Monday, October 5, 2009

The Beginning Of The End For The U.S. Dollar

The Independent, a British newspaper, is reporting that discussions are being held among Gulf Arab Countries, China, Russia, India, Brazil, Japan and France to end the use of U.S dollars in global oil trade. The 1944 Bretton Woods Treaty established the U.S. dollar as the world's reserve currency.  A primary reason the Treaty was accepted was that, at the time, the U.S. dollar was backed by the Country's gold reserves. When BW became operational in 1945, all global trade  - most important, all oil trading - was transacted using U.S. dollars.  Now, there is a global movement to replace the U.S. dollar as the currency used to settle oil trading: 
Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars. The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.  (Article Link)
This development should not come as a surprise to anyone paying attention to public statements being issued by China and other economically powerful countries.  Ever since Nixon dislocated the dollar from its gold-backing in 1971, the U.S. Government and the Federal Reserve have embarked on 38 years of extraordinarily reckless - ultimately catastrophic - fiscal and monetary policies.  Policies which allowed the middle class to feign prosperity, while the business and political elite have engaged in years of escalating fraud and corruption, culminating in the consolidation of wealth and power into the hands of very few people and have completely sabatoged our Constitution and system of democracy.  Policies which furthermore have inflicted a continual and insidious devaluation of the U.S. dollar currency reverves being held by every other country in the world, especially the massive dollar reserves held by China and Japan.

It was the recycling of these petro/export-based dollars back into the U.S. via Treasury bond purchases by the OPEC countries, Japan and China that allowed the U.S. to run its now trillion-dollar spending deficits and 12 trillion dollar Treasury debt outstanding.  It should have been clear to everyone long before we reached this tipping point that this behavior by the U.S. was unsustainable.  And now it looks like the rest of the world is going to force the issue by pulling the rug out from under the U.S. dollar, thereby ultimately ending the U.S. system as we've known it since the end of World War Two.

This could well be the event which precipitates the escalation of "quantitative easing," aka monetary printing press policy, by the Fed.  In the 2nd quarter of 2009,  Bernanke's Federal Reserve purchased 50% of all the Treasury bonds issued by the Government.  If our trading partners no longer need to recycle their dollar reverves back into our financial system, we could well see the monetary hyperinflation that a small but growing number of financial commentators have warned is inevitable, as the Fed would be forced to print even more money in order to finance U.S. spending deficits.

The bottom line is that, while Americans are being well-fed by Bernanke and Obama with the illusion that the recession is over and economic prosperity is right around the corner, the rest of the world is preparing funeral arrangements for the U.S. financial system.   Anyone who wants to preserve some modicum of their remaining wealth would be advised to shift as much money as possible into gold, silver and mining stocks.  Do not be the last one out of the dollar.


  1. I just read an unbelievable commentary on a well-known financial website stating that it doesn't matter in what currency oil is priced. The author compared it to the fact that you can measure the temperature in either farenheit or celsius or kelvin, but the temperature is the same. I was going to leave a comment, but I didn't even know where to start!

  2. LOL. It's amazing how rediculous some of the commentary out there is. Kitco had a piece about gold as measured in dollars today that was beyond retarded.

    Ask the author if it matters whether or not you price oil in dollars or gold...

  3. All,
    That was a Mish Shedlock piece. I was a bit confused too. I think we need a clear picture as to why "reserve currency" status is such a BFD. I saw many argue today that reserve status is not that huge, but obvioulsy that cannot be correct.

  4. gyc, I'm not sure how ANYONE can possibly come up with any rational arguement as to why reserve currency status is irrelevant. That's retarded. Just think about the degree of economic hegemony imbued in having control over THE currency which is used to settle all global trading activity. It's the economic equivalent of having the world by the balls, especially when such currency is pure fiat.

    To be quite frank, I have thought for years that Mish should stick to photographing cow pies, cheese factories and the Schlitz brewery operations in Milwaukee because I have never really seen evidence of his having a good grasp of economics buried anywhere in his dressed up prose.

  5. One more thought and then I'm off to spend the irrelevant pieces of paper decreed to have some sort of value in exchange for groceries, and it's irrelevant that manufacturer of said piece of paper can manufacture an infinite supply of that paper, constrained only by the supply of trees on earth. I guess that makes reserve status irrelevant.

    Crackhead Ben Bernanke will ultimately print dollars to the point were the value of each marginal dollar is equal to the cost of printing that dollar. In the case of our "new" technology-driven economy, and given that Bernanke has already issued a famous speech in which he proudly proclaimed that the modern electronic printing press "allows [the U.S.] to produce as many U.S. dollars as it wishes at essentially no cost,"(1) then theoretically the supply of dollars can be close to infinite, conversely inflation can theoretically approach infinity.

    I guess Mish would say it's all irrelevant.

    (1) Ben Bernank, Remarks to the National Economists Club, 11/21/2002

  6. Dave, love your blog. First time posting.

    Mish's argument was that even if dollars are needed for the purchase of say, oil, then you could convert your Euros into dollars (rather instantaneously in the forex market) for the transaction without actually "holding" dollars.

    If you don't have to "hold" dollars to make global transactions then it diminishes the dollars importance as a reserve currency.

    Does this notion have any merit? I'm not a forex trader.


  7. No, because you need the dollars to change the euros into. It makes no difference from the US' point of view whether you hold them or not. People still need them.