Scary Times for the Dollar
The United States is bankrupt.
Understanding what this really means is this month’s topic. It must be examined in terms of “devaluation,” “trade economics” and “reserve currency” in order to visualize the future of our country through these varied perspective lenses.
The weak U.S. economy inspires little confidence in the dollar, although 63.9% of global currency reserves are still in dollars, compared to 26.5% in Euros. In recent years, China and other developed nations have implemented bilateral trade agreements that no longer conduct trade in dollars (Australia is the most recent), creating an artificial valuation of their currency (Yuan) to compete favorably with dollars.
The U.S. approach to devaluation has been to create enormous debt by printing dollars from thin air (calling it quantitative easing). America can then stave off the collapse by buying “cheap” imports (run a trade deficit) to keep on the good side of trading partners while using decreasing-value dollars. The entire world has accepted these means of “competitive valuation” but rarely used it until all nations abandoned the gold standard during the Great Depression.
This all changed with the 1944 Bretton Woods Agreement, which set aside the British Pound as the world standard. It changed again in 1971 when major world currencies were floated freely in international markets, and the U.S. rescinded gold backing of the dollar. The U.S. then privately reached agreement (negotiated by Henry Kissinger) with Saudi Arabia to buy (and sell) all crude oil in U.S. dollars worldwide. What this did was further entrench the dollar as the exchange medium – the “reserve currency” for the world. What this action of establishing “petrodollars” did was cause all world petroleum buyers to exchange their national currency to dollars before buying oil with those dollars. So, the world economy was closely tied to the health of U.S. dollars. This situation has not wavered until recent declines.
Market participants (banks) can then engage in arbitrage, borrowing currency of a nation doing quantitative easing (the U.S.) and lending in nations with higher interest rates. Sagging international confidence in dollar integrity in the past year prompted OPEC nations to establish a new exchange basket replacement for dollars, which is composed of Yuan, Euro, gold and a new currency from Gulf States (Saudi Arabia, UAE, Qatar and Kuwait). Concurrent with this development, China is moving toward a gold-backed Yuan and has often (and openly) suggested since March 2009 that the concept of “reserve currency” be replaced with the International Monetary Fund SDR (Special Drawing Rights), a basket of Yen, Yuan, Dollar, Euro and Pound.
In fact, the recent energy-production boom in the U.S. could boost the dollar because petroleum imports have declined 40% over the past seven years. A fair question to ask is “Why not encourage more of the same?” Don’t ask me, ask the Obama Administration, which has ideological objectives but no clue about the realities of how to get there.
Honestly, the U.S. dollar is not the world reserve currency but “fiat” money. Our world competitors are getting strategic commodities such as gold, silver and oil out of dollars – plus separate agreements that avoid involvement with U.S. monetary problems – and are well into the phase of rebellion for the “exorbitant privilege” we in America have enjoyed. It is obvious that the world is seeking a new currency order. What all this means is highly speculative. What will trigger collapse and specific events and results along the path to this calamity have yet to be revealed. But recognize that America today has more debt than any entity in the history of the world; borrows 46 cents of every dollar spent by federal government (of $435.8 million per hour spent, $200.5 million is borrowed); and has public debt that doubled since the onset of the current Administration, authorized by several spendthrift Congresses.
Although nobody really knows when and how this disaster will unfold, history can be used as a guide. When a national financial system collapses, the following occurs: banks do not open, businesses shut their doors in efforts to avoid losses while awaiting a vision of understanding, stores close because they cannot conduct trade without products and exchange via financial communities they rely on for stable commitments, and the public will panic immediately when their world ceases to function. Hyperinflation comes overnight. Ask a German immediately before World War II, a citizen of Zimbabwe two months ago or an American an hour after the Bank of China and their cohorts call the $3 trillion U.S. notes outstanding in callable debt. Life can and will change dramatically and instantaneously.
This is real, folks, and it is not far away. We are in for an unpleasant journey. IH