2013-05-15

Death of the U.S. dollar greatly exaggerated; Historic U.S. dollar rally still likely

Argentines Are Hoarding 1 Of Every 15 Cash Dollars In The World
But as Bloomberg Businessweek reports, a lot of US Dollar bills are tucked away somewhere in Argentina (in stacks of $100 bills since the number in circulation has risen from 58% of the total to 62% since 2008). One table is a 2012 Fed paper on demand abroad for US currency shows net inflows to Russia and Argentina has increased by 500% since 2006 (compared to US demand up around 10%). In fact, demand for large dollar transfers to Argentina since 2006 has outstripped demand for dollar cash overall in the world.
What will Japanese hoard if the yen hyperinflates? What will Europeans turn to if the euro dies? None of this is good for the dollar in the long-run, far from it since it will guarantee a U.S. debt crisis by raising the value of U.S. debt relative to the global economy. But those looking for hyperinflation are betting against the odds, as the more likely path to U.S. dollar hyperinflation is first through hyperdeflation, the other side of which is the hyperinflation of other fiat currencies.

The U.S. dollar is the core of the global financial system and global powers, including China, will seek to preserve it as long as possible. As each nation passes through hyperinflation, however, they become freed from the global financial system via devaluation. At that point, the cost of launching a new financial system have been paid up front. As each nation goes through hyperinflation, it puts the U.S. dollar in a more untenable situation and makes a nation more likely to defect to a new system. Since gold will likely be a part of a new financial order, even if there is deflation it is wise to obtain physical metal, but the ultimate denouement of the U.S. dollar may be years away.

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