by Tony Davis – Atlanta Gold & Coin Buyers ……….
One of the most popular topics in the news today is the status of the dollar as the world’s currency and how efforts are being made by foreign nations to circumvent using the dollar by entering into currency swaps and commodity trade agreements. There’s no questioning that the dollar has lost some of its luster in recent years due to the Federal Reserve’s unprecedented quantitative easing efforts, an enormous expansion of the Fed’s monetary basis, and record level annual deficits and national debt. This is further evidenced by the reduction in the value of the dollar relative to other major currencies in recent years. In fact, when you look at the financial health of the U.S., or rather lack thereof, our financial situation is less than desirable. Our on-balance sheet debt has recently surpassed annual GDP, clocking in at 103.2% at the time of this article, which most likely has contributed to the tepid growth we’ve seen since the end of the Great Recession. This also puts us at greater risk of higher interest rates in the future, which in turn will cause a greater percentage of our annual budget being used to service debt payments. Considering the above, it appears as though the dollar’s status as the world’s currency is quickly coming to an end, but upon further review, reports of the death of the dollar may be greatly exaggerated. In this article, we’ll discuss why the dollar may not be in immediate risk of losing its status as the world’s reserve currency and how we will know if and/or when the process has started.
Foreign Debt Holding is at an All-Time High
If the dollar is at risk of losing its status as the world’s currency, you would expect a substantial decline in the holding of treasuries by foreign countries. For all of the bad press that the dollar has received over the past year or so, foreign holdings have actually increased over the past year – not declined. This chart from the U.S. Treasury shows that foreign holdings of U.S. debt have increased by $318 billion for the one year period ending in May of 2014. Japan and Belgium have accounted for most of the increase, while Russia’s selloff of $30 billion over the past year is the most obvious example of a country diversifying away from the dollar. Presumably, this is in direct response to the geopolitical conflict in Ukraine and the sanctions imposed against Russia by the U.S., the EU and NATO. If we begin to see a sharp selloff in treasuries from foreign holders, there should be reason for concern, but until that time, take sensationalist headlines with a grain of salt.
Why Foreign Countries Hold U.S. Debt
Many may be wondering why foreign countries are such a substantial holder of U.S. debt, accounting for nearly one-third of the U.S. treasuries that have been issued by the U.S. Treasury. The fact of the matter is that the holdings help to maintain the strength of the dollar relative to the foreign country’s currency. This allows for exports from the foreign country to the U.S. to be more desirable and affordable. Since the U.S. consistently runs a trade deficit with most other nations, in theory, if the excess reserves held by the foreign country aren’t used to prop up the dollar, exports to the United States will become more expensive. Not surprisingly, the top trading partners of the U.S. are also the largest holders of U.S. debt. If we see a substantial reduction in trade with countries that hold a considerable amount of treasuries, this may be reason for concern, as there will be less incentive for the country to maintain a weak currency relative to the dollar. However, until or unless this happens, major trading partners with the U.S. will likely continue to be among the largest holders of U.S. debt.
Chinese Gold Holdings
While the Chinese have slightly reduced their treasury holdings over the past year, to the tune of approximately 2%, they have reportedly been adding to their gold holdings at a rapid pace. Because China isn’t forthcoming with their official holdings (last reported in 2009), it’s difficult to verify their actual gold holdings, but financial experts have estimated their current gold reserves to be as high as 5,000 tons, which would make them the second largest holder of gold reserves, trailing only the United States. Some individuals in the financial media have speculated that China is attempting to assert the Yuan as the world’s currency with the ultimate goal of converting to a gold-backed Yuan, which would undoubtedly make it the world currency of choice. However, the People’s Bank of China (PBOC), much like the Federal Reserve, has a reputation of pursuing accommodative monetary policies, so it would be surprising if they voluntarily limited the flexibility of their currency by adopting the gold standard. In other words, don’t look for the Yuan to take over as the world’s currency anytime soon. The only other currency that has the potential to assume the position of the world’s currency is the Euro, but with many European countries currently mired in a recession, or on the brink of a recession, the likelihood of this occurring in the near term is slim to none.
In conclusion, while there’s certainly reason for concern with respect to the strength of the U.S. dollar and its status as the world’s currency, foreign holdings of treasuries would indicate otherwise. Even if Russia proceeds with selling off the rest of its treasury holdings, this would have very little impact on the value of the dollar. Furthermore, it’s likely that another one of our major trading partners would soak up the reserves. Of course, a loss of confidence can occur in relatively short order, which could cause a large selloff of treasuries, but this is a somewhat unlikely situation; at least in the near term. As long as we continue to run a trade deficit with our major trading partners and make good on our debt servicing payments, the only near term risk to the dollar is a gold backed Yuan, which in this writer’s opinion is an unlikely scenario. Of course, the value of all fiat currencies will eventually drop to their intrinsic level; in other words zero, which is why we advocate investing in gold.
Tony Davis is the owner of Atlanta Gold & Coin Buyers, a full service Atlanta based coin and bullion dealer specializing in buying, selling and appraising coins and coin collections of all types and sizes. Visit his website atwww.atlantagoldandcoin.com for additional information on the products, services and educational resources offered by his company. Tony can be reached at [email protected] or at 404-236-9744. Be sure to “like” us on Facebook and follow us on Twitter to receive a feed to our blog to stay on top of all of the latest economic and political factors affecting the precious metals market.