Friday, July 07, 2006

The US dollar: may be topped out


New thought: An increasing amount of oil will be traded in euros. When that happens, the demand for dollars is going to decline. Our foreign friends, holders of huge amounts of dollars, are not going to be happy when their dollar holdings start to lose value. They're going to unload some of their dollars. They will also want to unload some of their US real estate holdings. This could send the price of housing into a vicious downward spiral. Remember, since World War II Americans have never had to worry about a steadily and even rapidly unraveling dollar. It will not be a pleasant experience. This is one of the main reasons why I recommend that investors hold gold. As the dollar declines, the dollar price of gold will rise.

What's a home worth? I consider a home to be reasonably priced when you can buy a home, and then rent it out and cover your costs. You can't begin to do that today. This means that either rents are going to trend higher or home prices are going to come down -- or both. American's "wealth and savings" largely resides in the value of their homes.

If home prices start sliding, there's going to be hell to pay. If home prices decline, home owners are going to cut back on their spending. They're going to do whatever they can to hang on to their homes. In some cases, if equity falls below the size of their mortgages, these people are going to hand the keys to the bank and walk away -- and rent rather than own.

Here's my thinking -- because the US has lost its manufacturing base, over the long run the US standard of living (now the highest in the world) will be heading down, while the standard of living in China and Asia (which are now attracting dollars and gold) will be improving. Remember, the current US prosperity is based on the rest of the world's accepting the fiat dollar that the US creates. This situation will only continue as long as the rest of the world has no substitute for dollars. But now that is changing. The substitutes are mainly euros and gold. In due time the ruble and the yuan may be added to the "substitute" pool.

1 Comments:

Blogger Jackie O'Brien said...

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Jaclyn

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1:38 PM  

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