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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: Chip McVickar who wrote (24290)2/24/2005 11:33:12 PM
From: regli  Read Replies (3) of 116555
 
I believe that the Iraq invasion was the watershed event that marks the beginning of the end of the dollar as a reserve currency. The dollar has been supported for years by its aura of safety due to this status. The severe disagreements about Iraq and the resulting shifts of alliances are going to result in more dollar divestiture in the future. The U.S. has blown an incredible amount of goodwill in an incredibly short time.

I actually do not think that CBs are quietly “agreeing to agree”. In fact, the Korean and Russian events are perfect indications of cracks in these “agreements” with many more to come.

As can be seen in the polls from around the world, the U.S. is highly unpopular, in fact it has never been as unpopular not even during Vietnam. Combine this with U.S. fiscal balances completely out of control, a dollar that has taken a significant beating and very few ROW central bankers feel comfortable about their dollar investments. These central bankers do not like to be criticized especially not for losing money as a result of dollar losses as just happened in Germany.

I therefore do not view the Korean and Russian mishaps as benign. Just because they are denied after a few days does not mean that the internal debate is not taking place. Note that the Koreans did not say they would ADD to their reserves they only indicated they would not sell! With the main players in Europe, Russia and China extremely uncomfortable about foreign U.S. policy and fiscal management, there is significant domestic pressure to lighten up on U.S. investments both on the public as well as the private front.

However, the whole world is still in awe of U.S. military power and its economic might and this is the reason why the dollar jumps so readily on even little positive news. Note how quickly dollar shorts evaporated in the last rally, not a good indication for a contrarian play. But once the bad news about the U.S. economy becomes common knowledge, I expect a much accelerated flight from dollars as the wounded giant will start to look more and more vulnerable.

Goodwill and the prospect of excellent returns are essential contributors to investment decisions. Once one or both of these ingredients evaporate, a steady shift starts to take place. I believe we are observing the early rummaging of these shifts of capital.
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