U.S. dollar collapse could devastate economy: book

NEW YORK (Reuters) - A dollar plunge could ravage the U.S. economy as soon as 2012, when foreign investors are likely to exit en masse from U.S. assets, according to a new book by two analysts who forecast the recent credit crisis.

Even after credit, stock and housing bubbles popped in the past two years, dollar denominated assets are still overvalued, and a bigger crisis is yet to come, write the authors of "Aftershock: Protect yourself and profit in the next global financial meltdown".

Huge U.S. government debt issuance will drag the dollar into a much deeper dive, say analysts David Wiedemer and Robert Wiedemer, and writer Cindy Spitzer.

In the short term, China and other foreign investors will keep buying Treasuries to curb their currencies' appreciation against the dollar, say the analysts, who forecast the financial crisis in the 2006 book, "America's Bubble Economy".

Over the long run, investors will slash purchases as bond prices drop, according to the book published this month.

Though most of the pressure on the dollar will come from the Chinese yuan and other resurgent Asian currencies, the euro will eventually punish the debt-burdened dollar, said Robert Wiedemer in a telephone interview with Reuters this week.

The euro will rise to about $2 over the next two to three years, before surging rapidly above $3, forecast Wiedemer, whose risk assessment firm advises hedge funds and businesses.

At first, Treasuries will keep their safe haven status. A year or two of double-digit inflation and interest rates will then trigger a sell off in U.S. government bonds and batter stocks, says the book published by John Wiley & Sons.

This view is extreme even among those economists who expect the dollar to decline in coming years.

On Tuesday, the euro traded just below $1.50, near 15-month highs but below its record high above $1.60 hit in July 2008.

For Wiedmer, the biggest myth about the dollar is that foreign investors have nowhere else to go. The book says many foreign central banks and governments have already started shifting part of their dollar foreign exchange reserves into other currencies, gold or commodities.

Over the long term, foreign central banks and pension funds will abandon ship if the returns from U.S. assets shrink in a depressed economic environment, the book forecasts.

U.S. government debt is expected to exceed $11 trillion by the end of 2009 and the government will ultimately exceed its credit limit when investors come to view Treasuries as toxic assets, the authors expect.

"At that point, Treasury auctions will begin to fail completely, meaning no one will buy our debt."

(Reporting by John Parry; Editing by Andrew Hay)