA (WWW SFC SA) has not independently verified, validated or audited such data. WWS SFC SA accepts no liability whatsoever for any loss arising from use of this information, and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Please consult your own professional adviser before taking investment decisions.

The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.