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The following is a guest post by my friend “Joe Harvard”. For a listing of all of Joe’s posts, click here.

I was watching a Jay-Z music video the other day, and I noticed a weird thing. Typically, a lot of hip-hop/gangsta videos feature rappers standing in front of expensive cars and bikini clad girls, while rapping along to the beat of their music. And as if the display of boobs and cars are not enough to make you envious, the rapper tops it off by holding large wad of cash in their hand (typically a stack of $100 bills), while they wave their hands in a typical gangsta fashion.

The video I saw had all these elements except for the rapper was holding Euros instead of US dollars. That’s right folks, even your local gangsta rapper knows the mighty US dollar is going to hell in value, and its no longer the mark of prestige. And yes (echoing the article I read earlier but in gangsta speak), Euro is da new BLING.

Again how did we get here? Why even Mr. “I am gonna pop a cap in ya” gangsta rapper is diversifying into non dollar based asset classes? That is because the US government for the past 8 years has decided that its alright to print as much money (via uber-size government bond offerings) as needed in order to finance our various little projects like the war in Iraq, tax cuts, and various pork barrel project. So as the printing press ran, the gangsta rappers of the world ran the opposite direction toward the Euro as if they are being chased by their rival rappers. These fleeing rappers realized that the US dollar will continue to devalue as long as the printing press ran overtime.

I read in the NY Times article on US giant debt crisis today that said:

“Because the administration actually cut taxes as we went to war, when we were already running huge deficits, this war has, effectively, been entirely financed by deficits. The national debt has increased by some $2.5 trillion since the beginning of the war, and of this, almost $1 trillion is due directly to the war itself … By 2017, we estimate that the national debt will have increased, just because of the war, by some $2 trillion.”

“What we’re getting instead is the stuff of nightmares. Mr. Stiglitz, a professor at Columbia, has been working with a colleague at Harvard, Linda Bilmes, to document, among other things, some of the less obvious costs of the war. These include the obligation to provide health care and disability benefits for returning veterans. Those costs will be with us for decades.”

I think these academics only got part of the nightmare scenario right. Yes, we will have a huge debt to pay in the coming future, and yes the money could have been used to save social security and Medicaid, but since we didn’t do that, we are going to be even more screwed. But the other big shoe that is going to drop (and Mr. Gangsta Rapper knows this better even than the Harvard guys) is that foreign central banks are diversifying away from the US dollar and into other currencies (e.g. Euro) and the US dollar will surely lose its reserve currency status in the future.

As we can even see today, oil at $103 a barrel is partly the artifact of OPEC pricing in the exchange rate difference between the US $ and the Euro. So I guess I will be watching more gangsta video for lessons on currency hedging and asset diversification. I think once Snoop Dog start to demand Euro, all the Harvard trained hedge fund managers will follow.

The following is a guest post by my friend “Joe Harvard”. For a listing of all of Joe’s posts, click here.

Human history can be best summarized by the following: Countless episodes of gory blood letting warfare, and death interspersed by periods of intermittent peace brought to us via the courtesy of the winner(s) of the blood letting contests. These epochs of peace, Pax Sinica/Romana/Britannica, and most recently Pax Americana are all product of an overwhelming military might supported by a giant every growing economy.

But like all good orgies, they come to an end. In the case of the Romans, excessive frivolous government spending on things such as 120 days of gladiator games (game days in Rome are public holidays) coupled with lack of economic growth (Rome ran out of places to plunder) and inflation (Rome printing coins with ever declining silver content), led to severe reduction in military funding, and finally resulting in total economic collapse and ass kicking by the barbarians at the gate.

Unfortunately, I think Pax Americana is heading toward a similar fate as our party loving Roman brethrens. First, the US economy, the sole source funding for US military, is structurally floundering at its core. The US dollar has been the world’s reserve currency for the past 60+ years. As a reserve currency, all major global financial transactions (e.g. oil, gold, copper trades) are carried out in US dollars. The dollar’s special status confers upon it unprecedented global financial power. The US is the only country that does not need to keep a foreign reserve, thus enabling it to run much higher budget deficits than any other country. The US currency also influences interest rates across the globe enabling the country to affect monetary policies, and thus, the world’s economy.

But the US reserve currency status is under tremendous threat. In fact some experts have argued that US dollar has already lost its venerable status, and that the Euro is the new reserve currency. Read the rest of this entry »

May 2020