This article from the great Warren Buffett in the New York Times yesterday pretty much sums up the question that seems to be on everyone’s mind: Will the US dollar collapse?
The conventional wisdom: The tremendous amount of liquidity pumped into the financial system combined with the astronomical debt levels of the US will ultimately lead to runaway inflation. The greenback, often seen as a “safe haven” and the most trusted currency in the world, backed by the full faith of the US government, will collapse in value. Perhaps the Renminbi will become the new currency standard of the world.
My view? It’s too early to tell, but I don’t think that it’ll happen within the next couple of years. Countries (eg China) are still too dependent on US consumers to allow the dollar to fall. If China stops buying US debt, they run the risk of a major economic slowdown. However, I think that such a scenario may be very possible in the intermediate future for a number of reasons:
1) The US is de-leveraging. This means that consumers will no longer have the spending power to purchase from markets like China. In turn, the governments of these countries will decide that propping up the US dollar isn’t going to help their economies anyway, so they’ll let the dollar fall.
2) China is already seeing the danger of holding too much US debt, and is putting in some measures to reverse the effects, such as asking repayments to be made in its own currency or holding other assets besides US debt.
3) The Fed has to answer for the baby boomers’ excesses somehow. This debt is only going to get worse, and if other countries not buying debt, consumers are not buying debt (because of deleveraging), the only way to solve this problem is to print money, which leads to inflation.
The US needs to stop using the financial crisis as an excuse to keep recklessly increasing its debt.