How Long Will the Dollar Remain the World's Reserve Currency?
We frequently hear the financial press refer to the US dollar as the "world's reserve currency," implying that our dollar will always retain its value in an ever shifting world economy. But this is a dangerous and mistaken assumption.
Since August 15, 1971, when President Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold, the US dollar has operated as a pure fiat currency. This means the dollar became an article of faith in the continued stability and might of the US government
In essence, we declared our insolvency in 1971. Everyone recognized some other monetary system had to be devised in order to bring stability to the markets.
Amazingly, a new system was devised which allowed the US to operate the printing presses for the world reserve currency with no restraints placed on it − not even a pretense of gold convertibility! Realizing the world was embarking on something new and mind-boggling, elite money managers, with especially strong support from US authorities, struck an agreement with OPEC in the 1970s to price oil in US dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence backed the dollar with oil.
In return, the US promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite radical Islamic movements among those who resented our influence in the region. The arrangement also gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as the dollar flourished.
In 2003, however, Iran began pricing its oil exports in Euro for Asian and European buyers. The Iranian government also opened an oil bourse in 2008 on the island of Kish in the Persian Gulf for the express purpose of trading oil in Euro and other currencies. In 2009 Iran completely ceased any oil transactions in US dollars. These actions by the second largest OPEC oil producer pose a direct threat to the continued status of our dollar as the world's reserve currency, a threat which partially explains our ongoing hostility toward Tehran.
While the erosion of our petrodollar agreement with OPEC certainly threatens the dollar's status in the Middle East, an even larger threat resides in the Far East. Our greatest benefactors for the last 20 years − Asian central banks − have lost their appetite for holding US dollars. China, Japan and Asia in general have been happy to hold US debt instruments in recent decades but they will not prop up our spending habits forever. Foreign central banks understand that American leaders do not have the discipline to maintain a stable currency.
If we act now to replace the fiat system with a stable dollar backed by precious metals or commodities, the dollar can regain its status as the safest store of value among all government currencies. If not, the rest of the world will abandon the dollar as the global reserve currency.
Both Congress and American consumers will then find borrowing a dramatically more expensive proposition. Remember, our entire consumption economy is based on the willingness of foreigners to hold US debt. We face a reordering of the entire world economy if the federal government cannot print, borrow and spend money at a rate that satisfies its endless appetite for deficit spending.
Posted by amanfromMars on 09/04/12 11:28 AM
[i]If we act now to replace the fiat system with a stable dollar backed by precious metals or commodities, the dollar can regain its status as the safest store of value among all government currencies. If not, the rest of the world will abandon the dollar as the global reserve currency.[/i]... .. Ron Paul
Methinks that is not a viable solution to the problem which the whole article, "How Long Will the Dollar Remain the World's Reserve Currency?", identified so clearly, for any convenient currency for trade and exchange is always a fiat system which creates an inflationary bubble when backed by anything which has been selected to act as if it has real value, rather than just being a virtual convenience for artificial wealth transfer to intellectual stock holders ... .. those smarter dudes and cool lasses who dream up the schemes and plans which have tomorrow replacing the errors of today with something different for media to share and have the not so very bright and intentionally misinformed, kept in their ignorance of the way in which they are controlled, and some would justly say, enslaved to a fiat currency system which invents paper tiger wealth for its friends from nothing at all ... ... . which of course you have just advised us all, it does.
The abiding problem which ensures that it catastrophically collapses increasingly quickly, with those both filthy rich and in interesting charge of money supply running for non existent cover and rightly in fear for their lives if not widely known and instantly recognisable philanthropes, is that currency is not delivered for smart spending to smart spenders to ensure that it works its magic in the flow to those who will create industry and commerce and pleasure and greater prosperity for all with its simple further exchange/liberating spend ... ... in a mutually advantageous, expanding loop.
Huge money at rest in accounts identifies the fool with no idea about what needs to be done to generate peace and stability and happiness and equity for all.
Posted by laceja on 09/04/12 01:13 PM
Of course, now the military industrial complex has decided they can get even richer and have even more control over us, if we just have a war against Iran. After all, the insolent Iran has dared to sell their oil for anything but the US Dollar. No doubt, the other countries in the middle east have taken notice that Iran has gotten away with it... so far. So, it is now necessary to teach the insolent Iranians a tough lesson. I doubt there's any intention of winning a war, just causing as much damage as possible and, of course, using up as much military hardware as possible so it has to be replaced with ever more expensive gear.
Posted by abdulHadiscott on 09/04/12 04:50 PM
Ron Paul, Thanks again for explaining in clear language what should be obvious, But thanks to "double speak" economic theory is any thing but.
Posted by dotti on 09/04/12 05:38 PM
I don't know how long we've been "live" on feedback--last time I checked we were still being forced to sit in the corner. Figuratively speaking, of course.
Glad to have feedback again! It makes it much more interesting for folks like me.
Reply from The Daily Bell
Posted by dotti on 09/04/12 06:00 PM
Sorry. Where are my manners?????
And thanks to DB for re-opening the Cafe DB!