Tag Archives: Reserve Currency

Nixon Shock, the Reserve Currency Curse, and a Pending Dollar Crisis, by Mish Shedlock

When Nixon closed the gold window in 1971, he opened a Pandora’s box of economic evils. From Mish Shedlock at moneymaven.io:

Many problems today including deficit spending, trade deficits, and income inequality have their roots in 1971.

Nixon Shock

A reader asks “What Forced Nixon to Close the Gold Window in 1971?”

The answer is called “Nixon Shock“.

Nixon wanted to fight the war in Vietnam, not raise taxes, and not hike interest rates to finance it.

Arthur Burns, not Volcker was at the Fed.

American economist Barry Eichengreen summarized: “It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one”.

Vietnam War and the Dollar Exodus Beginning

The dollar exodus had its beginnings way back in February 1965 when President Charles de Gaulle announced his intention to exchange its U.S. dollar reserves for gold at the official exchange rate of $35 per ounce.

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De-Dollarization: Europe Joins the Party, by Ronald-Peter Stöferle

De-dollarization will be a slow, incremental process, unless some sort of crisis hastens it along. From Ronald-Peter Stöferle at mises.org:

The ongoing “World War of Currencies”, as the German journalist Daniel D. Eckert called it, the battle for the future of the world monetary system is not a shallow action film but more like Game of Thrones – a complex series with hundreds of actors and locations, stretching over decades and demanding full concentration from the viewer.

The bottom line is that what has been true for decades still applies. The US dollar continues to enjoy the confidence of markets, governments, and central banks. But faith in the US dollar weakens a little every year. Europe, China, Russia and many small countries set new initiatives every year to make themselves independent. And gold, too, plays a major role in this slow departure from the US dollar. But for the world financial system, none of their currencies offer a viable, fully-fledged alternative to the US dollar yet, which is why any news of the death of the US dollar is definitely exaggerated.

Europe’s Small Uprising

Since the Greek crisis of 2012, the American media have often given the impression that the EU and the euro have already broken up or are about to break up. This is not the case. Twenty years after its creation in 1999, the euro area is larger than ever. Of course, nothing is perfect in the EU. The debt problems of the southern states have hardly improved. The structure of the euro zone itself is also often criticized and described as being in need of renovation.

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Goodbye Dollar, It Was Nice Knowing You! by Philip Giraldi

The rest of the world is chipping away at the US dollar’s status as the reserve currency. From Philip Giraldi at strategic-culture.org:

Over the past two years, the White House has initiated trade disputes, insulted allies and enemies alike, and withdrawn from or refused to ratify multinational treaties and agreements. It has also expanded the reach of its unilaterally imposed rules, forcing other nations to abide by its demands or face economic sanctions. While the stated Trump Administration intention has been to enter into new arrangements more favorable to the United States, the end result has been quite different, creating a broad consensus within the international community that Washington is unstable, not a reliable partner and cannot be trusted. This sentiment has, in turn, resulted in conversations among foreign governments regarding how to circumvent the American banking system, which is the primary offensive weapon apart from dropping bombs that Washington has to force compliance with its dictates.

Consequently, there has been considerable blowback from the Make America Great Again campaign, particularly as the flip side of the coin appears to be that the “greatness” will be obtained by making everyone else less great. The only country in the world that currently regards the United States favorably is Israel, which certainly has good reason to do so given the largesse that has come from the Trump Administration. Everyone else is keen to get out from under the American heel.

Well the worm has finally turned, maybe. Even the feckless Angela Merkel’s Germany now understands that national interests must prevail when the United States is demanding that it do the unspeakable. At the recently concluded G20 meeting in Tokyo Britain, France and Germany announced that the special trade mechanism that they have been working on this year is now up and running. It is called the Instrument in Support of Trade Exchanges (Instex) and it will permit companies in Europe to do business with countries like Iran, avoiding American sanctions by trading outside the SWIFT system, which is dollar denominated and de facto controlled by the US Treasury.

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Dollar Hegemony, Again, by Michael Doliner

Having the world’s reserve currency has allowed the US to amass a gargantuan debt. The debt won’t be paid with anything but hyperinflated dollars, and the dollar will lose its reserve currency status. From Michael Doliner at counterpunch.org:

The United States Entity lost the war in Iraq. That fact determines the Entity’s position in the Middle East today. After having destroyed Saddam’s army and dispossessing the Sunnis in favor of the Shi’ites, after Abu Ghraib and it’s indelible pictures, after the total destruction of Fallujah, in short after a victory achieved with the utmost brutality, contempt and humiliation of Iraq and Iraqis, the Entity was in charge. Then the “insurgents” appeared. They put improvised explosive devices along the roads so, with a phone call, they could destroy patrols of the Entity. They made car bombs so that every vehicle approaching a check-point might spell doom. They donned suicide vests to blow themselves and any nearby Entity soldiers up. Entity soldiers couldn’t go into the streets. Every move they made could be their last. The enemy was everywhere and nowhere. These people would rather die then be ruled by these idiotic mechanized barbarians. Everything seemed peaceful, but at any moment, out of nowhere, they could be blown to pieces. That kind of thing wears on you. Their patrols, pointless bouts of Russian roulette, ended up as parked “search and avoid” missions. Life went on without the clanking monsters. Entity bases were like Kaposi sarcoma in AIDS patients. The Entity’s attempts at reconstruction were comically inept – roads to nowhere and chicken processing plants for chickens no one wanted. In short the Entity’s occupation of Iraq after the victory, other than being a disaster of comical incompetence, was non-existent. Muqtada Al-Sadr, the Shi’ite cleric, had much more power than the Entity. Eventually Iraq rejected the Entity’s status of forces agreement (SOFA). In other words the Iraqi puppets the Entity had installed unceremoniously kicked the Entity out of the country.

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The Tyranny of the U.S. Dollar, by Peter Coy

The world sends us goods, we send the world pieces of paper (or computer entries). Sounds like a good deal for the US. It is, but it may be coming to a close. From Peter Coy at bloomberg.com:

The incumbent international currency has been American for decades. Is it time for regime change?

There’s a paradox at the heart of global finance. The U.S. share of the world economy has drifted lower for decades, and now President Trump is retreating from the American chief executive’s traditional role as Leader of the Free World. Yet the U.S. dollar remains, as the saying goes, almighty. “American exceptionalism has never been this stark,” Ruchir Sharma, head of emerging markets and chief global strategist for Morgan Stanley Investment Management, said at a Council on Foreign Relations symposium on Sept. 24.

By the latest tally of the European Central Bank, America’s currency makes up two-thirds of international debt and a like share of global reserve holdings. Oil and gold are priced in dollars, not euros or yen. When Somali pirates hold up ships at sea, it’s dollars they demand. And threats to be cut off from the dollar-based global payments system strike terror into the likes of Iran, North Korea, and Russia. It’s no exaggeration to say that the dollar’s primacy is at least as valuable to the U.S. as a couple of aircraft carrier strike groups.

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Turkey Now, America Later? by Ron Paul

Ron Paul sees some disturbing parallels between the US’s and Turkey’s economic policies. From Paul at ronpaulinstitute.org:

President Trump recently imposed sanctions on Turkey to protest the Turkish government’s detention of an American pastor. Turkey has responded by increasing tariffs on US exports. The trade war is being blamed for the collapse of Turkey’s currency, the lira. While the sanctions may have played a role, Turkey’s currency crisis is rooted in the Turkish government’s fiscal and (especially) monetary policies.

In the past seven years, Turkey’s central bank has tripled the money supply and pushed interest rates down to 4.5 percent. While Turkey’s government did not adopt Ben Bernanke’s proposal to drop money from helicopters, Turkish politicians have taken advantage of easy money policies to increase subsidies for key voting blocs and special interests.

The results of the Turkish government’s inflation-fueled spending binge are not surprising to anyone familiar with Austrian economics or economic history. Turkey is now plagued with huge deficits, a collapsing currency, and a looming economic crisis, making it the next candidate for a European Union or Federal Reserve bailout.

Turkey’s combination of low interest rates, money creation, and massive government spending to “stimulate” the economy parallels the policies the US government has pursued for the past ten years. Without drastic changes in fiscal and monetary policies, economic trouble in America is around the corner.

The very large and growing federal debt will cause a major crisis as the government’s debt burden will be unsustainable. Instead of cutting spending or raising taxes, politicians can be expected to pressure the Federal Reserve to do their dirty work for them via inflation. We may even see the Fed “experiment” with negative interest rates, which would punish Americans for saving. The monetization of the federal debt will erode the dollar’s purchasing power and decimate middle-and-working-class Americans who are already seeing any gains in their incomes eaten away by inflation.

If we are lucky, the next Fed-caused downturn will cause only a resurgence of 1970s-style stagflation. The more likely scenario is the type of widespread economic chaos not seen in America since the Great Depression. The growth of cultural Marxism, the widespread entitlement mentality, and the willingness of partisans of various sides to use force against their political opponents suggests that this economic crisis will result in civil unrest that will be used to justify new crackdowns on individual liberty.

To continue reading: Turkey Now, America Later?

Behind Korea, Iran and Russia Tensions: The Lurking Financial War, by Alastair Crooke

Several countries who do not consider themselves friends of the US are moving away from US economic and financial dominance. That’s fueling tensions. From Alastair Crooke at strategic-culture.org:

What have the tensions between the US and North Korea, Iran and Russia in common? Answer: It is that they are components to a wider financial war. Russia and Iran (together with China) happen to be the three key players shaping a huge (almost half the global population) alternative currency zone. The North Korean issue is important as it potentially may precipitate the US – depending on events – towards a more aggressive policy toward China (whether out of anger at Chinese hesitations over Korea, or as part and parcel of the US Administration’s desire to clip China’s trading wings).

The US has embarked on a project to restore America’s economic primacy through suppressing its main trade competitors (through quasi-protectionism), and in the military context to ensure America’s continued political dominance. The US ‘America First’National Security Strategy made it plain: China and Russia are America’s ‘revisionist’ adversaries, and the US must and intends to win in this competition. The sub-text is that potential main rivals must be reminded of their ‘place’ in the global order. This part is clear and quite explicit, but what is left unsaid is that America is staking all on the dollar’s global, reserve currency status being maintained, for without it, President Trump’s aims are unlikely to be delivered. The dollar status is crucial – precisely because of what has occurred in the wake of the Great Financial crisis – the explosion of further debt.

But here is a paradox: how is it that a Presidential Candidate who promised less military belligerence, less foreign intervention, and no western cultural-identity imposition, has, in the space of one year, become, as President, a hawk in respect to Korea and Iran.  What changed in his thinking?  The course being pursued by both states was well-known, and has offered no sudden surprise (though North Korea’s progress may have proved quantitatively more rapid than, perhaps, US Intelligence was expecting: i.e. instead of 2020 – 2021, North Korea may have achieved its weapons objective in 2018 – some two years or so earlier that estimated)?  But essentially Korea’s desire to be accepted as a nuclear weapon state is nothing new.

To continue reading: Behind Korea, Iran and Russia Tensions: The Lurking Financial War