The First Signs of the Coming Dollar Crash are in Hong Kong

10-21-2010 • EconomicPolicyJournal.com

Trillions of dollars of institutional money need to be parked somewhere, and as much as institutions might like to hold their cash in a better store of value like, say, the Chilean peso, there simply aren't enough Chilean pesos in existence to absorb trillions of dollars. This means that institutional investors are essentially left to judge a redneck beauty pageant: which of the three contestants is the least ugly? The winner fluctuates. For the six months from September 2008 through March 2009, the dollar was the least ugly. Then for the next 6-months until November 2009, the dollar was the ugliest. From November 2009 through May 2010, the euro was the ugliest, and since May it appears that the dollar has once again been deemed the ugliest. Undoubtedly, the Japanese yen will have its time in the spotlight as the ugliest, and we'll continue to see all three of these currencies jockeying for position against the others. Their respective bureaucrats favor weak currencies, and they're doing whatever they can to inflate and devalue. In the meantime, little by little, some of these institutional flows are spilling into other currencies viewed as safer stores of value... hence the rapid rise of the Swiss franc, Canadian dollar, Aussie dollar, New Zealand dollar, Singapore dollar, Chilean peso, Brazilian real, and of course, precious metals. For institutional funds, though, these currencies don't necessary offer a long-term solution because they're too small. The entire money supplies of Australia and Canada, for example, are each about $1.3 trillion, while the value of all the available precious metal is less than $6 trillion. Meanwhile, the Bank for International Settlements estimates the size of the world bond market at over $80 trillion. Thus, you can see why institutions are having to play judge in such an unfortunate beauty pageant... there simply aren't any reasonable options to hold vast amounts of currency. As one of the world's strongest and most dominant economies, China's renminbi represents a long-term solution... but not yet. China's economy is already #2 in the world and will likely overtake the United States within a decade. Its money supply is vast, and would be able to withstand significant capital flows.