US Dollar Long Term Chart and a Scenario for Dollar Devaluation
People have asked, "How can the dollar be devalued? After all, there is no fixed standard."
Well, the dollar can decline considerably in purchasing power of real goods, as it has been doing for many years. However, the dollar can be devalued against its only true measure as a fiat currency: itself.
A formal devaluation of the dollar would be the discontinuance and reissue of the US dollar as a 'new dollar' with some preset exchange rate.
A likely figure would be 100:1, that is, 100 old dollars for 1 new dollar, possibly to be called 'the amero' as some have suggested or simply the 'dollar' as the US dollars currently in use will be withdrawn from circulation. If this does not provide sufficient relief it might have to be repeated.
This is what happened to the Russian rouble on January 1, 1998 after a debt default. Since it is unlikely that the US default will be preceded by a hyperinflation and protracted period of instability, we think the 1000:1 ratio of reissuance used by Russia might be too severe for the dollar, most especially because of its position as the reserve currency.
However, if the new dollar is to be at least partially backed by gold at the insistence of its international trading partners, then 1000:1 seems to 'work' more effectively given the US gold reserves and projected new money supply. This might be accomplished in phases, or with a dual currency regime.
It should also be noted that devaluation alone does not fix economic problems. It is a form of debt default, more severe than mere inflation. After its reissuance in 1998, for example, the new Russian rouble quickly lost approximately 70% of its value against the dollar because the devaluation had not been accompanied by significant economic reform. It has since recovered through painful adjustment.
You should not believe that this scenario is possible for the US dollar, yet. After all, if it was generally accepted and believed that it would happen, a severe value decline would already be underway.
Fiat currencies traffic in confidence. This things tend to play out over months and years, not days, unless there is a precipitating event usually caused by exterior events. Even though there had been a Russian debt default in the 1990's, the rouble had been troubled by serious inflation for many years before that.
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