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The financial alarm bells are beginning to ring loud and clear. The world is waking up to the fate of the U.S. dollar and is rapidly losing their appetite for the once-mighty currency. This has very ominous implications for the future of the United States, a nation that must borrow around $1.5 Trillion per year just to stay afloat. America has enjoyed the benefits of having the world reserve currency and has simply been able to print and borrow to fuel its excess spending and fiscal irresponsibility. The dollar has held up rather well considering the amount of printing, borrowing and staggering levels of debt. Those days appear to be ending as the dollar’s days are all but numbered.

Last week, the Standard & Poor’s financial rating company revealed it has downgraded its outlook for the nation’s future creditworthiness. The rating had been “stable.” It now is “negative.” Standard & Poor’s also announced it is considering a change in the credit rating it has assigned U.S. government debt. The rating now is AAA, the highest possible. But Standard Poor’s said there is approximately a 33 percent chance in may have to advise clients that Americans, as a government, no longer are low-risk when it comes to buying bonds and financing debt otherwise. This was the first major shot over the bow of the U.S. economy.

The second shot came this week from a number of Chinese officials, all echoing the same sentiment that China should diversify out of the U.S. treasuries and reduce their foreign exchange reserves. Tang Shuangning, chairman of China Everbright Group, said on Saturday that:

China should reduce its excessive foreign exchange reserves and further diversify its holdings. The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars, Tang told a forum in Beijing, saying that the current reserve amount is too high. China should further diversify its foreign exchange holdings. He suggested five channels for using the reserves, including replenishing state-owned capital in key sectors and enterprises, purchasing strategic resources, expanding overseas investment, issuing foreign bonds and improving national welfare in areas like education and health.

Tang’s remarks echoed the stance of Zhou Xiaochuan, governor of China’s central bank, who said on Monday that:

China’s foreign exchange reserves “exceed our reasonable requirement” and that the government should upgrade and diversify its foreign exchange management using the excessive reserves.

Meanwhile, Xia Bin, a member of the monetary policy committee of the central bank, said on Tuesday that

1 trillion U.S. dollars would be sufficient. China should invest its foreign exchange reserves more strategically, using them to acquire resources and technology needed for the real economy.

To put Mr. Bin’s comment into perspective, China’s foreign exchange reserves increased by 197.4 billion U.S. dollars in the first three months of 2011 to 3.04 trillion U.S. dollars by the end of March. So, a Chinese central banker and member of the monetary policy committee is essentially calling for a 66% reduction in U.S. reserves!

What is even more devastating to consider is that China has been a major buyer of U.S. treasuries and if this rhetoric translates into direct action, China will not simply be reducing their purchases, but turning into a net seller. The impact of this policy shift has grave consequences and can not be easily understated.

When the two major political parties can not even agree on a spending cut that amounts to just 2% of the total budget deficit, we are in serious trouble. The media spectacle over the past few weeks really has to be put into perspective. The boneheads running the U.S. government were arguing over whether they would cut $30 billion or $38 billion when we have an annual budget deficit of $1.5 TRILLION this year alone! It is clear that neither party is serious about getting the fiscal house in order. Neither is willing to make any cuts to our bloated military budget that accounts for nearly 50% of global arms spending, is six times larger than the military budget of China and has a Navy larger than the next 13 navies combined!

Not only are politicians unwilling to address the outrageous spending, but they are also unwilling to address the revenue shortfall by taking any serious steps to address corporate tax dodgers such as General Electric, Bank of America or Exxon. This is precisely because our government has been hijacked by the banks, oil companies, military-industrial complex and other large corporations. Their priority is corporate profits and not the best interests of the United States or its people. But let me get off my soapbox for a moment and let’s take a look at the technical chart for the dollar.

Not a pretty sight, as the USD index has formed a bearish head and shoulders pattern and has fallen through support to its lowest level in nearly three years. I supposed we could get a rally in the coming days, but I certainly would not hold my breath. Any dollar rally is likely to be short lived and used as an opportunity for foreigners to exit their positions and dump dollars. With the debt ceiling rapidly approaching, again, and the debt-to-GDP ratio now over 100% by some measures, it is hard to find a rationale for continuing to hold dollars. When factoring in unfunded liabilities, some estimates have the true debt-to-GDP of the United States at around 500%, making Japan’s 200% look like a model for fiscal responsibility.

When you combine bought-off politicians, record debt and deficits, declining tax revenues and endless wars, there eventually will come a time when the world no longer accepts the fiat currency of the nation and begins to dump their holdings. For the longest time, nations like China and Japan have been reluctant to do so because it was also in their interest to keep the pyramid scheme afloat a while longer. However, China has been diversifying its distribution channels and is no longer as reliant on the U.S. consumer as they once were. Japan is going to have to focus its resources and wealth on rebuilding their nation and industries following the March 11th disaster. So, who will buy U.S. debt and keep the dollar alive?

The only entity left to do this is the Federal Reserve and this simply amounts to monetization of debt or theft from the citizenry and anyone else around the world that is still ignorant enough to be holding U.S. dollars. This type of talk was labeled conspiracy theory just a few short years ago, but now the writing is on the wall in clear daylight for all to see. To be sure, there will be plenty of Americans in denial about this possibility, but hiding your head in the sand does not address or remedy the problem.

This will all lead to the United States defaulting on its debt obligations and/or hyperinflation, likely alongside slowing economic activity (stagflation). I believe there is precious little time to get out of U.S. dollars and into tangible assets that can not be printed out of thin air or inflated away. Silver at $50 may seem high at the moment, but it will look insanely cheap in the event of a currency crisis, which seems all but inevitable at this stage.

It is only a matter of time before we see a true downgrade of U.S. debt, either via a credit agency or by wholesale dumping of dollars by China and other creditor nations. If precious metals correct into the Summer as they usually do, I will be aggressively adding to my positions in both bullion and quality mining stocks. Of course, I’d love to be proven wrong and see the dollar and economy stabilize and return to healthy organic growth. Unfortunately, I don’t see that happening anytime soon.

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