America and the Dollar Illusion

A friend of mine in Germany emailed me this story a little while ago. Even though it is from 2006, it is eerily prescient about what has been happening with the Treasury bond markets lately. (See Bond Yields Rising, June 11, 2007)

"Der Speigel" is Germany's leading newspaper, and the head of its Berlin office, Gabor Steingart, recently wrote a best-selling book called "World War for Wealth: The Global Grab for Power and Prosperity." In it he talks about the illusion that has been created by the use of the American dollar as the global currency.

Investors, whether they are individuals, hedge funds or government agencies, are motivated by both greed or fear. Greed drives them to try and get ever greater returns on their investment, while fear compels them to reduce risk as much as possible. The answer for many investors has been the dollar, represented by U.S. Treasury notes. As a result, the value of the dollar and of Treasuries is greater than the underlying value of the U.S. economy. The resulting low interest rates have allowed those of us who live in the U.S. to enjoy a standard of living based on debt.

Steingart points out that all is well until the day that one investor panics, thus causing a selling spree. This scenario is exactly what happened in the dot-com boom and bust. The difference is that all investors know this will happen, and everyone is playing a game of cat-and-mouse to gain as much return (greed), and get out before the dollar falls too fast (fear).

(Source: Der Spiegel, "America and the Dollar Illusion," October 26, 2006)

What It Means to You

I got caught in stock market meltdown in 2000, at which point I vowed to never be that uninformed again. No one knows when a dollar meltdown could occur, and there is always the chance that the governments who are investing in the dollar will control it so there is no collapse. However, a declining dollar means more expensive imports, inflation, and higher interest rates...all of which mean a lower standard of living in the U.S.

The best way to prepare is to cut back on spending, pay down debt, and develop a well-diversified portfolio. For tips on how to do that, read How to Retire Early and Live Well by Gillette Edmunds. This is the book I used to do exactly that.

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