Tags: dollar | jobs | yuan | reserve

Reserve Currency (US Dollar) Demise — Circa 2013?

Wednesday, 08 May 2013 07:50 AM

By Ashish Advani

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So the Dow Jones Industrial Average closed above the psychological 15,000 barrier Tuesday.

The surge in stock prices must be pleasing the stock jockeys and the blind analysts. The media and newspapers are full of the U.S. recovery stories and how we are now nearly out of the woods.

Just look at the jobs number last Friday. The United States apparently created 165,000 jobs in April. I was watching some of the acclaimed economists that adorn TV stations, who all unanimously acknowledged after "checking under the hood" that the number is solid and deserves a standing ovation.

Hurray USA. NOT!!

OK. Once the flag waving is over, let's really see what made up this number. I have often spoken about the Birth/Death Rate Model, which is published by the Bureau of Labor Statistics (BLS — same guys who publish the monthly data on jobs growth). This is a model that is supposed to predict the number of jobs that "ought" to have been created on a bunch of different measures. In other words, we are not sure if these jobs really got created, but we believe they ought to have been created — says the BLS.

The BLS "ghost" jobs for the month of April was 193,000.

In other words, if the "ghost" jobs were not added, we would have lost jobs for the month.

So much for the feel good factor!

Moving from make-believe news to real news …

Monday night, Chinese Premier Li Keqiang pledged to come up with a plan by the end of this year to allow investments and currencies to move freely in and out of China. In other words, he is pledging to free the Chinese yuan of currency restrictions and freely float the currency. While we have seen the yuan gain over 30 percent during the past several years, one of the biggest reservations to claiming reserve status is free trade in the currency.

Even if the premier misses the launch date by a few months, the yuan is about to float freely. Once this happens, we will see a surge of countries that will rush to join the already 40+ nations that have signed bilateral currency trade agreements with China. That will signal the beginning of the rapid decline of the U.S. dollar and the loss of its reserve currency status as it slides into an irrelevancy.

This does not mean that the U.S. dollar will be worthless. Like the British pound, it will still be traded, but with less dominance in the world.

Many of the actions that the U.S. government takes are based on the U.S. dollar being the reserve currency. Once we lose that, the loss will affect each one of us as our standard of living deteriorates and we become less critical to world growth.

Making the U.S. dollar worthless seems to be the prerogative of the current fiscal policies. The continuation of deficits, the lack of will to suffer austerities, the impatience to suffer minor inconveniences at airports (withdrawal of sequestration cuts to air traffic controllers) and the resistance to bring about real reform by forcing our congressmen to pass bitter but fiscally responsible policies are all dragging the dollar down.

Despite a rate cut, the euro did not decline last week. What does that tell you about the plight of the U.S. dollar?

If this does not urge you to diversify away from the dollar, what will?

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