American dollar might be going the way of Iceland

2008 was a very dramatic year from an economic point of view, when the worldwide real estate market was skidded. All three major banks of Iceland failed; leaving losses higher than Iceland’s GDP to be borne by banks and backed up by government. Strict pledges and help from the European Union helped Iceland escape insolvency. The Icelandic krona was decimated in terms of its foreign exchange value as the country doesn’t have the ability to print money to pay off its debts.

At the same time, the American currency has been gradually destabilized due to $14 trillion of national debt and the quantitative easing program designed to try and save the US economy. Like Iceland’s krona, the foreign exchange value of the US dollar is also declining steeply. A sustained downward trend in the foreign exchange value of the dollar was for a short time reversed by the 2008 world-wide crisis as investors sought a safer place. The downfall in the US dollar can be witnessed clearly, as was the case of Iceland’s krona, because the dollar is slowly being replaced as the world’s reserve currency. There is not much change in nominal bank balances, but the cost of everything else will be doubled or tripled. However, this may affect the lifestyle of the people.

In today’s world we would opt to have our money earning interest in anticipation of bills that come due, but the risk of prices growing radically is much greater than the few points of interest you might get for delaying expenses. Something that can be done is prepayment for any services or merchandise as far in advance as is allowable. There is a heave of inflation coming down the pipeline; soon we will see the dollar losing its value rapidly, while consumers will be trying to buy whatever they can before prices go up even further.

It has even been suggested that the possibility exists that bank accounts will be frozen as a measure of price control and rationing.

The actual problem will arise as to where the converted currency will be held and to make sure that it is accessible after any economic emergency regulations are put into position.

Companies holding durable assets like oil, gas, minerals, even real estate must be holding up extremely well after the end-of-the-world sell-off we just experienced. It should be remembered that life will continue to go on. People will still perform their routines, like going to work and taking children to school. Some have even suggested that life will become much simpler and a lot less materialistic, that the outcome of the coming crisis will be positive. The standard of living might not be as before, but our lifestyles will be healthier, so the theory goes. The timing of all these events is still not certain. We could hang back in our gradual dollar downtrend for many years, or perhaps foreign buyers abruptly stop supporting treasury bonds and things deteriorate very swiftly.

Chris Termeer

Chris Termeer is an oil and gas consultant, industry commentator and analyst. His book, Fundamentals of Investing in Oil and Gas provides a comprehensive overview of all aspects of the oil and gas industry, including exploration, drilling, production, storage, transportation and refining, to name but a few.

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