" Some History Of Dollar "

The gold standard caused major problems in the 1960’s when France (under the  London Gold Pool called America’s bluff and demanded gold for payment of debt, rather than US dollars (they understood that we were printing more money, to finance the Vietnam conflict and fund new social programs, than we had available in gold reserves).

 

Due to the rapid loss of US gold reserves, President Nixon had no choice but to abolish the Bretton Woods accord in August of 1971 and he took the US dollar off the gold standard (it was $35 per ounce then; today it is > $900).

 

This noxon shock of August 1971 caused a swift devaluation of the US dollar (gold doubled in price by 1972) and numerous efforts followed (by U.S. leadership) to develop a new system of international monetary management. They felt they must find another way, as currencies around the world were in turmoil and were now floating among one another

The year 1974 provided the much needed answer. In June of 1974, Secretary of State Henry Kissinger established the us -saudi arabian joint commission on econimic cooperation. One of the major components of this commission stated that OPEC would officially agree to sell its oil only for dollars—meaning any country purchasing oil from OPEC had to pay in U.S. dollars. This agreement enormously increased the demand for the floating dollar, as oil importing countries now had to earn or borrow dollars to pay for their oil.

OPEC oil countries were soon overflowing with petrodollars and most of them ended up recycled through accounts in London and New York banks.

Bottom Line: this 1974 act reestablished the dollar as the global monetary instrument and oil now replaced gold as basis for a strong dollar. Countries competed for dollars and they accumulated huge dollar reserves to sustain their own currencies.

 

Please allow me to shift gears a bit—we’ll get back to the dollar in a moment:

 

Post WWII, the US was the world’s manufacturing powerhouse, as our continent was unscathed by the ravages of war and the military industrial machine was running at maximum efficiency.

 

That however has changed over time, as thousands of corporations succumbed to the pressures of improving their bottom lines. Entire sectors were outsourced: U.S. Manufacturing, Steel, Technical services, Administrative call centers, Research & Technology and numerous others are now gone. Heck, you can’t even find a pair of levis (the American Trademark) made in the good ole USA anymore.
 

Why did this happen? It’s all related to profits… A U.S. company can pay a worker overseas $1-2 bucks an hour to do the same job requiring $15-30 hour in the US... Either they outsource or they end up like the rest of our troubled U.S. home bound corporations (below).

 

Many of the home-bound US companies still trying to compete in the Global marketplace are reeling from high labor costs, pension plans, union benefits, health care costs and the like.  delphi general motors and ford are prime examples of the growing trend of companies feeling the pressures. I expect to see more US corporate and worker problems in the future…

 

Outsourcing however did have its benefits. For many years we Americans were able to export inflation through the import of cheap manufactured goods and recycled dollars. Foreign manufacturing allowed Americans to purchase many things that otherwise they could have never afforded had they been made in the USA (e.g. $20 Jeans, $29 DVD players, $50 Microwave ovens, $60 cell phones, $100 TV’s; $200 computers, the list goes on and on). Our standard of living rose, but we eventually became a service-based economy dependant upon 1) selling each other foreign made goods and 2) foreigners recycling their excess dollars back to the US.

 

This foreign recycling of dollars provided Americans with low interest rates, plenty of available credit and it allowed us to live far beyond our means through cheap debt.

 

On the negative side, foreign governments built up huge dollar denominated holdings that they could use to secure long-term energy agreements, purchase Global assets/corporations, etc and these massive holdings realistically (it will never be admitted) tied our hands geo-politically, as foreign governments could now threaten to dump dollars into the world market as retribution for disliked policy.

 

Back to the dollar:

Once removed from the gold standard in 1971, the US dollar became a fiat currency  (tied to nothing tangible and it was backed only by the word of the US government). The Fed Reserve Banking System could now  print miney  at will -- and they did. Take a look at the chart below and the growth in M3 money supply since 1971. This chart ends in 2006, but (in case your wondering) today’s figure is ~ $12.5 Trillion.


 

As the world’s reserve currency, the US has been able to, year after year, import goods from the rest of the world (for consumption) and pay for it with dollars that were created from nothing. These dollars are then used by foreign central banks to purchase US assets (corporations, land, properties, etc) or debt instruments from the Fed, or they amass these excess dollars to keep inflation tame within their borders, as many have their own currencies pegged to the exchange rate of the US Dollar.

 

It is currently estimated that foreign governments (OPEC Nations, China, Japan, India, Great Britain, Korea, Russia, etc) have amassed > $4 Trillion of US dollar holdings. China alone is sitting on > $1 Trillion (Pretty scary stuff).

 

Over the last several years, foreign Central banks have started to become leery with the huge debt levels, massive trade deficits and unsustainable fiscal policy of the US and they are quietly working to  diversify their dollar holdings.

 

Additionally, for decades now, many foreign countries have pegged their currencies to the US Dollar, but recent inflation increases, internal to their domestic economies, has become far too severe for them to handle (with the dollar peg, they have to print money as fast as we do, and it is stoking domestic inflation, therefore several countries have started a new trend of depegging. Re cently , vietnam, qatar4 and kuwait have all depegged while a host of others (Russia, and other OPEC Nations) are questioning whether or not they should do the same… When this currency de-peg happens on a larger scale (not if, but when) inflation within our borders will SCREAM. Why? Well, as they de-link from the dollar, their currencies become stronger causing our import costs to increase commensurately (e.g. Oil, consumer goods, etc)

 

Lastly, governments such as IRAN  no linger want to accept dollars  for oil  This was also the case with IRAQ back in Saddam Hussein’s day, but we all know what happened there. Anyway, the point is: There is wide-scale pressure afloat to price oil in currencies other than the depreciating US Dollar. If that happens on a larger scale, the artificial foundation for the World’s Reserve currency will be removed and all hell could break loose.

Bernanke: Rather than try to shore up foreign confidence in the dollar, Helicopter Ben Bernanke has made matters worse by officially sacrificing the dollar to save our faltering, sub-prime like, US banking/financial systems… By lowering rates at a time when the dollar is already at its weakest point in history, there is no other explanation to his actions.

 

Bottom line: Demand for the World’s Reserve Currency (dollar) has been kept artificially high for many years through oil pricing agreements and US inflation was held in check by importing cheaper goods. These were both net benefits for the US in times past, but are quickly moving towards being detriments.


 

Closing:

 

The US was once an economic powerhouse who earned the right to own/maintain the World’s Reserve currency, but we’ve squandered this luxury through massive debt loads, poor foreign policy decisions, excessive monetary printing, outsourcing our industrial base, making too many future promises and by living way beyond our means.

Foreign Governments are now growing tired of subsidizing our opulent lifestyles, and the recent fact that we put the world financial system in peril by offloading our toxic securitized garbage was (I believe) one of the final straws to break the dollar’s back. In another 5-10 years, dollar hegemony  will probably be a thing of the past. Our central foundation of US Economic Strength (dollar) is faltering and there is little we can do about it.

With that said, I think the Fed and our government officials are already aware of this and without any viable solutions to our current financial problems (baring raising interest rates and initiating a massive depression) they have made the best choice they can (cut rates and inflate).

 

I believe it has now become a matter of (unwritten) policy to try to hyper-inflate our financial system out of its current and future insolvency crisis.

In their attempt to inflate, the world will experience significant dollar devaluations which will (over time) allow the United States to 1) eliminate much of its foreign debt and 2) pay for future (currently un-funded) obligations through devalued payouts.

As our standard of living drops more in-line with the rest of the world due to loss of purchasing power and a massive economic slowdown, it will (over time) become much cheaper to employ American workers again and this will slowly bring jobs back into our borders. Eventually, 20-30 years from now, our country will become competitive in the world again and we will do more than just sell each other cheaply made foreign goods--we will actually manufacture them again. BUT, we will (most likely) no longer own the World's Reserve Currency nor will we be the World's main economic power.

 

Ultimately, I believe massive currency devaluation and a much lower US standard of living is our country's only way out of this financial predicament...

The only wildcard I can think of is Oil. How in the world do we survive without cheap oil?

Guess we'll need to work out some new strategic plans and geopolitical strategies -- and I'll bet they lead to

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