The decline of the American dollar is still rapidly in motion as a set of fiscal and spending policies by the American federal government create a perfect monetary and economic storm.
The continued strength of the dollar at the end of 2012 is more a symptom of the weakness and in one case the non-convertibility of other currencies.
As much as a number of countries would like to disembark from the American dollar the alternatives are not plausible given present economic conditions throughout the world. The Euro is going through its own crisis and without the strength of the German economy it would be in a much more tenuous position than it already is.
As much talk as there was about the resurgent economy of Japan in the 1980’s the decade of no growth that followed and structural problems with the Japanese economy has made the yen unlikely as a reserve currency.
The British pound has not been in a position of real authority since the run on the pound in the 1960’s.
China’s yuan is not yet fully convertible and the other rising economies like Brazil, Russia or India do not have the economic strength nor size to compete with the dollar on a global scale.
The worlds continued reliance on the United States to be the world’s medium of exchange for trade especially in commodities has given Americans a tremendous advantage over the years. It has allowed the United States to run huge trade and balance of payments deficits for years.
Companies and investors from overseas are paid in a currency that continues to lose value just as the pools of this currency grow ever larger. Americans continue to think that their reckless economic and monetary policy has few consequences but they are about to find out that there are no proverbial free lunches.
A rapid decline in value of the American dollar will have far reaching effects to Americans everywhere.
The Bretton Woods Agreement of the 1940’s which fixed the international exchange rate of the major currencies of the world finally came undone in 1971. The United States had recklessly decided to expand social programs at home and pay for a war abroad through accumulation of government debt.
The result was an inflationary spiral and a rapid decline in real terms of the dollar. Since exchange rates were fixed it obliged other countries to finance part of the cost of this economic behavior during the Johnson Administration.
By the Nixon Administration the situation had become untenable for many countries particularly in Europe.
The way to call “America’s bluff” to coin a phrase would be to demand payment in something more tangible than the American dollar.
At the time the world was on the gold standard and the dollar was supposed to be worth 35 dollars an ounce. The run on America’s gold reserves had begun. Although it was the French who initiated the strike against the value of the dollar it was poor economic management of American finances by the United States government that led to this result.
The issue had to be resolved sooner or later regardless because other countries had no long term interest in funding American endeavors at home and abroad.
The result was the disastrous inflationary economy of the 1970’s which was of course exacerbated by oil embargoes and conflict abroad. The United States had no choice but to abandon the gold standard and allow a floating exchange of international currency. The alternative was a dramatic cut in federal spending that the politicians in Washington were not willing to push forward.
The American government did not get a handle on this downward spiral until the advent of the Reagan Administration in the 1980’s.
Although inflation was wrung out of the economy by high interest rates and renewed growth; a continuing problem was the increase in government debt and the rising cost of servicing that debt.
It is true that tax cuts and deregulation of business interests during these years vastly expanded economic growth but government spending rose even faster despite the increased inflow of money to the American treasury.
Again the United States had decided to fund a rapid increase in military expenditures to win the Cold War which was championed by a Republican administration. At the same time there was no slowdown in social spending on the Congressional side which was mostly in the hands of the Democrats during these years.
During the Clinton years of the 1990’s you had the reverse.
A Democratic administration that wanted to spend more and saw government deficits as far as the eye could see and a Republican Congress that wanted to curb it. Yes there was politics behind it; not wanting a popular president to gain even more political strength by increased social spending.
The result was a federal government balance between taxes and expenditures and even a “surplus” by the end of the Clinton Administration.
I hesitate to use the word surplus because if you included federal obligations, future liabilities, and federal debt already accumulated there was no real surplus but it was a big step in the right direction of fiscal prudence and responsibility.
It will be the first painful step that the United States government will need to achieve once again, if there is any hope in saving the American dollar and prevent its collapse.
Given the present impasse between the different branches of the United States government that seems highly unlikely.
In a later article we will discuss the disastrous federal government policy of running trillion dollar plus budget deficits on a yearly basis and a massive expansion of future entitlements and liabilities that number into the hundreds of trillions.
A sum so massive that it is overwhelming to most people trying to get a handle on government expenditure.
The trade and the balance of payments deficits have not gotten any better either. The slowdown in the economic growth rate in the American economy because of massive debt have only made a bad situation worse.
How is the American government funding this present fiscal problem? Certainly not through tax receipts alone.
At present the United States can fund about 60% of its present expenditures.
The government funding of the remaining amount is the catalyst that will facilitate the rapid decline of the dollar within a very short time frame. This will have catastrophic consequences both in the United States and throughout the world.