Thursday, July 28, 2016

Collapse of US Dollar as World Reserve Currency

The Global Technological System (GTS) began to collapse in 2008. Decisions made by American elites, such as Zero Interest-Rate Policy and Quantitative Easing, have accelerated this collapse. Now the US dollar will soon lose its status as the world’s reserve currency. The consequences will be unpleasant. Patrick Barron, in an article entitled “Why It Matters If the Dollar Is the Reserve Currency,” (July 3, 2015), tells us why.

To say that the US dollar is the world’s reserve currency means that international trade between countries around the world is settled in US dollars more than in any other currency. Consequently, foreign central banks around the world keep trillions of dollars in reserve to make this trade possible. Foreign central banks also keep dollars in reserve to maintain a favorable exchange rate for their own currencies by buying or selling dollars as needed.
Originally, however, it was gold—and not a currency like dollars—that was kept in reserve. From the mid-1800s to the mid-1900s, it was the British pound that served as the world’s reserve currency. Most countries preferred to trade using it because every British pound was tied to a certain amount of gold held in reserve. Central banks with British pounds could receive from the Bank of England, on demand, the amount of gold represented by the British pounds they possessed.
In 1944, the American dollar replaced the British pound as the world’s reserve currency. As with the British pound, the US dollar was pegged to a certain amount of gold. In 1944, the US controlled most of world’s gold with about 18,000 tons. Germany, in a distant second place, had only 3,400 tons. Foreign central bankers could receive one ounce of gold for every $35 they controlled. Elites around the world were happy to keep dollars in reserve and trade using them, knowing that at any time they could exchange them for gold at a known fixed rate.
During the 1960s, American elites decided to expand the number of dollars available to them without a corresponding expansion of gold reserves. Central bankers in other countries, beginning with those in France, grew increasingly concerned that the number of dollars needed to purchase an ounce of gold would start to rapidly inflate. They started to cash in their dollars for gold. In 1958, the US held in reserve 20,000 tons of gold. By 1970, it had only about 8,000 tons left.
By 1970, American elites faced a dilemma. To prevent the loss of any more gold, they had to take one of two actions. They either had to increase the number of dollars needed to buy an ounce of gold. In 1971, to allow the redemption in gold of all dollars then in circulation, American elites would have needed to increase the ratio of dollars to gold from $35 to $400/ounce. Or they had to break the connection between dollars and gold altogether. In September 1971, they chose to break the connection altogether.
With that decision, the nature of the dollar as a currency changed. The dollar ceased being a commodity currency; that is, a currency tied to gold as a commodity and exchangeable for it. Instead, the dollar became a fiat currency; that is, a currency worth what American elites said it was worth and could make foreign central bankers think it was worth. Since, in 1971, the American empire and economy were both the world’s most powerful and relatively stable, foreign elites acted as if the dollar was still just as valuable and continued to trade with it. As a result, foreign central banks around the world continued to hold huge amounts of dollars in reserve.
Now, 45 years later, the American empire and economy are still dominant but significantly less powerful. Confidence in the dollar’s continuing value is disappearing because, since 2011, American elites have pretended to create $5 trillion out of nothing. Foreign central bankers, not fooled and less coerced, are losing their confidence that the dollar will be worth anything soon. Consequently, they are getting rid of the dollars they own and corporate elites are making trade agreements using other currencies.
The more this happens, and its occurrence is accelerating, the smaller the number of dollars held in reserve will be. This is serious. As of July 2015, of all the dollars in the world, 62% ($6.154 trillion) sat in foreign central bank vaults (figuratively speaking) while only 38% ($3.839 trillion) circulated within the US. If foreign central bankers decided to get rid of those increasing worthless dollars, and the US economy had to absorb that 62%, American elites would no doubt simply create more phantom money. The perfectly predictable result would be galloping inflation.
One reason why a run on the Federal Reserve has not already occurred is that foreign central banks, including the European Central Bank and the Bank of Japan, have also been inflating their own currencies by creating phantom money. While this temporarily maintains the US dollar as the world’s reserve currency, the consequences will eventually be globally disastrous.
The first important country to stop inflating its own currency will see it become the next world reserve currency. That might be China. China is currently buying huge quantities of gold. If it pegs its currency, the yuan, to gold, then the US dollar as world reserve currency will immediately disappear.
Should that happen, the price of even the most basic products and services in America will skyrocket. The availability of government services, such as medical care, schools, garbage collection, police, and the military will disappear.
The purpose of discussing the impending loss of the US dollar as the world’s reserve currency is to encourage a frank and critical discussion of its likelihood, timing, and consequences. That, in turn, will hopefully encourage people, especially Christians and churches, to start now to respond creatively to this increasingly looming threat.

Copyright © 2016 by Steven Farsaci.
All rights reserved. Fair use encouraged.