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The Inevitable Weakening of Both

America’s Rich Legacy and “Stronger than Gold Currency” is under Duress



As Americans continue, day-after-day, earning the waning dollar, their leaders continue to mortgage-off their future with out of control spending and reckless policies – both domestically and internationally. From all appearances and from both side of the aisle, it appears they are committed to auctioning off every single asset to the highest bidder, until there is nothing left to sell or until all the bidders dry up. The hotly contested debates over raising the national debt ceiling are perfunctory, at best. Hoping to quiet the growing dread in the hearts of its people and to somehow appease a watching international community, America’s leaders know that this raising of the debt ceiling will not be the last. It is one of many to come.

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With a national debt of $14.3 trillion and growing, borrowing from China now at over $1.1 billion a month, and a national current account balance at negative $563 billion, America cannot pay the required interest payments on its debts. If leaders do not raise the debt ceiling, America will default on its debt obligations. If government spending is not reined-in, America will become junk status. Moody, a major bond rating agency, warned that it might review a possible downgrade of the United States’ triple-A debt rating if a deal is not struck soon to increase the national debt ceiling and cut deficits. According to the Treasury Department, it would begin defaulting on its obligations as soon as August 2nd without a debt-limit increase.1

A MOMENT IN HISTORY

Someone may be asking “what does this all mean?” “We’re America, we can’t fail, right?” Emerging from the devastating Great Depression and in the midst of World War II, leaders from around the global gathered in Bretton Woods, New Hampshire to establish a system of rules, institutions, and procedures to regulate the international monetary system. This system would become known as the Bretton Wood system. The chief features to come out of this system, were an obligation for each country to adopt a monetary policy that ties its currency to the U.S. dollar and the creation of the International Monetary Fund (IMF) that would bridge temporary currency imbalances. As such, countries purchased the U.S. dollar, held large amounts of it in reserve accounts to be used if the value of their currency declined significantly, and they pegged their currency to move up and down on a daily basis with the U.S. dollar. The willingness of other countries to tie their economic survival to the United States, then and now, hinges on the strength and stability of the United States itself. Backed by nothing but the promise of the federal government, the dollar is (was) considered “as good as gold”. This alone, speaks to the magnitude of America’s greatness, backed by nothing but a promise, nations from around the world purchase trillions of U.S. dollars – in many cases, binding their continued existence to a promise. It is this promise that has been placed in jeopardy due to out-of-control spending that now places the United States in a precarious predicament. Right now, the United States is unable to meet its debt obligations without the ability to print money that is not backed by economic stability, financial discipline, and strength. Instead, the U.S. dollar is backed by a waning demand that presently allows for the endless printing of “funny-money”.

WHAT WOULD HAPPEN IF AMERICA CAN’T PAY HER BILLS?

The effects of America defaulting on debt obligations would be the same as those resulting from continued out of control spending. That is, calamity. The U.S. is in a catch-22. America finds itself in a no-win situation if the debt ceiling is raised or not and if spending is cut or not. The hole that has been created over many decades is too deep to emerge from completely unscathed. If you think things are tough now, just watch what happens when America cannot pay its bills to an expectant international community. Many of us are acquainted with someone who learned of the consequences of not meeting debt obligations – homes go into foreclosure, cars are repossessed, jobs are lost, and so forth. However, the magnitude of the economic blow that would be felt by America and the world is unquantifiable. For many, the across-the-board scale of such a fall is incomprehensible. To illustrate the doom and gloom, let us talk exchange rates for a moment. A part of the Bretton Wood system is the creation of exchange rates. Simply put, exchange rates bring into balance the purchasing power of one nation’s currency with the purchasing power of another nation’s currency. Visualize a balancing scale and this is essentially the purpose of exchange rates. Exchange rates ask the question “how many U.S. dollars are needed to purchase its equivalence in Mexico, for example?” The answer: 1 USD = 11.6 MXN (Mexican Peso). Meaning, it takes 11.6 pesos to equal the purchasing power of 1 U.S. dollar. However, compared to Europe, it only takes 0.69 Euros to equal 1 U.S. dollar, because the U.S. dollar is trading weaker than the Euro. Many variables are used to determine the exchange rate, culminating in what will eventually be used to judge the riskiness of one nation’s currency compared to another nation. In Finance, we use this “risk” factor to determine the price or value of a nation’s currency. Some of the variables that increases risk and thus decrease the value of a nation’s currency are: risk of defaulting on debt obligations, too much debt, increasing inflation, increasing interest rates, etc. As the existence of any of these variables increases, the riskier a nation is deemed to be, consequentially, the value, price, or worth of that nation’s currency declines. Today, America is drastically plagued by 3 of the 4 risk factors above. So, why hasn’t the dollar been significantly reduced in value? Why is there still a demand by the international community for the U.S. dollar? Two words: Bretton Wood. Remember, as of today, many nations have pegged or tied their currency to the ebb and flow of the U.S. dollar. As such, there is a constant and inherent demand for the U.S. dollar. But, this demand is mostly based on nostalgia and not economic reality. The question to be asked is whether the financial markets are going to be willing to continue to finance America’s imbalances? The answer is no. In fact, China’s central bank chief, Zhou Xiaochuan, has outlined how the dollar could eventually be replaced as the world’s main reserve currency by the Special Drawing Rights (SDRs, an international reserve asset created by the IMF). Zhou comments “spells out in detail China’s dissatisfaction with the primacy of the U.S. currency.” He stated that moving towards the increased use of SDRs instead of the dollar “serves as the light in the tunnel for the reform of the international monetary system”. He also stated that “the price is becoming increasingly high (to peg nations currencies to the U.S. dollar), not only for the users, but also for the issuers of the reserve currencies.” 2 After the close of the annual Chinese parliament session, Chinese Premier Wen Jiabao said “we lent such huge funds to the United States and of course we are concerned about the security of our assets and, to speak truthfully, I am a little bit worried.”3 George Soros: on April 8th, a group he funded with $50 million, held a major economic conference and Soros’ goal to establish new international rules and reform the currency system was the discussion of the day. The event brought together more than 200 academic, business, and government policy thought leaders. Some expected notable attendees were:4
  • Former Fed Chairman Paul Volcker who is chairman of President Obama’s Economic Advisory Board.
  • Soros friend Joseph E. Stiglitz, a former senior vice president and chief economist for the World Bank and Nobel Prize winner in Economics.
  • Former U.K. Prime Minister Gordon Brown.
In a 2009 op-ed, Soros lays out his plans for a new world order. This new world order would balance out the flow of power away from America and to one entity that would represent the interests of the world. He goes on to speak of a common source of all currencies, which would permit the international creation of money that could be directed to where it is most needed – in effect, creating a one world currency or a “super-currency” 5 6.

IS THEIR A SILVER LINING FOR AMERICA?

In 2008, we heard for the first time the term “too big to fail”. We came to learn that this term is applied to those organizations believed to be too large, too important, and their role in the national and global community is too crucial for them to be allowed not to succeed. Although, their financial woes may be due to misconduct, incompetent management, or fiscal irresponsibility they would not be allowed to truly reap the consequences of their missteps. In short, they would not be allowed to fail. Likewise, America is “too big to fail”. The global community will not allow her to fall completely – although, some rigged patch work will be required. America will emerge, but she will not be who she once was, strong and mighty. She will become a shadow of herself. She will become something different, something a little more acceptable for the world to bear – a little less dominant. On several levels, America has truly become a “sleeping giant,” as spending and national policies move impulsively and with reckless abandonment, seemingly unaware of the impending costs. If true “Change” is going to come, then Americans must broaden its scope and vocabulary to include such topics as China’s growing dominance, China’s huge ownership of American assets, quantitative easing, G-20, and growing pressures for China to dump the dollar or abandon its exchange-rate peg to the dollar. Undeniably, America is the greatest nation on earth. Arguably, it is the greatest nation throughout all of history. What have made America so great, are not so much her people, as it is the values she was established upon. These values have been passed down from one generation to the next generation, and are threatening to culminate with today’s generation. Yet, in spite of her rich legacy and “stronger than gold currency”, the decline of both is ominous. Perhaps there is something Americans can still do to slow down the inevitable. Fortunately, it will call for Americans to exhume two traits they embody, but are buried deep within: discipline and critical thinking skills. After that, minds will become unshackled from decades of systematic restraints placed upon it. Political discussions will move beyond party affiliations, the color of one’s skin, and religious backgrounds. Americans will hold leaders accountable for decisions made and will no longer be swayed by crafty spin doctors and liberal “talking-heads”.
  1. http://www.chicagotribune.com/business/breaking/chibrkbus-moodys-warns-of-us-debt-downgrade-20110603,0,2694733.story
  2. http://www.chinadaily.com.cn/business/2009-03/23/content_7607627.htm
  3. http://www.chinadaily.com.cn/business/2009-03/14/content_7579030.htm
  4. http://www.foxnews.com/opinion/2011/03/23/media-ignoring-plans-george-soros-remake-entire-global-economy/#ixzz1NEsfegDg
  5. http://search.japantimes.co.jp/cgi-bin/eo20091108a1.html
  6. http://www.chinadaily.com.cn/business/2009-03/23/content_7607627.htm


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Kathy Barnette -- Bio and Archives

Kathy Barnette is a conservative black young mother and wife, with intelligent perspectives and views that are oftentimes controversial in light of mainstream media.  She communicates as an apologetics speaker and writer.  She is an adjunct Professor and her corporate career includes working with two major Wall Street firms.  She served her country for 10 years in the Armed Forces Reserves, where she was accepted into Officer Candidacy School.  Kathy currently sits on the board of a crisis pregnancy center.  Kathy is also the founder of Truth Exchange Ministries.  The purpose behind the roundtable dialogues is to engage minds to think critically about the world around them from a Biblical perspective. TruthExchange


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