Virtually every country distrusts its own currency. The distrust is so acute that most nations choose to invest their money in U.S. Treasuries: 60 percent of global currency reserves are held as dollars (as of 2005). And who could blame them—since the end of the Great Depression, the United States has been a safe haven free from war, political, social and economic unrest. Unfortunately for Americans, however, the trust in the dollar is being broken, and it could lead to a massive financial meltdown (Spiegel Online, October 25).

In a startling announcement, former Federal Reserve Chairman Alan Greenspan warned that both private investors and central banks were beginning to dump dollars in favor of the euro.

“We’re beginning to see some move from the dollar to the euro, both from the private sector … but also from monetary authorities and central banks,” Greenspan said at a conference sponsored by the Commercial Finance Association on October 26.

Although the dollar fell by 0.5 percent against the euro immediately after Greenspan’s comments, the dollar could be in for a much longer slide, especially considering the many recent headlines suggesting escalating central bank dollar sales.

On October 16, Russia’s central bank announced that it was preparing to diversify some of its foreign reserve holdings next year. Russia’s central bank, which has the world’s third-largest foreign currency reserves, made known that although it was primarily planning to purchase Japanese yen, it may add other currencies as well. According to Chuck Butler of Everbank, when the Russian central bank says it plans to diversify “reserves,” we should translate it “dollars.” Apparently many investors agree, since the dollar immediately dropped almost 1 percent on the announcement (321gold, October 25).

On October 18, the Sydney Morning Herald ran an article titled “Costello Seeks Orderly $us Withdrawal.” The article started out saying that Australia’s “Treasurer Peter Costello has called on East Asia’s central bankers to ‘telegraph’ their intentions to diversify out of American investments and ensure an orderly adjustment.”

Over the past several years, central banks in China, Japan, Taiwan, South Korea and Hong Kong have spent hundreds of billions purchasing American government bonds. However, if Mr. Costello is correct, “the strategy [has now] changed.” America’s Asian creditors are up to their eyeballs in U.S. dollars and may now be reaching the point where they no longer feel it is safe to hold so great a proportion of their foreign currency reserves in the dollar. China alone is estimated to hold approximately 70 percent of its $1 trillion of currency reserves in U.S. dollars. Only Japan holds more dollar-denominated reserves.

Other central banks may be positioning themselves to dump the greenback too. Besides Chinese officials, who have repeatedly warned that China will one day diversify away from the U.S dollar, Sweden’s Riksbank, the Central Bank of the United Arab Emirates, Qatar Central Bank and the Central Bank of Syria have all announced intentions this year to diversify their reserves away from the U.S. dollar and to the euro. Even though holdings in Middle Eastern central banks like Saudi Arabia, Qatar and the United Arab Emirates, which hold only $54 billion of the world’s $4,250 billion in dollar reserves, are comparatively small, the state-run investment funds in those countries are much larger. For example, the state-run Abu Dhabi Investment Authority controls at least $450 billion (Financial Times,June 2).

However, for America it is the Asian banks that may be of more concern. Asian countries hold over half of the $2.15 trillion in Treasury debt that America owes to foreign interests. So the real danger is if Asians stop buying U.S. dollars or, worse, begin to sell their current reserves.

Under this scenario of escalating foreign central bank dollar sales, which seems increasingly probable, Americans could be in for a future of ascending interest rates and import prices as well as a rapidly depreciating dollar.

But the big question is, what has changed the minds of America’s lenders and investors so that they no longer consider the U.S. dollar a safe investment?

The answer is, America is becoming unstable, and confidence in the government and economy is eroding.

America is very busy: warring in Iraq and Afghanistan; trying to manage escalating nuclear stand-offs with North Korea and Iran. And beyond the enormous economic strain associated with financing these wars, increasing political and social division is also becoming more evident within the U.S.

Greenspan, however, specifically pointed to America’s rapidly ballooning current account trade gap of which the unwinding, he said, could be economically damaging. “We’ll get to the point at some point that willingness to finance it will slow, and if you can’t finance it, it won’t happen” (Reuters, October 26).

But it is more than just the current account trade gap: America’s whole economic house of cards is threatening to cascade and take the dollar with it.

Spiegel editor Gabor Steingart agrees. Characterizing America’s imbalanced economy, he says “in the long term, currencies can’t be stronger than the national economies from which they derive. Consumption without production, imports without exports, growth on credit—these are all things that can’t last in this world” (Spiegel Online, op. cit.).

America is bloated with debt. At all levels within society and government, it is borrowing money to finance spending. America no longer manufactures or grows many of the products essential to a healthy society or economy. Many of the products Americans have been world-class producers of—like automobiles, steel and even computer technology—are increasingly made overseas instead. In short, confidence in the American economy is being chipped away.

Yet if it is becoming so obvious that America is not a financially trustworthy economy, why aren’t all investors dumping their current dollar holdings in fear?

“The answer is terrifyingly simple,” according to Spiegel, “Everyone knows how dangerous the game is, but continuing to play it strikes them as less dangerous than quitting.”

As previously mentioned, over time America’s investors have themselves become bloated with U.S. Treasuries and other dollar investments. Foreign investors realize that by purchasing more U.S. Treasuries, they create security for their current dollar holdings. Many investors no longer care if the U.S. currency still justifies their confidence; they only hope the billions in U.S. dollar investments that they hold do not depreciate in value. “Dollars are bought so they don’t have to be sold,” says Spiegel. “If [foreign investors] were to stop buying dollars tomorrow, suspicion about the currency would spread and insecurity would grow. … The dollar would start to falter and all the wealth held in dollars would lose its value. Of course, that’s not something investors want to see happen” (ibid.). So far, many of America’s largest lenders have chosen to try to strengthen the dollar.

But it is only a matter of time before this changes. All investors eventually reach a point of limit to lending their money.

The dependence of foreign central banks on the dollar will only postpone the crash, not stop it. As Spiegel’s Steingart warns, “The dollar is still the world’s reserve currency, even though it hasn’t deserved this status for a long time. The devaluation of the dollar can’t be stopped—it can only be deferred“ (emphasis ours).

Today’s snowdrift will become tomorrow’s avalanche. The signs are accumulating at breathtaking speed. The avalanche could happen a few months or years from now—or it could happen tomorrow. Much of what people today think will never change is about to be buried by the global currency crisis—perhaps even the global leadership role of the United States.

The odd thing about the statement made by Australia’s treasurer, when referring to possible foreign dollar sales, was this: “Of course you can have an orderly adjustment …. And what I would recommend is that these matters [dollar dumping] be telegraphed well in advance. I think we should begin preparing ourselves for it” (op. cit.). Yet Asians, including the Chinese, have been telegraphing this very intention for almost a year now. No one should be surprised if they start doing what, months ago, they warned they would.

The writing seems to be on the wall; are you prepared for a significant dollar devaluation?