Investors world over will mourn the passing of the American Dollar. The reign of King Dollar was a long one from 1944 to 201?. That the end will come is now certain. The only question is how soon and by what means?
The American Dollar (USD) has been under threat of mortal danger for sometime now. The death watch among some analysts has already begun. There is a certain anxiety with the imminent end of the USD among international investors and financiers. There is fear of the unknown.
As any investor will tell you uncertainty in the markets will lead to a numerous dangers as well as opportunities. Governments around the world are waiting to see what will result as the USD continues it’s decent in strength and therefore value.
The problem with preparing for the USD demise is what international mechanism will replace it? There is no shortage of individuals that are disaffected with the present international economic order. However, what currency or medium of exchange will be used when the American Dollar finally collapses and dies?
There is no other nation waiting in the wings. The final destruction of the British pound (GBP) began in the 1940’s with the weakness of the British economy and international position of the British Empire. The end of the pound as an international reserve currency finally arrived in the 1960’s by the government in London. The devaluation of 1967 started a run on the currency that quickly destroyed the international position of GBP.
There was soon a flight from GBP to USD. It was an obvious choice for numerous investors at the time. Once it began it was next to impossible for the British government to stop the exodus. Unlike the former devaluation of 1949 it totally destroyed the previous faith that international investors and bankers had placed in the pound. It is also important to note that the devaluation of 1967 in the end, largely failed to turn around the British economy. It did not become a major factor in helping British exports.
Unlike the preceding conversion there is no apparent successor to the American dollar. This partly explains the continuance of the dollar’s reign. There are a number of world currencies like the Euro, the Chinese yuan, and at one time the Japanese yen, that were thought of as possible replacements for the USD. These currencies all have liabilities that make international reserve status unlikely at the moment.
This is not to stay that there is not action being taken to undo the dominion of the dollar. The most recent is the meeting Russia called for and held, to directly challenge the international role of the dollar. The Russian goal is to begin the process of de-dollarizing international world trade. The Russian effort would have little chance of success if it were not for two additional nations that have expressed interest in the Russian initiative.
The nations of China and Iran have agreed to begin to explore bilateral trade options that will be USD free. It is a direct attack on the supremacy of the dollar because it would include the all important energy market. The upcoming oil and gas contracts between China and Russia will be dollar free. It strikes at the very heart of the role of the dollar as the medium of exchange for oil in the world. The goal of these nations is to end the petrodollar system that has been in place since the early 1970’s.
What brought this movement to the forefront now? The Russians feel compelled to take action as a result of Western sanctions, both real and threatened ones. Sanctions were leveled against Russia for actions that were taken against Ukraine earlier this year. How effective will this open attack on the petrodollar system be? Well, that depends on the other nations of OPEC (Organization of Petroleum Exporting Countries) of which Iran is a member.
Most member states have reservations about Iranian provocations. Those nations of the organization that can be found in the Persian Gulf are actually quite fearful of the Iranian regime, especially in the movement of that government to acquire nuclear offensive capability. So at this point, OPEC is unlikely to support Iranian endeavors except for “rogue” states like Venezuela.
Iran has already been selling oil without the use of the USD to a number of countries for the last few years mainly to China and India.
However, one cannot be complacent if Russia and China move forward in using their own currency in bilateral trade especially as they attempt to bring other nations on board like India, for example.
What many observers do not recognize is that the movement to replace the USD has been underway for a number of years. Each hit removes a chink in the armor of the dollar. Already in June of 2012 China and United States ally Japan, had begun to use their own domestic currencies in bilateral trade. In itself, it is not a very large percentage of world trade,but it began the movement away for the USD.
Although not well publicized, Australia as well, has signed a number of agreements that excluded the use of the American dollar.
In 2012, the USD was used in 76% of all world trade and compromised 63% of global reserves. That percentage continues to decline over time, reducing the role and influence of the USD.
By 2013 the currency of the United States had dropped to a 15 year low in the world money supply. As a share of global reserves it dropped another 1% to 62% of the total. A total of $3.72 trillion USD was being held by the rest of the world’s central banks. This is out of a overall currency portfolio of a value equal to $6 trillion USD.
If one considers that as a share of all world currencies that were in existence in the early 1950’s the USD had close to 90% of the total. The percentage for the dollar now is close to 15%.
The United States government has not been kind or helpful to the value of it’s own currency. In addition to running trillion dollar plus primary federal budget deficits from 2009 to 2012, the quantitative easing programs of the US led to the creation of $3 trillion more dollars in circulation.
As the value of the dollar declines further, it will eventually force the United States Federal Reserve Bank to raise interest rates. This will make American debt more expensive. This will in turn force the government of the United States to spend an ever greater share of the federal budget on servicing the interest on the debt.
As these interest payments reach 40% to 50% of government revenue on debt the dollar will begin a rapid decent in value. Bond prices will plunge as nations holding the USD decide to begin a massive “dump”. The United States will then face the dilemma of ruinous tax increases which will destroy the American economy, or more quantitative easing, which will destroy the American dollar.
Quantitative easing on the part of the American Federal Reserve at this point will be like giving more heroin to an addict. It will accelerate the crash in the value of the dollar. Banks, companies and soon individual investors world wide, will want to exchange their USD to other currencies and assets of value like gold and silver. As nations around the world rush to unload dollars the trickle will soon becomes a deluge. The toppling of the financial system in the United States is then unstoppable.
The USD will soon disappear in much of the world’s transactions as global investors move to other investment vehicles. Inside the United States, hyperinflation will be the result of all these overseas dollars coming back home. Again the remedy will be to raise interest rates even higher, in an attempt to mop up the excess liquidity. This will in turn force the United States into a recession, one that will resemble The Great Depression of the 1930’s.
As businesses and institutions are forced into bankruptcy it will create an economic calamity in the United States that has not been seen since the founding of the American republic in the 1780’s. The term “as worthless as the Continental Dollar”will once again have meaning if the Federal Reserve System does anything to try to alleviate the skyrocketing unemployment rates.
This American nightmare is already on the horizon as the dollar continues its decent in standing and value. The escalating debt in expenditures and liabilities inside the United States only hastens the inevitable collapse. Yet the government of the United States seems paralyzed to take action. Political gridlock has become the normal operation of business in the nation’s capital.
At this point, it would be wise for investors inside the United States, and throughout the world, to factor future business calculations that no longer rely on the USD. The death spiral of the dollar as the world’s reserve currency already in motion, is about to pick up speed.