World
Prepares to Dump the Dollar
July 21, 2009 | From theTrumpet.com
American
economists think the world can’t afford to let go of the dollar’s
reserve currency status. The world is about to teach them
differently.
hat do China, India, Brazil, Russia, France
and Germany have in common? These countries most often can’t
agree on anything. But they are united in one strange—and
ominous—way. They blame the United States for wrecking the
global economy. And they think the dollar is the wrecking
ball.
One rock-solid, foundational belief underpins almost all
economic theory in America: faith in the dollar’s unassailable
status as the world’s reserve currency. Foreigners hold so
many dollars that they can’t afford to stop buying them, the
theory goes. Therefore the dollar’s status as the world’s
reserve currency is sound. But the dollar is now coming under
a concentrated attack. Are American economists about to get
schooled?
Angela Merkel summed up the dollar-skeptic viewpoint last
year. “Excessively cheap money in the U.S. was a driver of
today’s crisis,” she told the German parliament. And America’s
solution—even more cheap money—was just setting the world
up for another crisis, she said. It was just a matter of time.
The irony is that America is completely blind to the catastrophe
heading its way. As the economic crisis unfolded at the end
of last year, investors made a mad rush out of global stock
markets and into other assets. The biggest beneficiary of
the panic was the one market large enough and liquid enough
to handle the trillions of dollars being moved: the U.S. dollar
market. This caused the dollar to surge in value.
America grossly misdiagnosed the demand for dollars as a
vote of confidence in the U.S. economic system. In fact, it
was primarily a case of investors looking for a place they
could quickly and easily get their money in—and out.
Now that the initial panic has subsided, the dollar’s international
purchasing power has resumed its former downward trajectory.
Since the post-crisis high in March, the dollar has fallen
by a portfolio-shredding 10 percent.
America’s foreign creditors are again questioning the wisdom
of holding so many U.S. dollars. And they’re looking for a
way out.
“Leaders from Brazil, Russia, India and China are demanding
a greater stake in the management of the global economy and
challenging the dollar as the primary denomination for world
reserves,” reported Bloomberg about the recent G-8 summit.
But is dumping the dollar just wishful thinking on the part
of these nations? Or is there some tangible alternative? Well,
how about this: Some think they’ve already minted a dollar-killer.
Russia’s president is pushing to remove the dollar and reinstate
some version of a gold standard. Dmitry Medvedev unveiled
a newly minted gold bullion coin that he said was a true “symbol
of unity,” and “our desire to solve such issues.” It was a
test sample of a new supranational currency referred to as
the United Future World Currency. Samples were issued to each
of the world leaders attending the G-8 summit.
“We are discussing the creation or, to be more correct, the
appearance of new reserve currencies,” said Medvedev.
What is even more surprising is that the dollar assaults
have come not only from perennial U.S. antagonists but also
from its more democratic allies. At the G-8 summit, French
President Nicolas Sarkozy called for a complete revamp of
the global currency system, saying that the dollar’s supremacy
is outdated. “[W]e’ve still got the Bretton Woods system of
1945,” Sarkozy stated on July 9. “Frankly, 60 years afterwards,
we’ve got to ask: Shouldn’t a politically multipolar world
correspond to an economically multi-currency world?”
Bretton Woods was the historic conference that laid the foundation
for a postwar global economy centered on the dollar. “Even
if it’s a difficult topic,” Sarkozy said, “There has to be
a debate.” “Debate” about Bretton Woods is flowery code for
an attack on the dollar.
India too seems to be moving into the anti-dollar camp. Suresh
Tendulkar, an economic adviser to Indian Prime Minister Manmohan
Singh, is urging the government to diversify its foreign-exchange
reserves and hold fewer dollars. India holds over $250 billion
worth.
But the next blow to the dollar may come as a complete surprise
to Washington policymakers. Since World War ii, Japan has
been a stalwart dollar supporter and a close collaborator
with Federal Reserve monetary policy. That may be about to
end. For only the second time in 54 years, the opposition
in Japan is close to taking over the government. Japan’s economy,
like those of the rest of the world, is in severe contraction,
and disgruntled voters are upsetting the balance of power
and pushing for radical reforms.
Back in May, Masaharu Nakagawa, the chief finance spokesman
for the opposition, told the bbc that he was worried about
the future value of the dollar. He said that if his party
were elected in the upcoming national elections, Japan would
refuse to purchase any more U.S. treasuries unless they were
denominated in Japanese yen instead of dollars.
Such a decision could break the U.S. dollar bond market.
Japan is America’s second-most important creditor nation—lending
the U.S. billions of dollars each year. If Japan won’t lend
unless America pays it back in yen, then China and other major
lenders may quickly follow suit. This would eliminate America’s
ability to use inflation to cheat on its debt payments. America’s
debt burden would soar, interest rates would jump, and national
default—Argentina-style—could be staring America in the face
within months instead of years.
“America is making a terrible mistake which will result in
the greatest fall in all of mankind’s history!” Tim Thompson
wrote for the Trumpet in 2000. “As soon as America is no longer
a safe place for foreign money, that money will be gone. And
once the foreign money is gone, it will leave us with a mountain
of debt that we cannot repay.”
What Japan is proposing could be the first steps of a great
exodus from the U.S. bond market and consequently the end
of the dollar as the world’s reserve currency.
America’s leaders seem blind to the looming dollar revolt.
Global economies are in crisis. Unemployment rolls are soaring.
People want answers and solutions. The jobless will demand
action, and culpable politicians will look for scapegoats
and distractions. The first step, blaming the U.S. and its
currency for the global recession, has already begun.
A new global currency—and leveraging it to knock the U.S.
down—will be the solution.
The highly trained economic theorists who keep telling us
that foreigners can’t afford to stop supporting the U.S. are
about to get reeducated at Reality U.