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We frequently
hear the financial press refer to the U.S. dollar
as the “world’s reserve
currency,” implying
that our dollar will always retain
its value in an ever shifting world economy. But this is a
dangerous and mistaken assumption.
Since August 15, 1971, when President Nixon closed the gold window and refused to pay out any of our remaining
280 million ounces of gold, the U.S. dollar has operated as a pure fiat currency.
This means the dollar became
an article of faith in the continued
stability and might of
the U.S. government.
In
essence, we declared our insolvency in 1971. Everyone recognized some other monetary system had to be devised
in order to bring stability to the markets.
Amazingly, a new system was
devised which allowed the U.S. to operate the
printing presses for the world reserve currency with no restraints placed on it-- not even a pretense of gold convertibility!
Realizing the world was embarking on something new and mind-boggling, elite money
managers, with especially
strong support from U.S. authorities, struck an agreement with OPEC
in the 1970s to price oil
in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence backed
the dollar with oil.
In
return, the U.S. promised to protect
the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped
ignite radical Islamic movements among those who resented
our influence in the region.
The arrangement also gave the dollar artificial strength, with tremendous financial benefits for the
United States. It allowed us to export our monetary inflation by buying oil and other goods at
a great discount as the dollar flourished.
In 2003, however,
Iran began pricing its oil exports in Euro for Asian and European buyers. The Iranian government also opened an oil bourse in 2008 on
the island of Kish in the Persian
Gulf for the express purpose of trading
oil in Euro and other currencies. In 2009 Iran completely ceased any oil transactions in U.S.
dollars. These actions by the second largest OPEC oil producer pose a direct threat
to the continued status
of our dollar as the world’s
reserve currency, a threat which partially explains our ongoing hostility
toward Tehran.
While the erosion
of our petrodollar
agreement with OPEC certainly
threatens the dollar’s
status in the Middle East, an even
larger threat resides in the Far East. Our greatest
benefactors for the last twenty
years-- Asian central banks-- have lost their appetite for holding U.S.
dollars. China, Japan, and Asia
in general have been happy to hold
U.S. debt instruments in recent
decades, but they will not prop up our spending habits forever. Foreign central banks understand that American leaders do not have the discipline to maintain a stable currency.
If
we act now to replace the fiat system with
a stable dollar backed by precious
metals or commodities,
the dollar can regain its
status as the safest
store of value among all government
currencies. If not, the rest
of the world will abandon the dollar as the global reserve currency.
Both Congress
and American consumers will
then find borrowing a dramatically more expensive proposition. Remember,
our entire consumption economy is based on the willingness of foreigners to hold U.S. debt. We face a reordering
of the entire world economy
if the federal government
cannot print, borrow, and spend money at a rate that
satisfies its endless appetite for deficit spending.
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