Reserve Currencies Come and Reserve Currencies Go. The Dollar Too Will Go!

Reserve currencies don’t remain reserve currencies forever. This fact is clearly demonstrated by this graph attributed to J. P. Morgan, which,  I snagged from the Global Economic Warfare blog.

 

20120103_jpm_reserve

 

The so-called developed nations agreed in 1971 that the U.S. Dollar would become the primary reserve currency and most world commerce, as a result, would be conducted in dollars. It was then that President Richard Nixon took the measure that the dollar would no longer be convertible to gold.

Having the dollar as the primary reserve currency has been both a blessing and a curse. For countries around the world to build up a “reserve” of US dollars in their central banks after 1971, the most expedient way was for the US to have negative trade balances with the other countries; i.e., import more from a country than they import from the US. Thus America has consistently has had a negative trade balance for the last 43 years. This policy supports economic growth and jobs in the other countries but not so much at home. On the other hand, the American consumer has benefited from lower cost imports. No doubt the Walton family is very appreciative of this aspect too. As long as America’s economy was expanding at a healthy rate, American’s were able to enjoy both the low-cost imports and still have low unemployment; such as we saw in the seventies, eighties and nineties. The party, unfortunately, appears to have ended in 2000 when the workforce participation began to decline and is now at 1979 levels.

The dollar, as the world’s primary reserve currency, has been a doubled edged sword in another manner depending on your point of view. Our government has been able to borrow money (sell bonds) at preferential lower interest rates compared to most other countries. This has allowed them to fund a myriad of programs without asking Americans to pay higher taxes. This is how America got over $17 trillion in debt. Approximately forty cent of every dollar our federal government spends is borrowed money.

It’s common knowledge that not all countries are happy about the dollar being the primary reserve currency and especially the lock the dollar has had on the pricing of oil. China and Russia and  the other BRIC countries: Brazil and India would like to break the dollar’s hegemony for a number of reason not the least of which is the Fed’s Quantitative Easing policy which debases the dollar and therefore their national reserve value. The news has covered many recent mega oil deals that Russia and China have made between themselves and Iran, Iraq, and other countries, I can’t find my link right now, but I believe it is this week that the heads of the BRIC countries are meeting to discuss other ways they can trade with each other without using the US dollar.

Please understand that neither China nor Russia are looking to have their currencies replace the dollar as the world’s reserve currency. That is the last thing they would want. They would like to see the dollar replaced with some basket of currencies so that the policies of one country wouldn’t have a great effect on their national reserves. Most pundits believe the only way that could be done would be to replace the dollar with Special Drawing Rights from the International Monetary Fund (IMF). The author of this article  on the demise of the petrodollar has an opinion on the IMF which I happen to agree with:

The argument has always been that the IMF is a U.S. controlled institution, however, this is a faulty assumption.  The IMF is a GLOBAL BANKER controlled institution, a front organization for the Bank of International Settlements, which is why the recent refusal by the U.S. Congress to vote on new capital allocations for the IMF has resulted in the world’s central bank threatening to remove U.S. veto power. Globalists have no loyalty to any single nation, and the reality is, the fall of the dollar actually benefits these financiers in the long term.

Should the IMF ever get that power, the too big to fail and too big to trust banks would have the world right where they want it…. at their mercy.

As more and more countries agree to sell/buy oil in currencies other than the dollar and as more and more commerce, in general, is done in currencies other than the dollar, the dollar will weaken on foreign exchange markets and interest rates will rise and Americans will being paying much more for gasoline and everything else they consume. Also and very importantly, the US debt service cost will skyrocket. Unlike the fiat dollar, the previous reserve currencies in the graph above were backed by gold or silver and they were not represented around the world with trillions of worthless units , at the time of their demise, as is the case for the dollar.

When will the tsunami hit? I don’t know but I do believe the tsunami is in the making. Prepare the best you can, my friends.

Well, that’s what I’m thinking. What are your thoughts?

 

 

 

 

 

 

 

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10 thoughts on “Reserve Currencies Come and Reserve Currencies Go. The Dollar Too Will Go!

  1. My thoughts? Once the Tsunami hits and we are in a depression (panic as it used to be called” the Democrats will blame capitalism and use it as an excuse to create the socialist worker’s paradise they’ve been trying to implement since Roosevelt.

  2. It’s not in any pertinent party’s interest to see the dollar simply collapse, and it really doesn’t matter if it is no longer the world’s common currency. That could actually be a good thing for most Americans. The effect of globalized markets on America was quite predictable and many prominent economists and others did predict it. It’s the ol’ Water Rising effect, but because we came in at the top, more of that water came from us. It was the Giant Sucking Sound, the one main thing Ross Perot had right. Free Trade really hurt America.

    And you point out the borrowing! Again, many more national-protecting types, my humble self included, have been saying for years it’s the borrowing, more than the “taxes and spending” that is the creeping cancer undermining our economy, our democracy, our very way of life. We should not be borrowing any more money. The only way we should borrow should be in time of war or disaster. We should pay as we go, and if that means raising taxes now and again, well, that’s life. The effect of this will be a reining of spending down to less,. and those less would be the more popular and necessary government action.

    I’ll say this right now – this coming from ol’ uber-liberal Jersey McJones – if the Tea Party demanded an end to borrowing and paying the bills up front instead – I’d back Sarah Friggin’ Palin to see that happen.

    JMJ

    1. The dollar collapse has to happen sooner or later. America, unfortunately will suffer through a year or so of hyperinflation after it happens. There many trillions of dollars out there that will be looking for a home in a panic.

      I am very pleased to hear your view on borrowing, Jersey. I am curious how you reconcile that with your progressive view on governent spending when 40% of those dollars being spent are borrowed. There is no sustainable way that taxes could replace that borrowing. At any rate, I am planning a post on issue of debt in the US. Maybe Monday. Stay tuned.

      1. We could raise the revenues, CoF. Besides, if you take the military out of it, the spending would be quite manageable. If anything, we should be spending a lot more right now – on productive things we actually need.

        JMJ

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