For three years, these SAFE Insights have pointed out the danger of the U.S. dollar losing its place as the worlds' reserve currency; further, these Insights have stated clearly that in the globally competitive economy, China & Russia are anything but allies. Beginning in earnest three years ago when Russia and China concluded a trade pact that called for trading outside of the U.S. dollar, this trend to reducing the dollar as a trading vehicle has continued. China has recently concluded an agreement with Brazil to trade without using dollars, and just recently concluded a similar agreement with Australia. There are two important questions that American's face when considering this issue; what is the importance of having the dollar as the world's reserve currency and what are the ramifications of losing that status? These two fundamental questions are of course followed by "and what do you do about it?"
The importance of living in the nation that holds that coveted position is life-style. When goods around the world are priced in your nation's currency, you receive a slight discount on all imported goods because you don't face a markup on prices that reflect conversion of purchases into other currencies. In addition, the reserve status creates a substantial demand for a nation's currency so as supply and demand always impact prices, the value of the issuing nation's currency is held up. This is no more visible than in the pricing of oil. As oil is priced in dollars, oil in the United States is less expensive than other countries and therefore our economy benefits from lower energy prices. It's not possible to state exactly where gas prices would be if the dollar lost its importance to the trading of oil, but rest assured, gas prices would rise by a significant percentage, perhaps as much as 20% or more if the dollar were replaced.
The United States economy is now $15.8 trillion dollars with about $2.5 trillion of that coming from imports. Therefore, as the U.S. dollar moves out of its position as the reserve currency, the cost of these imported goods will rise. On the other side of this however, the export side of the U.S. today is around $1.7 trillion or so and that number would benefit as the value of the dollar decreases.
So we come to the bottom line, what to do about this? There are policy issues our government should most certainly do chief among which is quit debasing the currency by spending so much more than we earn. But for the individual trying to build wealth for themselves and their families the issue is how to capitalize on this transition so you're not left behind. There are fundamental things you should certainly be doing like not putting yourself in a position of borrowing money to survive and paying off your indebtedness and positioning your lifestyle so that you're saving that magical 10% each paycheck. With that said though, you need to position your investments (your retained earnings) to benefit from this strategic change. What companies will prosper in an environment of inflation and a devaluing dollar? Clearly commodities will react to rising prices so that means gold, silver and all precious metals; agricultural products; and other basic materials will likely see price appreciation as the dollar loses value. The second benefiting areas are exporting companies. As the dollar depreciates versus other currencies, their products become less expensive to the importing country so with lower prices, sales improve. So these two themes should be considered in your investments but bear in mind that the future is never perfectly predicted so while these trends will establish and continue, they won't happen immediately and they won't establish in a straight line. Prices will rise and fall in the short-term even as the longer term trend is up. So use these two themes as a part of your overall investment plan, not the total plan.
Building wealth is a function of two basic things; saving capital and investing capital. Saving capital is a function of spending less than you make and investing capital is a function of knowledge and action. You must take steps each and every day to insure that you are both saving and investing to the best of your ability. The fact of the matter is two things are inevitable; things will change and you will get older (Lord wiling). As things in our world change with increasing rapidness and you recognize that your life expectancy is now around 85 years old, it should hit you like a brick in the head that you must be protecting your own life-style and the only way to do that is to save capital and invest it well. American's by and large do NOT have the capital accumulated to provide a sound retirement for themselves and this is a burgeoning bubble that will burst in a very ugly way. As baby-boomers retire and possibly outlive their savings they will be forced to seek help from government; this is part of the $100 trillion in unfunded liabilities accruing by the U.S. government. The snowball effect from this is not pleasant but you can position yourself to capitalize on it and not suffer through it and you should start today if you haven't already and you should seek to improve if you have started. How do you improve, seek more knowledge and learn how to better take action, and that is the value of S.A.F.E. to you.