Why The U.S. Dollar Is In Trouble
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dollar etfMichael Lombardi: The U.S. government, after winning World War II for the Allies, was very convincing. It told central banks around the world that they should hold the U.S. dollar as their reserve currency instead of gold, based on the idea the U.S. dollar would be backed by gold. Only limited amounts of U.S. dollars could be printed, because the currency was tied to gold bullion. Central banks bought into the idea.

Unfortunately, a few decades down the road, the concept of a U.S. dollar backed by gold was thrown out the window (thank you, President Nixon). Eventually we were introduced to the modern day printing press—printing money out of thin air at the will of the Federal Reserve without the U.S. dollar being tied to any “hard” currency like gold.

Why would anyone agree to this horrible idea?

Back in those days, the U.S. economy was prospering. Our government was in good shape and didn’t have much debt. And the logistics made sense, too, as time passed. Why wouldn’t a central bank have in its reserves the currency of the world’s strongest economy and military? Why wouldn’t a central banker keep U.S. dollars in his vault as opposed to hard-to-carry and hard-to-store gold?

Years have passed since the U.S. dollar “unglued” itself from gold. Things have changed, too. America is not so glorious anymore. Ever-rising debt and the never-ending printing of U.S. dollars have resulted in some countries changing their policy on U.S. dollar-backed reserves. And the fundamental factors that keep the U.S. dollar strong are deteriorating quickly.

The balance sheet of the U.S. economy does not look as good as it did in the 1950s and 1960s.

The chart below shows the change in nominal gross domestic product (GDP) and the change in U.S. debt year-over-year (yoy) on a percentage basis. You can quickly see that U.S. debt is rising at a much faster pace than GDP.

Year

% Change in GDP YOY

% Change in Public Debt YOY

2008

1.66%

10.29%

2009

-2.05%

18.26%

2010

3.75%

14.22%

2011

3.85%

9.46%

2012

4.58%

9.10%

*2013

2.56%

4.67%

Average

2.39%

11.00%

* Data until second quarter

Data source: Federal Reserve Bank of St. Louis web site, last accessed October 16, 2013.

As the chart above shows, we have U.S. government debt rising 360% faster than economic growth! GDP in the U.S. economy has been increasing at an average annual rate of 2.39% over the past six years, while government debt has been growing at an annual pace of 11% since 2008.

The mainstream doesn’t talk much about the situation I’ve just outlined above. But the obvious fact is this: the stock market rallies when it hears government debt will increase or the Federal Reserve will print more money; the stock market drops when government spending or money printing is in jeopardy.

But things are changing outside the United States.

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