As currencies expert Alex Merk of Merk Mutual Funds wrote recently, “Russian President Medvedev suggests the dollar is on its way out; Russian Finance minister Kudrin says there is no substitute for the dollar. The Chinese see a need to diversify out of the dollar; the Japanese say their trust in the dollar is unshakable.” What’s a poor investor to think?

Merk says Russia’s and China’s – along with fellow BRIC nations India and Brazil – concern over the stability of the dollar and their need to diversify out of dollar-denominated assets is a strategic perspective. As he rightly points out, “There is simply no substitute for the U.S. dollar today; no other market is as deep and liquid, or able to absorb the cash that needs to be deployed by central banks around the world.”

Does this mean the dollar is safe and sound? Not by a long shot. This, again, from Merk:

[We] believe countries around the world are racing to put the “tools” in place to be less dependent on the US dollar. In Asia, for example, after the 1997/1998 financial crisis, Asian countries realized they needed to bolster their countries’ reserves. In the latest crisis, they realized that holding almost exclusively U.S. dollar reserves was a risky strategy. The solution is all too obvious, namely to develop domestic markets. This isn’t just about developing domestic consumption to create a more “balanced” world economy, this is about creating domestic infrastructures, fixed income markets in particular. Currently, many global investors invest in Asian markets by buying US dollar denominated securities plus derivatives. This makes Asian issuers – governments, supranational and corporate issuers alike highly dependent on the US dollar. This will only change if global investors have confidence in the stability and maturity of the local markets. The message to “CEOs” of countries around the world is to show that they are open and ready for business. Such trust is not earned overnight. In Asia, Singapore is a leader; not surprisingly, Singapore has a healthy domestic fixed income market. China is on its way, but needs to do more to provide access to its domestic markets.

It other words, global diversification away from the dollar may not happen today or tomorrow. But the risk to the dollar – and to long-term US economic growth – is real.

Notes readers may want to do something about diversifying their portfolio allocation to hedge against this outcome. As usual we recommend considering beefing up the hard assets side of your portfolio and adding TIPS into the mix, too.

If you’re serious about investing in hard assets, we highly recommend you read this special investor report from Crisis Trader editor Christian DeHaemer on what he calls the “Great Red Oil War.”

Of course, you could also choose to trade currencies directly. For information on how to follow master forex trader Bill Jenkins to currency trading profits, click here.

A look at the actual numbers from the Reserve Bank yesterday tells a slightly different story. Total Australian credit card debt actually grew at 9% in February, from $39.5 billion to $43.25 billion. Interest-bearing debt grew by 9% to $31 billion. Even worse, the average interest rate Australians pay on credit card debt leapt from 17.6% to 19.4%.

Thanks to the rise in rates, credit card interest rates are 20% higher than this time last year. And it means, with current balances, Aussies are paying about $500 million in interest on stuff they already bought. Is it too late to buy into the Visa IPO?

What is so annoying about the credit card headline?

Well, it suggests that Australian credit card debt has actually declined. It hasn’t. It’s just growing less fast. This is like those ridiculous announcements that periodically emanate from the bowels of the U.S. Government about the size of the Federal deficit.

In the months that the deficit grows less fast than the month before, you see headlines like, “Deficit shrinks.” Of course it’s deliberate deception (a lie, if you like). If a tumor grows less fast it doesn’t mean it’s less dangerous. It’s still cancer (nearly all debt is malignant). And growing less fast isn’t really a qualitative improvement.

The goods news for Glenn Stevens is that high interest repayments on credit cards will eat into domestic consumption. The bad news is that the higher rates actually led to lower repayments according to the latest RBA figures. Repayments in February fell by 7.9% from $18.21 billion to $16.71 billion. That was for the month, by the way.

One chart came to mind in light of yesterday’s credit card news. It’s the climb in household interest repayments as a percentage of disposable income.

Not surprisingly, it’s on the rise. Granted, the combined number includes many older homeowners who are willing to carry higher debt loads later in life. But the simple truth is that paying interest on debt is not a good way to accumulate wealth. Never has been. Never will be. Simply not possible to get rich by spending the bank’s money.

Let’s put it this way: unless wages rise (something that would probably cause the Reserve Bank to put up rates again), Australians on the margin of the boom will have to use their credit cards to finance essential consumption, and they will pay dearly to do so. Either that, or they will have to reduce consumption. “If we do not discipline ourselves,” the old saying goes, “life will do it for us.”

Dan Denning
The Daily Reckoning Australia

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