Industry & Business News
Replacing the dollar has HUGE implications and the U.S. Government knows it.
Surfersvillage Global Surf News, 7 June, 2009 : - - A country who holds what is called the reserve currency has what De Gaulle called ‘an exorbitant privilege’. Other countries in order to get hard currency (usually USD) have to physically make ‘stuff’ and sell it to buy cars from Japan, clothes from Asia, machines from Germany etc. In order for the U.S. to get more dollars, it only has to run the Federal printing presses. Hey Presto – more USD…
The U.S dollar replaced the Pound Sterling as the worlds reserve currency after WW2 after the Bretton-Woods conference which was held to design the post war economic order, create the IMF and World Bank etc. When the US Govt made a deal with the Arabs to trade oil in Dollars in return for protection, that sealed the fate of the Pound. Everyone needed oil, therefore everyone needed dollars to buy it. The demand for them grew and the need for Sterling collapsed.
America left the gold standard during the Nixon administration and it then became what is called a FIAT currency. Basically the currency was no longer backed by its equivalent value in gold. The Govt said – ‘trust us - if you buy US treasury bonds you will one day be repaid’. The world had no option but to agree. Lyndon Johnson continued to spend and borrow during the hugely expensive Vietnam war – alarming the world with yet more red ink. When asked the classic economic question whether the U.S. had a ‘guns or butter‘ economy (I.E you could either afford one or the other but not both – he replied ‘we are a guns AND butter economy’ (because it was being paid for not with real cash from export sales of ‘stuff’ the U.S had made, but with borrowed money from overseas buyers of U.S. T-Bonds).
Of course, the exorbitant privilege that De Gaulle mentioned also brings temptation to avoid economic prudence. Slight budget problem this year? Don’t raise taxes or cut spending – just borrow more and/or print more money.
Over the last 20 years, the U.S. has continued to borrow ever more money from China to fuel (excessive) domestic consumption and keep the domestic economy going. China in turn kept lending them the cash so they could keep buying the low cost ‘stuff’ they produced until now they are owed nearly two TRILLION dollars by America. Of course there is no way that America can start to repay a huge debt like that normally, so what they do is continue to print more and more dollars which devalues it relative to other currencies.
Foreigners with real (and very large debts) are repaid not with real cash like Euros or Swiss Francs or Yen but with ‘monopoly money’ in return. When they in turn go to use those dollars to buy something real from say Brazil, they find it buys a whole lot LESS now than it used to. The U.S basically exports inflation and dumps the problem in someone else’s lap. The value of the currency is driven only by the global demand for these ‘Petro-dollars’ and not by real backing from U.S .manufacturing activity or economic output. Other countries are worried about America’s ability to ever repay these debts. Not helped by Bushes TWO massive tax cuts to the rich which increased the debt even further. Iran’s President, whatever you may think of him, was right when he said the dollar was basically worthless.
China is in a sticky situation. They can see the dollar is going down more and more each year and the value of their huge investment is decreasing. But if they start dumping the dollar to ‘cut their losses’ its value will start to slide even further. The more they dump to get out of it the more it slides and increases their losses. If other countries around the world see China starts to sell-off will feel they are stuck with a soon to be worthless currency, and race to get rid of it which will continue to reduce its value.
If the dollar is replaced as a reserve currency, American military power collapses literally overnight and with it the ability to dominate world affairs. All the aircraft, ships, submarines, the over 700 overseas military bases – mostly in the Middle East protecting the flow of the economy’s lifeblood (oil) - are currently paid for on the Chinese credit card. The wars in Afghanistan and Iraq are in fact being financed bv Chinese money. If military spending had to be paid for by what the economy makes each year in real manufactured goods, then it would have to be cut dramatically until the American defense forces resembles less a super-power and more the defense forces of other large countries.
The major powers of the world (Brazil, India, China, Russia) know that once the dollars’ reserve currency status of the world is gone, the U.S. military will shrink until it is a more even match-up of players and they will have a greater say in world affairs. Plus, any wars that America chooses to wage would cost REAL money and the Govt. wouldn’t be able to be put it on the ‘foreign borrowings credit card’. Wars cost major money which generally means sacrifice paying higher taxes and/or lower standards of living (Britain only finished paying off its borrowings for WW2 in 2006!)
So far the American people have not been asked to pay more taxes or reduce living standards since the ‘facture’ for Iraq/Afghanistan is being put off until sometime in the very distant future, so the effect of the war(s) on them are minimal. Basically ‘it’s happening on the other side of the planet, I’m not fighting, so who cares?’ If they did have to sacrifice more though, you could guarantee their interest and approval of foreign wars /military bases would change dramatically. ‘Do we really need to have troops in Iceland, Qatar, UAE, Korea, Japan, and the other 130 countries???
Before WW 1, Britain was a creditor nation, had buckets of cash and held the reserve currency (GBP) – the British empire ruled a quarter of the worlds surface. WW1 and then WW2 were ruinous and the U.K went to being a debtor nation owing massive amounts to foreigners. The balance of power shifted after the Bretton Woods conference and British Govt policy – knowing that they could no longer afford a huge navy and soldiers in outposts in India, Kenya, South Africa, Malaysia, Singapore, Burma and all the other outposts of empire was called ‘the orderly management of decline’ and they started to wind it all down granting independence to each country during the 40’s, 50’s, 60’s etc.
Historically all empires that go from being rich to massively in debt – the Roman Empire included – soon collapse. Rome fell not so much because of the barbarians at the gates, but because their economy collapsed. The most recent example was of course as I mentioned the British empire.
Russia does all oil deals in Euros now and has reduced it holdings of dollars. China signed several trade deals with South American countries and is also issuing its own treasury bonds in Yuan and bypassing dollars completely. Iran has talked about selling its oil in a basket of currencies rather than American dollars. All these actions reduce the global demand (and therefore the value) of the dollar.
So combine the massive U.S. deficits; the falling confidence of foreign lenders in the U.S. Govt’s ‘honour’ and willingness to repay the loans and not ‘inflate’ them away; the collapse of the American financial system brought about by Wall Street greed and cozy politicians who failed to regulate the banking sector; reduced demand for dollars to pay for oil and other trade; as well as the world’s desire for a more stable global system without the artificial bubbles (dot-com bubble, the sub-prime housing bubble) and collapses means that the U.S. dollar’s as reserve currency and hence as a super-power are numbered.
RVP Coresspondence
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Industry - Surfersvillage
