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Bloomberg
reported July 13, 2007 that Iran is now requiring Japan to pay for
oil in yen instead of U.S. dollars, the traditional currency for oil
transactions worldwide.
1
It might seem like a minor event in the scheme of world affairs, but
it is indicative of the declining status of the U.S. dollar as the
world’s reserve currency. Because of the historic strength of the
U.S. economy, many nations around the world have chosen for decades
to store their national savings – their reserves - in
dollar-denominated assets. However, the continuing slide of the
dollar has prompted central bankers around the world to begin
exchanging their depreciating dollars for other currencies such as
the euro and yen. China’s foreign exchange reserves are believed to
be around $1 trillion or more, 75% of which is believed to be in
U.S. dollars.
2
Assuming China has $750 billion in U.S. dollars, just a 1% decline
in the value of the dollar will cost China $7.5 billion in
the value of its reserves. No central banker would wish to incur
those kind of losses on an ongoing basis, therefore China has
signaled its intent to gradually move away from U.S. dollar
holdings. If you are wondering why you should care about this, know
that decreasing demand for U.S. dollars will negatively impact the
value of your savings and investments. The yen received a boost
after Iran’s announcement because the markets understand that it
will likely result in increased demand for the yen. If increased
demand can cause a currency to increase in value, then decreased
demand can cause a currency to decline in value. If foreign
central bankers start dumping dollars, it will represent decreased
demand for the dollar and will put pressure on the value of the
dollar, resulting in the erosion of the purchasing power of your
savings and investments. China, with its massive foreign
exchange holdings, has been treading very carefully on this issue
because it does not want to create a sell-off in the dollar that
could jeopardize the other dollar investments it must keep for now.
However, they know a losing game when they see one; the Federal
Reserve is continuing to intentionally undermine the value of the
dollar by printing massive amounts of them to meet America’s
never-ending appetite for spending. Every dollar printed results in
the devaluation of every other dollar in circulation and
relentlessly drives up prices. This is inflation, and in reality
Americans should be suffering under much higher levels of inflation.
By soaking up so many dollars and holding them in reserve, foreign
central banks like that of China have artificially propped up the
value of the dollar by increasing demand for it. If this changes on
a widespread basis, Americans could face a rapid decline in the
value of their dollars.
Paulson Thinks Housing Market Nearing Bottom
Treasury
Secretary Henry Paulson thinks that the “U.S. housing market
correction [is] ‘at or near the bottom’". 3
Considering the relatively low number of people who can truly afford to purchase a
2-bedroom condo in Southern California for $500,000 or more, it
seems preposterous that the housing market could have bottomed
already. Inflation around the world is pushing U.S. mortgage rates
higher, and with 30-year fixed rates now averaging near the mid 6%
range, even fewer people can afford to buy property in high-priced
areas like Orange County. It has only been a few months since it was
possible to obtain a 30-year fixed mortgage in the high 5% range and
every 1% increase in rates represents a $329 dollar increase in the
payment for a $500,000 mortgage. If affordability decreases, demand
will decrease with it, resulting in pressure on home prices. If
mortgage rates continue to increase, which they likely will as
inflation mounts around the world, home prices will have nowhere to
go but down. And in a highly inflated market like Southern
California, the bottom may yet be a long way off.
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