U.S. Dollar (USD)

In his 1996 and 2000 Republican Pesidential campaign, Steve Forbes was the populist candidate due to introducing the concept of a "Flat Tax." The concept involved replacing the progressive income tax system with a simpler tax in which all tax payers paid the same percentage rate. The arguments involved fairness and a reduction in corruption along with greater participation due to a simplified system.

But what if there was a perfectly fair tax system? What if even the black market was taxed as surely as the middle class? I would expect such a tax to be incurred precisely as the government needed the funds or as the taxable event occurred. Fortunately, such a tax is already exists.

While being flat, this system is also progressive. It taxes money whether in a Swiss bank account or in a Christmas savings. It taxes whether the money was earned through legal or illegal means. It also differentiates between whether the money was held for a long or short period of time. I call this tax the "Flatter Tax."

This tax occurs each time that the government prints more money than it actually has. The taxing occurs by reducing the value of its applicable currency. Those with more currency pay proportionally more tax.

Those with tangible assets (such as property) are not taxed. Imagine if the government published the "flatter tax rate" and stopped the income tax. The markets could stabilize the dollar's fall and the downward trend would become much more predictable. The current unpredictability in the dollar is due to the lack of visibility of the overprinting and deficit spending. Under the Flatter Tax there would be no need for deficit spending. Adjustments in the tax rate for GDP growth would be automatic and immediate.

I know that it is somewhat shocking to think of replacing the current income tax system, but isn't NOW as good of a time as any?

The amount of US government debt has reached astronomical proportions as commentators like Contrary Investor have detailed. The major foreign holders of US Treasuries have begun pulling back. In the next few months to a maximum of a few years, when the US government attempts to refinance, the riskiness of the debt and the currency will become unavoidable, provoking a flight of capital.

The aging of the baby boomers will cause a major shift in capital from other government expenses to Social Security. The debt could be as large as $70 Trillion.

USD has to decline. Its the inevitable after effect of what we have seen till now.. What we saw till now was flight to cash during market liquidations and redemptions.

1) Federal Reserve - a for profit private organisation - is in charge of printing the dollars out of thin air. Due to fractional reserve banking, the money supply in US gets multiplied many times for each dollar printed. So , effectively Fed is destroying the value of dollar by pumping more into the hands of the US govt and public. Dollar can't continue as safe haven for long, because its only paper currency created out of nothing.

2) I find no reason why foreign economies (China and Middle-East Oil countries) should continue to highly rate the currency of a country that is running a $10.6 trillion goverment debt, and a $2 trillion budget deficit. If half of OPEC turns to Euros for petro trade to save their earnings, it will be catastrophic to US. And most markets will slowly move into Euro dominated investments potentially in the future. Japan bought dollars to keep the value of the yen low to make Japanese cars relatively cheaper in the U.S. market, helping Japan's economy to escape a 10-year deflationary cycle.

3) Weakening dollar will lead to higher yields in US treasuries, and people will exit from the treasuries, which will re-inforce the dollar collapse.

The dollar has had its heyday according to a U.N. panel, which will be convening next week. And when they do, they’re going to recommend cutting the US$ as its reserve currency in favor of a more inclusive grab bag encompassing a variety of currencies.

No specific details are out about the proposition, but currency specialist Avinash Persaud, who’s on the panel in question, did fill in Reuters to the general idea at least. According to that discussion, the presented plan would be something like the formerly used Ecu, an old European model that not only combined currencies but also weighted them to each constituent’s economic strength and influence so it could be valued against every other currency out there.

Though that’s hardly the only option being bandied about, the central theme of all of them is that the US$ gets kicked out of its current lofty spot. “It is a good moment to move to a shared reserve currency,” Persaud advised.

He and his aren’t the only one who think so, as Russia just announced earlier this week that it will be bringing some new ideas to the table at the April G20 meeting. The anti-American - and for that matter, anti-everybody but Russia - country is also planning its own plan. Over the last few years, it’s been practicing what it’s about to preach as its been reducing the dollar’s share in its own reserves.

The reasoning behind this is two-fold, with one being simply that people are sick of the dollar. It might not be doing horribly right now, but overall it’s been steadily declining for the past several years. And why would anybody want to rely on a currency like that? When faced with that fact, a change sounds quite promising.

Reason number two according to Persaud is based off of the euro’s success. If the E.U. could combine such a diverse array of currencies into one successfully, than why not try it again?

First it was Russia, then the EU and now China’s on the ball too, proposing that the global community drop the US$ as the international reserve currency. Chinese central bank governor Zhou Xiaochuan, posted an essay on the People’s Bank of China’s website, saying that a new idea was in order, one that would be “disconnected from individual nations and… able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.”

The recent run-up in the dollar has been driven by the low capitalized banks. Banks are selling foriegn assets in order to improve their housing damaged balance sheets. Thus they are selling foriegn currency and equities to raise US dollars. This is a short term run-up and will reverse once the banks have been recapitalized.