The Dollar: A Controlled Fall

The headline of a Financial Times article from London does not shock me anymore – “Dollar Seen As Losing Global Reserve Status”. Instead, it brought to mind a Martial Arts analogy.

One of the basic concepts I was taught (many years ago) upon entering the class was the technique of the “controlled fall” to protect myself from a brutal impact with the ground. The basic goal is mastering the ability to fall without injury, even under extreme conditions otherwise out of my control.

And we have been observing an “out of control” global financial system since 2008. However, after all of the hype in 2010 regarding the development of a new global reserve currency, it would appear that the announcements are being made as a way of preparing Americans for a controlled fall.

According to a UBS poll of central bank reserve managers (who collectively control over $8,000bn in reserves), the U.S. dollar will lose its status as the global reserve currency over the next 25 years.

Over half of the managers polled expected a portfolio of currencies would replace the dollar. This would support the 2010 proposal by World Bank President, Robert Zoellick, detailing a new monetary system involving a number of major global currencies including the dollar, euro, yen, pound, and renminibi.

With the purchase of 151 tons of gold by central bankers thus far in 2011, gold may also be added to that portfolio. According to the World Gold Council, central banks are “on track to make their largest annual purchases of bullion since the collapse in 1971 of the Bretton Woods system, which pegged the value of the dollar to gold.”

The dollar has taken a lot of hits. It slid 5% so far this year, and is trading close to its lowest ever level against a basket of the world’s major currencies. According to Larry Hatheway, chief economist at UBS, “Right now there is great concern out there around the financial trajectory that the US is on.”

Countries holding large reserves, most notably China, have been diversifying away from the dollar. Standard Chartered estimates that three quarters of the $200bn expansion in China’s foreign exchange reserves were invested in non-U.S. dollar assets.

No one wants to see the shuddering of the global financial markets that occurred in the 2008 debacle. A controlled fall of the U.S. dollar as the global reserve currency may be maintained until the emerging economies of China, India, and Brazil are more firmly in place.

While this may seem a perfect plan for those in the halls of financial power, it is important for Americans to remember the Martial Arts analogy – relaxing the body during descent can reduce the impact velocity, but not the impact force. Daily life will change.