Analysis Overview – In the period 1980 to 2015, the dollar has lost 65% of its value with $1 of 1980 worth just $0.35 cents in 2015. One of the key functions of money is that it’s a store of value, but I am of the view that the dollar will never be a store of value again.
The chart below puts things into perspective providing the value of one dollar from 1980 to 2015 and the total credit market debt growth during the same period.
From 1980 to 2015, total credit market debt has swelled from $5.4 trillion to $63.5 trillion and during this period, the dollar has lost 65% value. With debt being money in the fiat money system, there has been a huge supply of dollar bills in the last 35 years and this implies decline in value of each dollar against hard assets or relatively stable currencies.
With all currencies treading the same path, the only store of value is gold or other hard assets that cannot be increased in supply at the same pace as fiat money.
Dollar Value Erosion To Continue – In the coming decade, I expect dollar value erosion to continue and potentially accelerate. The CBO expects almost $10 trillion in budget deficits in the next 10-years and this adds to the federal debt. Further, if interest rates trend higher, debt servicing cost can surpass $1 trillion by 2025 and the government will have to issue more debt to service debt. This point backs my view that dollar value erosion can potentially accelerate.
Investment Strategy – As the dollar loses value, it is important to remain invested in assets that can offset the loss in purchasing power. Besides being bullish on gold, I advise exposure to equities with global diversification. In the next 10-years, emerging market equities can provide higher returns than developed market equities. I also believe that long-term investment in Treasuries is not a good idea, but Treasury bonds can provide trading opportunity from time-to-time. Instead of exposure to long-term Treasury bonds, investors can consider exposure to investment grade corporate bonds as a part of the diversification strategy.
The Global Currency – While I am bearish on the dollar, I don’t see any alternative currency as a global currency. Among the basket of currencies in the dollar index, the dollar is likely to remain relatively strong in the long-term.