Pinnacle Activity Ticker
US Presidential Election Won't Make a Difference for the Dollar
Pinnacle Digest writes: With the US Presidential election quickly approaching, many are hoping the instability of the dollar will be addressed shortly thereafter. Unfortunately, according to Axel Merk, the dollar will be at risk no matter who wins. In his latest report, Merk analyzes the US dollar’s likely path under a Romney or Obama administration.
To put the US fiscal situation into context, Merk explains that the budget deficit, as a percentage of Gross Domestic Product (GDP) in the US, is worse than that of almost all of the weakest Eurozone countries (ie Portugal and Italy). In fact, he says, the Eurozone as a whole has a far lower deficit. Even if the tax hikes and government spending cuts were to take effect (the so called fiscal cliff) the US would still face a deficit exceeding 3% of GDP. And that’s before factoring in the economic slowdown brought about by the fiscal cliff. To exceed 3% of GDP, if the US was in the Eurozone, would be breaking the region’s number one fiscal rule.
You see, the US is in a considerable amount of financial trouble no matter what happens. It can either continue to add to the deficit or make dramatic austerity cuts and hope the economy can keep slugging along. However, if you look at what happened in Europe when it implemented austerity, one can assume it could be catastrophic to the US. In the end, the only thing saving the US economy and its dollar from completely collapsing, is the fact that it is still holds the world reserve currency. That’s it. Nothing else. But, if foreigners stop buying the US dollar and supporting the market, it will be the end of an empire.
Merk explains: Why does it matter? Unlike the Eurozone, the U.S. has a significant current account deficit. The current account deficit is exactly the amount foreigners must buy in U.S. dollar denominated assets to keep the dollar from falling. As a result, the U.S. dollar may be vulnerable should foreigners reduce their appetite for U.S. bonds. In contrast, the fallout from the Eurozone debt crisis has had a limited effect on the Euro because the Eurozone as a whole does not need inflows from abroad to keep the currency stable.”
Merk explains that it wouldn’t take a complete abandonment by foreigners to collapse the dollar. It would just take a slow down of significant portion in respect to their purchases. What could cause a slowdown in foreign bond purchases?
• A return to normal times
• Strong economic growth
• A crisis of confidence in U.S. bonds
Click here to read Axel Merk’s full article which breaks-down exactly how the dollar could collapse.