Unfortunately, it’s starting to happen… The Federal Reserve is now in the throes of unwinding it’s unprecedented monetary stimulous (i.e. money printing), and it’s hitting developing markets severely. Brazil, Argentina, Russia, and other developing markets are feeling the impact of foreign capital fleeing their fragile economies, and their currencies are losing value at an incredible rate.
The pressure is on as governments are bombarded by public outcry of their citizens who can’t afford basic necessities, since their paychecks, for the most part, are fixed, and inflation is running rampant as the value of their local currencies plummet.
Here is my prediction, and it’s not a pretty one: China, Russia, India, and other countries that have already made plans and have taken actions to conduct trade in their own currencies, rather than having to convert to US dollars to make the trade, will start pushing for a “world exchange” currency to replace the US dollar as the world’s reserve currency. Let’s face it– they already dont like the US, and the rhetoric surrounding removing our stimulus and the drastic impact it has had on the emerging markets has them even more up in arms. In short, they blame the US. They hated us even when our easy money policy helped to pump up their economies, and hate us even more now that we are cutting back. Cutting back is simply the right thing to do for our country, and the fact is, the rest of the world will have to deal with it.
I believe China and others will now use the devastation and point to the rest of the world, saying “look how much harm the US has done to these countries… we MUST reduce our dependence on the dollar”. And there it will begin, and the harm it does to the United States will make our 2008 great recession look like child’s play.
By losing our status as the world’s reserve currency, we wont be able to simply print more dollars to repay debt, and it is going to get quite ugly. Don’t believe me? just look at the history of England when the British Sterling was replaced by the US Dollar as the world reserve currency… it ain’t gonna be pretty in the least.