The US dollar is the world’s reserve currency, meaning that most meaningful financial transactions are conducted in US dollars. If French or German companies want to purchase oil from Saudi Arabia, they can’t do so using Euros. They have to take those Euros and convert them to US dollars in order to pay the Saudis for their oil. This system worked really well for decades because the US dollar was a solid currency backed by a government whose monetary policies ensured the dollar’s strong economic performance on the world stage.
But over the past three years with the onset of the Recession that economic performance hasn’t been so strong, as the monetary policies of the US government are leading the currency into serious decline. The massive deficits that both the Bush and the Obama administrations have racked up have caused the world’s lenders, China tantamount among them, to reconsider the dollar’s soundness.
What the US government is doing to the dollar is very similar to what was done to the real estate market over the past two decades. People would purchase houses with mortgages that were often in excess of 100% of the property’s value. As such, when the financial crisis and subsequent Recession caused more and more individuals to default on their mortgages, the value of real estate declined precipitously, leaving ever more people with mortgages substantially larger than the value of the real estate.
This is not to say that George Bush or Barack Obama is solely responsible for the dollar’s decline. That’s due to decades of politicians at all levels of government who engaged in financial pandering in order to buy votes. Believing that governments are too big to fail, local, state and federal politicians enacted legislative sleight of hand that resulted in uncontrolled spending, much of it in unfunded liabilities, like unionized government employees’ pensions, Medicare, Medicaid and Social Security, to name a few. While many elected officials didn’t worry about how to pay for these unfunded liabilities, as they would be someone else’s problem in the future, the decline in tax revenue that came about as a result of the Recession caused a squeeze in available cash.
Counter intuitively, both the Bush and the Obama administrations believed the problem would go away with massive infusions of government cash that would “stimulate” the economy and bring about prosperity. It’s one of those basic financial pitfalls that the average American family encounters all the time: when the credit cards are maxed out and repayment isn’t possible, STOP SPENDING!
But that’s not a lesson easily learned in Washington, where most politicians, particularly those of the Democrat persuasion, believe the answer to every problem is to spend your way out of it. And if it doesn’t work the first time, then double down and do it again because it’s bound to work a second time, or a third, or a fourth.
What all this government spending has done is that it maxed out Uncle Sam’s credit cards. And when no increase in the credit line was granted by the card issuers (i.e. countries like China) the US government decided to print more dollars so it could pay for its largesse. Hence the recent decline in the dollar’s value, which has resulted in a plethora of additional problems, not the least of which is a steady climbing in the price of oil, given that the US dollar is the only currency with which oil can be purchased. Of course an increase in the price of oil means that everything else is also going to increase in cost, as rising world food prices are showing us.
But the worst is yet to come.
As the combined government debt of the United States approaches the point of non-repayment, the remainder of the world’s economies, particularly the developing ones, are going to be looking for ways to secure their financial health.
Currently, depending on who is doing the math, US Government debt and unfunded liabilities total somewhere in the neighborhood of $80 trillion, which translates to about $260,000 for every man, woman and child currently living in America. If you add in state and local debts and unfunded liabilities that amount could easily triple to over $240 trillion, or more than $780,000 per US resident.
There’s no way that this debt will ever be repaid, either by this generation, the next or any subsequent generations of Americans. There simply isn’t enough available cash in a $15 trillion economy to pay that kind of debt. So at some point the US will be in default.
This is something America’s lenders know as well, and are taking steps to protect themselves against further losses. Many of the world’s larger emerging economies are now talking about creating a new world reserve currency to displace the US dollar. Recently there were reports of Russia, China, India and Brazil having this discussion and a number of ideas have been floated, including introduction of a brand new currency called the “Bancor”, a name first postulated by economist John Maynard Keynes.
If and when this occurs, the bottom will fall out of the US dollar and will create an economic crisis that makes the Crash of 1929 look like a hiccup. There is little doubt that this will take place as a document called “Reserve Accumulation and International Monetary Stability,” written by the strategy and policy department of the
International Monetary Fund (IMF), was released in April of last year
The IMF document is a real eye-opener in that it correctly points out that too much of the world’s reserve accumulation was in US dollars, which tripled in just 10 years. The paper further cited “the absence of good substitutes to the U.S. dollar as a reserve asset,” which leaves the world at the mercy of American monetary policy. The paper noted that over 86% of global foreign exchange transactions were in US dollars, while the US GDP accounted for only 24% of the global economy.
In short, the IMF is concerned about what will happen to the global economy once the dollar tanks. And tank it will, as the Federal Reserve recently committed to a second round of “Quantitative Easing” (QE2), which is shorthand for the Fed printing even more money.
Are you ready for $10/gal. gas? What about a $7.00 loaf of bread or a $15.00 gallon of milk? Watch for it; it’s coming to a retail outlet near you, as the dollar starts a death spiral created my selfish, mindless politicians who care more about staying in power than about those they supposedly represent.
