America's Shame Helps Detractors Continue to Take Liberties With the Dollar

Wednesday, 16 Oct 2013 07:36 AM

By Ashish Advani

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I am just returning from Europe where I spent a week meeting various banking and investment folks.

I have to say, I was embarrassed at nearly every meeting when I was asked to explain the insanity that the world is observing. The Europeans cannot comprehend how the government can shut down. They understand that two political parties can disagree on policies or spending matters. However, it never gets to a point where the government gets shut down.

Now the significantly more serious matter of the debt default has made the situation even more incomprehensive to the Europeans. They understand sovereign debt defaults very well. Having faced that precept several times in the past few years, they understand the crisis it can cause within the euro if a small participant like Greece or Cyprus were to fail. The European Central Bank (ECB) stepped in well in time and ensured that a default would not challenge the existence of the euro.

What the bankers in Europe cannot understand is how American politicians can play this game of chicken with the global economies with absolute disregard to how the world economies will suffer if the United States defaults on its debt. They stare in disbelief as to how little the United States cares about their petty squabbles affecting the world.

It was even more difficult to explain what Obamacare had to do with the government shutdown as well as the debt ceiling debate. They could not comprehend how healthcare policy in the United States can hold the world hostage. Some even went to the extent of calling this political terrorism on the part of the United States.

As a well-anticipated result of this brinksmanship, we have now seen Fitch put the United States' AAA rating on negative watch. Last time we had Moody's downgrade the United States from its AAA rating, and this time we will likely see Fitch do the same.

Even if a deal is reached by the time we go to print, the damage has already been done. We have seen dire warnings and urgent pleas from International Monetary Fund, China, Japan and almost every state that owns U.S. bonds to resolve the crisis and not consider a default. Yet the Tea Party candidates did not think twice about forcing a global crisis.

Being a reserve currency and the largest economy of the world comes with burden of responsibility and expectations of a leadership position from the United States. Such level of temper tantrums and holding the world hostage will only continue to weaken the position of the United States and the U.S. dollar.

China continues to aggressively forge forward with its agenda to dethrone the U.S. dollar as the world reserve currency. It announced a new bilateral currency agreement with the European Union late last week. Even the ECB is tired of the antics of the United States and is beginning to diversify its trade into non-U.S. dollar-denominated currencies.

I guess the death wish that our Congress and political parties have to kill the U.S. dollar seems to coming true sooner rather than later. Last time in August 2011 when we faced the first downgrade of the AAA rating, we saw the dollar tank for several months. This time we may not see such a severe loss as the last time we had the shock and awe effect, but it will certainly bring a sharp decline in the U.S. dollar against almost all currencies in the next few weeks.

If you have not diversified away from the U.S. dollar yet, you should move immediately.

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