Tag Archives: Reserve Currency

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

The World Is Creeping Toward De-Dollarization, by Ronald-Peter Stöferle

The US is slowly losing a huge economic advantage: having the world’s reserve currency. From Ronald-Peter Stöferle at mises.org:

The issue of when a global reserve currency begins or ends is not an exact science. There are no press releases announcing it, and neither are there big international conferences that end with the signing of treaties and a photo shoot. Nevertheless we can say with confidence that the reign of every world reserve currency has to come to and end at some point in time. During a changeover from one global currency to another, gold (and to a lesser extent silver) has always played a decisive role. Central banks and governments have long been aware that the dollar has a sell-by date as a reserve currency. But it has taken until now for the subject to be discussed openly. The fact that the issue has been on the radar of a powerful bank like JP Morgan for at least five years, should give one pause. Questions regarding the global reserve currency are not exactly discussed on CNBC every day. Most mainstream economists avoid the topic like the plague. The issue is too politically charged. However, that doesn’t make it any less important for investors to look for answers. On the contrary. The following questions need to be asked: What indications are there that the world is turning its back on the US dollar? And what are the clues that gold’s role could be strengthened in a new system?

The mechanism underlying today’s “dollar standard” is widely known and the term “petrodollar” describes it well. This system is based on an informal agreement the US and Saudi Arabia arrived at in the mid-1970s. The result of this deal: Oil, and consequently all other important commodities, is traded in US dollars — and only in US dollars. Oil producers then “recycle” these “petrodollars” into US treasuries. This circular flow of dollars has enabled the US to pile up a towering mountain of debt of nearly $20 trillion — without having to worry about its own financial stability. At least, until now.

For a long time the basis on which this global currency system rests was poorly documented. Finally, Bloombergpublished a comprehensive article in May 2016, which provided detailed confirmation of the agreement that was hitherto only known as a rumor. The fact that this article is published now also represents a subtle clue that there are simmering shifts in the global currency system.

To continue reading: The World Is Creeping Toward De-Dollarization

When the Money Supply Dries Up, by Jeff Thomas

Empires come and empires go, and the relatively short-lived US empire is on the way out. From Jeff Thomas at internationalman.com:

In 1944, the US had been the primary supplier for arms for the allies during World War II and, as such, exited the war with more wealth than any of the other nations that had entered the war earlier, draining their treasuries of money. Since payment was largely demanded in gold, the US held three-quarters of the world’s gold and therefore was in a position to call the shots with regard to the free world’s economic future.

At Bretton Woods, the US took advantage of this situation, setting up the World Bank and the IMF and declaring the dollar to be the default currency for all countries concerned. From that point on, the US was in the catbird seat, able to dictate economic terms to other countries and even to behave irresponsibly, eventually creating previously unheard-of levels of debt, thereby inspiring other nations to do their best to create their own debt in order to keep pace as best they could.

Eventually, of course, such irresponsible economics will cause any country, no matter how powerful, to collapse economically, no matter how many Keynesian economists such as Thomas Piketty, Paul Krugman, and Larry Summers declare otherwise.

Beginning in 1944, the US became the world’s foremost empire, for the strongest of reasons—it held the world’s wealth. This advantage led to a period of great power and, in the latter years, as the empire began to stumble economically under its own great weight, led to the creation of organisations and legislation designed to bring in new revenue, as the old forms of revenue declined.

In recent years, we’ve seen the rise of the extraordinary assumption that “money laundering” (the practice of protecting one’s wealth from rapacious governments), should be regarded as a crime. As such, “tax havens”—those jurisdictions that provide freedom from governmental usurpation—have also been vilified as being somehow criminal because they recognize the basic right of freedom to prosper.

To continue reading: When the Money Supply Dries Up

The Threat to the Dollar as the World’s Primary Reserve Currency, by Patrick Barron

If you only read one article about economics this month, make this that article. Not only is the analysis correct, but so to is the prescription at the end. From Patrick Barron, at Mises Canada, mises.ca:

The Threat to the Dollar as the World’s Premier Reserve Currency

…but does it really matter?

By Patrick Barron

My answer is that, “Yes”, it really matters. And that is why we need to take action today to protect all of our interests. The source of the threat may surprise you.

We refer to the dollar as a “reserve currency” when referring to its use by other countries when settling their international trade accounts. For example, if Canada buys goods from China, China may prefer to be paid in US dollars rather than Canadian dollars. The US dollar is the more “marketable” money internationally, meaning that most countries will accept it in payment, so China can use its dollars to buy goods from other countries, not solely the US. Such might not be the case with the Canadian dollar, and China would have to hold its Canadian dollars until it found something to buy from Canada. Multiply this scenario by all the countries of the world who print their own money and one can see that without a currency accepted widely in the world, international trade would slow down and become more expensive. Its effect would be similar to that of erecting trade barriers, such as the infamous Smoot-Hawley Tariff of 1930 that contributed to the Great Depression. There are many who draw a link between the collapse of international trade and war. The great French economist Frederic Bastiat said that “when goods do not cross borders, soldiers will.” No nation can achieve a decent standard of living with a completely autarkic economy, meaning completely self-sufficient in all things. If it cannot trade for the goods that it needs, it feels forced to invade its neighbors to steal them. Thus, a near universally accepted currency is as vital to world peace as it is to world prosperity.

However, the foundation from which the term “reserve currency” originated no longer exists. Originally the term “reserve” referred to the promise that the currency was backed by and could be redeemed for a commodity, usually gold, at a promised exchange ratio. The first truly global reserve currency was the British Pound Sterling. Because the Pound was “good as gold”, many countries found it more convenient to hold Pounds rather than gold itself during the age of the gold standard. The world’s great trading nations settled their trade in gold, but they might accept Pounds rather than gold, with the confidence that the Bank of England would hand over the gold at a fixed exchange rate upon presentment. Toward the end of World War II the US dollar was given this status by treaty following the Bretton Woods Agreement. The US accumulated the lion’s share of the world’s gold as the “arsenal of democracy” for the allies even before we entered the war. (The US still owns more gold than any other country by a wide margin, with 8,133.5 tonnes to number two Germany with 3,384.2 tonnes.) The International Monetary Fund (IMF) was formed with the express purpose of monitoring the Federal Reserve’s commitment to Bretton Woods by ensuring that the Fed did not inflate the dollar and stood ready to exchange dollars for gold at $35 per ounce. Thusly, countries had confidence that their dollars held for trading purposes were as “good as gold”, as had been the British Pound at one time.

However, the Fed did not maintain its commitment to the Bretton Woods Agreement and the IMF did not attempt to force it to hold enough gold to honor all its outstanding currency in gold at $35 per ounce. During the 1960’s the US funded the War in Vietnam and President Lyndon Johnson’s War on Poverty with printed money. The volume of outstanding dollars exceeded the US’s store of gold at $35 per ounce. The Fed was called to account in the late 1960s first by the Bank of France and then by others. Central banks around the world, who had been content to hold dollars instead of gold, grew concerned that the US had sufficient gold reserves to honor its redemption promise. During the 1960’s the run on the Fed, led by France, caused the US’s gold stock to shrink dramatically from over 20,000 tons in 1958 to just over 8,000 tons in 1970. At the accelerating rate that these redemptions were occurring, the US had no choice but to revalue the dollar at some higher exchange rate or abrogate its responsibilities to honor dollars for gold entirely. To its everlasting shame, the US chose the latter and “went off the gold standard” in September 1971. (I have calculated that in 1971 the US would have needed to devalue the dollar from $35 per ounce to $400 per ounce in order to have sufficient gold stock to redeem all its currency for gold.) Nevertheless, the dollar was still held by the great trading nations, because it still performed the useful function of settling international trading accounts. There was no other currency that could match the dollar, despite the fact that it was “delinked” from gold.

There are two characteristics of a currency that make it useful in international trade: one, it is issued by a large trading nation itself, and, two, the currency holds its value over time. These two factors create a demand for holding a currency in reserve. Although the dollar was being inflated by the Fed, thusly losing its value vis a vis other commodities over time, there was no real competition. The German Deutschemark held its value better, but the German economy and its trade was a fraction that of the US, meaning that holders of marks would find less to buy in Germany than holders of dollars would find in the US. So demand for the mark was lower than demand for the dollar. Of course, psychological factors entered the demand for dollars, too, since the US was the military protector of all the Western nations against the communist countries.

Today we are seeing the beginnings of a change. The Fed has been inflating the dollar massively, reducing its purchasing power and creating an opportunity for the world’s great trading nations to use other, better monies. This is important, because a loss of demand for holding the US dollar as a reserve currency would mean that trillions of dollars held overseas could flow back into the US, causing either inflation, recession, or both. For example, the US dollar global share of central bank holdings currently is sixty-two percent, mostly in the form of US Treasury debt. (Central banks hold interest bearing Treasury debt rather than the dollars themselves.) Foreign holdings of US debt currently total $6.154 trillion. Compare this to the US monetary base of $3.839 trillion.

http://mises.ca/posts/blog/the-threat-to-the-dollar-as-the-worlds-primary-reserve-currency/

To continue reading: The Threat to the Dollar