More hard evidence the U.S. is facing a dollar crisis.

When a former Fed chairman with the inflation-busting prestige of Paul Volcker and a former Treasury Secretary with the deficit-cutting record of Robert Rubin speaks about the dollar, we should all listen.

In speeches over the weekend, both these economic titans warned that if U.S. budget deficits continue unabated, people would start to decrease their holdings of U.S. dollars, provoking a dollar crisis.

Neither said we are, in fact, in a dollar crisis. But the facts show the collapsing dollar remains the greatest financial worry of Americans today - even if none of the major financial press will talk about this.

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Last week, Bloomberg reported Dallas Fed Chairman Richard Fisher said IMF data shows worldwide central banks holdings of $6.4 trillion, up from $1.6 trillion in 1996.

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Fisher also pointed out that currency reserves held in dollars had fallen from 71% in 2000 to 65.4% at the end of June 2006.

In other words, Volcker and Rubin may be issuing warnings about a phenomenon well underway - central banks already are moving away from dollars.

This helps explain why the dollar has fallen so dramatically - and continues to do so despite increases in the Fed funds rate from 1 percent in 2004 to 5.25 percent today - an increase of 425 percent in 24 months!

Fisher added that he did not think it is, "Unhealthy for the euro to have increasing acceptance in the case of central bank reserves. It does not mean necessarily that one sells dollars to buy euros. As reserves increase worldwide, its possible to boost reserves in both currencies."

Nonsense.

Imagine you owned a pizzeria and someone set up shop right next door opening a similar pizza shop. The new owner tells you: "Don't worry, my shop will help you sell more pizza."

Fisher does not feel that a build up in the euro portion of central bank reserves would precipitate a financial crisis. He pointed to the better relative growth rates of the U.S. compared to those of the EU as a reason to favor dollar reserve holdings.

It sounds nice, but those holding capital are still avoiding the dollar.

Financial Intelligence Report has been warning - like a lone voice in the wilderness - that the dollar is under attack. The measure of all wealth owned by Americans has fallen by some $11.5 trillion in the past five years alone.

These two charts - the U.S. dollar index and the purchasing power of a dollar against the euro - show the sharp decline of the dollar: 

 

 

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But, the story gets worse.

In June 2004, the Federal Reserve under chairman Alan Greenspan began to increase interest rates.

Historically, these Fed actions should have made the dollar much more attractive to global investors and central banks. The dollar should have been on the rise.

But, worrisome is that the exact opposite has happened. The dollar continues to fall.

Just over the past twelve months these charts tell the story: 

 

 

Greenspan and his colleagues at the Fed, and now his successor, Ben Bernanke, almost invariably speak of rates in terms of inflation.

But as FIR suggests, this is a bit of a smokescreen.

Other factors - and most importantly the "D" word - are the real worries driving the Fed.

For sure the collapsing dollar must have the Fed and the Treasury Dept. exasperated - and possible panicked.

They hesitate to mention their real worry because they know it could incite a market panic.

Key to strengthening the dollar is for the U.S. to put is financial house in order.

Rubin was correct when he said, "Failure by the U.S. government to shrink its budget deficit may spook the central banks, hedge funds and others who have been buying Treasury notes. It is almost inconceivable that this will continue indefinitely."

Former Fed Chairman Paul Volker said he felt, "The U.S. borrowing requirements raise the risk of a ‘crisis' in the dollar as soon as the next two and a half years." He added, "Foreign investors probably won't keep increasing [their] dollar holdings, raising the risk of a slump in the currency."

We are already seeing the warning signs of such a slump as the Chinese have signaled they will buy fewer dollars.
 

Facts to Remember:

1. The U.S. dollar free fall is the number one economic worry facing the U.S. The dollar has fallen by 28.9 percent since 2002.
    
2. That means your wealth - as valued by the rest of the world - has fallen by $11.5 trillion.
    
3. Hidden or stealth inflation is the key cause of the dollars collapse. Official government CPI statistics are fraudulent. Official government CPI statistics are fraudulent.
    
4. The percent of the collapse of the dollar probably better matches the real inflation rate.
    
5. Central banks also hate gold because its rise also reveals their lies about inflation.
    
6. Gold is up 127 percent in the past five years.

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