It comes as no surprise that China, along with a growing number of other nations is calling for the replacement of the U.S. Dollar as the World’s Reserve Currency. China, Russia and Brazil most recently has suggested instead, a basket of currencies. The U.S. became the world’s reserve currency following World War II with it’s effort to rebuild Europe and Japan. It was the only still solvent nation that remained.
Most notably, Standard and Poor’s downgraded the AAA credit rating of the United Kingdom which it has held since 1978 and Bill Gross of Pimco Investments has stated that the U.S. is also in danger of losing it’s own AAA credit rating (which it first received in 1917). This would have disastrous results on the bond market as the increase in risk premium could create a chain reaction of rising interest rates and lower standards of living.
In the Credit Default Swaps market, the cost to hedge the loss on U.S. Government bonds over 5 years rose to 3.5% to 41 points. That works out to be a cost of $41,000 to protect $10 million from debt default.
With unemployment in the U.S. standing at 6.66 million it is the 16th consecutive weekly loss. Add to this the coming residential “option arms” and Alt-A mortgage resets later this year and 2010, the commercial mortgage market poised to self-destruct and the next wave of credit card defaults that should hit later this year. There’s no wonder that China, which funds our relentless, mountain of deficit spending, is starting to get a little nervous… and how can you blame them?
The question is, “how is the Federal Government going to repay all this stimulus, bailout and entitlement spending?” The answer is quite simply, it’s not going to. It appears obvious that the Fed’s plan is to devalue the currency and service the debt with worthless dollars. When the Fed sees the CPI start to move higher it will cease it’s bond buying, become a net seller of U.S. bonds and turn the once mighty dollar into dust.
The only protection from the onslaught will be hard assets such as energy, metals and agriculture. Things that clearly have a defined value that people must have in order to live. These commodities will hold their value and these are the things you should be buying if you want to preserve your wealth… It’s time to start buying.
Ray
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