The end of the almighty dollar
By Lance Crossley
I have said this before, but future generations will write about our time as a turning point in history. One major event that is attracting too little attention is the decline of the American dollar. To understand the importance of this we must first understand the dollar’s privileged status as the world reserve currency.
Gold used to be the anchor that gave paper money value; paper currency was freely convertible into a fixed quantity of gold. But since President Richard Nixon abandoned the gold standard in the early 1970s, the international money system is entirely based on fiat currency.
To fill the void gold left behind, the American dollar – due to its economic and military might – stepped into the role of world reserve currency. That meant other countries would stock up American dollars as “proof of value” for their own currencies. It also meant international transactions for commodities such as oil were all settled in American dollars.
This is starting to change, and quite rapidly.
The Independent, a British newspaper, reported on October 6 that Gulf Arabs were secretly meeting with China, Russia, Japan, and France to end dollar dealings for oil and replace it with a “basket of currencies” which would include the euro, gold, and the Chinese yuan. To give you an idea of the significance of this, one of the reasons America invaded Iraq so swiftly was because Iraq started to sell oil in euros instead of dollars – something America saw as a clear threat to the dollar’s status.
But this time, we aren’t talking about a rogue country. The ones staging a mutiny against the dollar are some of the most powerful countries in the world. (These countries have since denied the secret meeting, but at least one other reporter has confirmed with senior sources that this meeting did in fact happen. It is also worth noting that these countries have openly, and on the record, questioned the dollar’s reserve status numerous times over the last several months).
Another bad omen for the dollar is that it is now becoming the currency choice for the carry trade. The currency carry trade is a strategy of very wealth investors who borrow one currency and cash it in at a profit in another currency.
When the Asian crisis hit in the 90s, Japan set interest rates at zero percent. Carry traders borrowed Japanese Yen for free, converted it to dollars, and then bought U.S. government bonds that had interest rates of 4-5 percent. There’s your profit.
Now America is becoming the weak currency by which carry traders prey upon to cash in at a profit elsewhere.
Meanwhile, the U.S. will continue to recklessly print money in order to keep its economy on life support. The more money it prints, the more it devalues its currency. When the currency is devalued enough, countries like China will stop buying American debt. That will result in more money printing and, very possibly, hyperinflation.