Although world events influence all economies, including our own, the greatest threat to this nation is our economy, and our government is the greatest threat to our economy. Actions taken by past and present administrations are finally catching up to us.
Three basic elements can erode the confidence the world has in a reserve currency. They are 1. The soundness of the currency. 2. The fiscal responsibility and solvency demonstrated by the issuing country (In this case, the U.S.) and 3. War.
The soundness of our currency is the basis of a strong economy. The United States was on a metals-backed monetary system (primarily gold) through the early 20th century. With the creation of the Federal Reserve in 1913 we began to turn away from such backing, and by 1933 we were essentially taken off the gold standard when President Roosevelt outlawed gold ownership except for jewelry. The exchange rate of $35 per ounce for gold was set, and the U.S. bought up enormous amounts of the precious metal. Then in August of 1971, President Nixon officially took our currency off the gold standard, and for the first time in history our currency was backed by no metal or commodity, only the good faith of the U.S. government. We, as is much of the world, are on a fiat monetary system. In reality our currency is essentially worthless.
The good faith of the United States government is now being questioned by many countries. Why would they do such a thing? The answer begins in the 1935 with creation of Social Security. The citizens were duped into thinking this was a government-structured retirement system when all they were creating was an entitlement program that would bring more dollars into the government. There are Supreme Court records to show the intent of this government program. Then after the war and the United States began to prosper, the government felt the need to declare a war on poverty which translated into new social programs. This was President Johnson’s Great Society introduced in 1964. From that point spending on social programs that have had marginal results, at best, has just increased. Then in 1971 President Nixon rendered our already-inflated dollar virtually worthless.
The events of 9-11 ushered in a whole new era of massive government spending with a series of wars and the creation of massive agencies like Homeland Security and the TSA. By the end of President Bush’s term in 2009 we had amassed a staggering $9 trillion national debt. Now, five years into President Obama’s term we have almost doubled that amount. We stand at over $17 trillion in debt, a debt that we cannot pay off under our current system. With two giant bailouts, the creation of ObamaCare, and continued quantitative easing by the Federal Reserve, there is no end to our runaway spending in sight. This doesn’t seem to ever bother our politicians, but it has caught the eye of the international bankers. For the first time in history Moody’s downgraded our credit worthiness. They did this primarily because we would not pass a responsible budget to address our spending problem.
It is this irresponsibility that calls into question the good faith of the government among the nations.
Since then end of World War II this country has not known peace. War and the rise of the military industrial complex has virtually consumed our foreign policy. We have gone on an international nation-building mission. We rebuilt Japan and Europe after the war and continued throughout the cold war to protect us from communism. After the cold war we looked to create the Middle East in our image beginning with the first Gulf War in the early 90’s. Continued unrest in the region, as well as Europe also warranted our investment. In the post 9-11 era we have kicked it into high gear. We have taken down Egypt and Libya, are backing “freedom fighters” in Syria and Ukraine, and continue drone assaults in Yemen and Pakistan. In a paradoxical foreign policy, we have insulted our allies and embraced our enemies. Our “reset” with Russia has us on the verge of another cold war.
Our favorability among the nations has declined, and we are acting like the bully on the block, like we are beyond reproach. This antagonistic view of America is a driving force behind several countries’ attempts to unseat our currency.
Evidence of Economic Unrest
There is plenty of rhetoric being passed around as countries tire of America’s economic and foreign policies. Vladimir Putin said of the dollar, “The one reserve currency has become a danger to the world economy. That is now obvious to everybody.” China is leading the way, the rebellion against the dollar, as they try to strengthen the yuan and replace it as the reserve currency.
It’s hard to get an accurate count but China has been hoarding gold, lots of it, for several years now. Russia, also, has been dramatically increasing its gold reserves. Since neither country really likes us (surprise) and know that an economic attack would be the surest way to bring America to its knees, their motives for greatly increasing their holdings is not rocket science. Having such vast amounts of gold would benefit any country in the event of an economic crisis as gold has demonstrated its resilience throughout the ages. Backing a nation’s currency with gold also makes it very stable and attractive, unlike the fiat dollar.
Another sign of international change is the rise of bartering agreements between certain blocs of nations. You should notice China is the prime instigator in many agreements. Here are a few:
*China and Iran are creating a barter system by which Iranian oil will be exchanged for Chinese imported products. China is oil hungry as its economy expands, while Iran looks to get around sanctions. It’s a win, win.
*China and Japan announced plans to bypass the dollar and use their own currencies in their trade relations. Discussions involving a partnership between South Korea and China to exchange their currencies also have taken place.
*China and Russia have, for more than a year, been conducting trade using rubles and the yuan.
*China and the United Arab Emirates (UAE) have announced an agreement which will use the yuan for oil trades.
*Russia and Iran have agreed to use rubles as a means of currency in their trades. These two have always been close friends, thus this doesn’t come as a big surprise.
*China will pursue bilateral trades with Russia and Malaysia using the yuan, the ruble and the ringgit, respectively.
*The nations comprising the BRICS group (Brazil, Russia, India, China and South Africa) recently agreed at their summit meeting in China, to establish mutual lines of credit in local currencies.
While these agreements will benefit member countries, it will cause chaos throughout the global community, the exact thing a reserve currency is supposed to prevent. The United Nations blames the dollar for most all the economic ills of the world and wants a one-world currency, and the International Monetary Fund (IMF) has brought back the idea of creating SDR’s (Special Drawing Rights) for international currency.
So what’s going to happen to the Petro Dollar? No one knows for certain, but many see the signs of the end of the dollar supremacy. Basically there are only three things that can happen.
Our economy will come to life and we will develop some sort of fiscal responsibility, thereby restoring the world’s faith in our greenbacks. And the world goes on.
Another currency such as the yuan or some contrived international currency replaces the dollar.
In this more likely scenario, there will be several circulated currencies traded globally, probably each linked geographically. It is important to be educated and aware of this silent, unreported threat.
Next: American Effects and American Solutions