The U.S. dollar has been the world’s reserve currency since World War II.
In March, China (and then Russia) openly attacked the greenback, calling for the dollar to be replaced as the world’s reserve currency. This call by China is particularly disturbing since China holds more U.S. debt than any other country—about $1.3 trillion—and the further the dollar drops, the less the value of the U.S. debt owed to China. If the dollar were completely replaced as the world’s reserve currency, the dollar would be quickly and dramatically devalued and the purchasing power of China’s $1.3 trillion in T-bills would be diminished by hundreds of billions of “dollars”.
Thus, by calling for replacement of the dollar as world reserve currency, China shows that it is willing to sacrifice much of the value of its hoard of US T-bills for the sake of overthrowing the U.S. dollar. This is not the simple economics of greed. Such enormous self-sacrifice is normally evidence of serious, economic warfare.
Will anyone come to the dollar’s defense? At the last G-20 meeting, of it was announced that the watchdog duties for the global economies were being taken over by the G-20 nations. A week later, G-7 Finance Ministers suggested that G-20 also take over the currency watchdog duties. We can reasonably suppose that while western G-7 nations may have had common reason to protect the dollar, the more internationally diverse assembly of G-20 nations will be less committed to maintaining the dollar’s position as “world’s reserve currency”. Implication? No cavalry’s coming to save the dollar.
Peter Boockvar, equity strategist at Miller Tabak LLC, said “The U.S. dollar is headed for also-ran status, and it will continue to lose its value against many other currencies and assets [like gold]. . . .The rest of the world wants the U.S. dollar to lose influence, but no one wants it to be abrupt, as it’s in no one’s interest. An evolutionary process is what is wanted.”
Thus, given their druthers, the governments of the world would like the dollar to die (or nearly so) gradually by means of the “death of a thousand cuts”. (If that happens, the price of gold should continue to steadily rise with each small “cut”.)
However, while the world’s governments may prefer to see the dollar fail gradually, the world’s governments may influence but don’t actually control of the process. If, at any time, the people of the world generally and dramatically lose faith in the fiat dollar, the dollar could suffer a sudden, unexpected devaluation that could range from significant to total. Given that there is little to support the fiat dollar other than the world’s “confidence,” even a small but sudden shift in that confidence might trigger a “panic” that almost instantly collapses the dollar’s perceived value.
The possibility of a dollar “panic” may have been demonstrated when, on October 6th, the widely-respected English Journalist Robert Fisk published an article entitle “Demise of the Dollar”. In that article Mr. Fisk reported that in the [new] “new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading.” Once the US dollar is stripped of its formerly unique capacity to purchase crude oil, the dollar will die.
Mr. Fisk continued:
“In the most profound financial change in recent Middle East history, Gulf Arabs are planning—along with China, Russia, Japan and France—to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.
“Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.”
Mr. Fisk’s report has set off a storm of rumor and possible reactions. According to the 5 Minute Forecast:
“Just a few days after the story/rumor that a consortium of nations wanted to remove the dollar from the oil trade, Global central banks are ditching the dollar at a historic rate. Bloomberg says central banks increased foreign exchange holdings by $413 billion in the second quarter (the most since 2003). But of those new holdings, only 37% were US dollars. Over the last 10 years, the average dollar share of new reserves has been 63%.”
Whether the Fisk story of “secret meetings” actually caused central bankers to “ditch” the dollar is unknown. Maybe we’re just witnessing a coincidence. But how many “coincidences” do you suppose we can witness before panic ensues?
For example, here’s a couple more “coincidences”: 1) As I write this article, the dollar index is down to 75.57—the lowest level in a year; 2) the USD index has fallen 10.3% since April—its worst six-month stint since A.D. 1991; and 3) the USD index has fallen almost 40% since A.D. 2001.
And while the spot price of gold recently climbed to another all-time high of $1,068, gold prices denominated in other currencies have lagged. For example, gold denominated in the South African rand is down 23% from its March 2009 high. In Australia, the spot price of gold is 20% off its previous high. Even in Canadian currency, gold prices are 6% below their all-time highs. According to Mineweb, gold has reached record highs in the last week in only three currencies: the dollar, Indian rupee and the Saudi riyal.
Implication? The world-wide price of gold may or may not be rising dramatically, but the value of the US dollar is definitely going down. The only questions are How fast? and How far?
According to Robert Fisk,
“The plans [to abandon the dollar], confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.”
I don’t doubt that the reports of secret meetings among oil producers and plans to abandon the dollar are true. I don’t doubt that exposure of these formerly “secret” plans may have precipitated the “sudden rise in gold prices”.
However, I don’t believe for one minute that any countries are holding “secret meetings” today in anticipation of abandoning the dollar as the global reserve currency nine years from now. There is no reason for “secrecy” for something that’s not anticipated to take place for another nine years. Meetings to discuss what might happen in nine years aren’t held in secret; they’re held in saloons over a couple of beers. The oil producing nations are holding secret meetings now in anticipation of the dollar’s demise within the next three years—and probably much sooner.
Foreign governments must realize that they, by themselves, do not have sufficient power to sustain or destroy the dollar. That is, if the dollar is going down, sooner or later that fact will be apparent to the world and when the people reject the dollar, the dollar will be dead or mortally wounded. Once that rejection takes place, there’ll be nothing the governments of the world can do to stop or even slow the dollar’s demise.
In other words, foreign nations must realize that they don’t have enough power to sustain the dollar for another nine years. Those nations must realize that the dollar could die suddenly and at almost any moment: five years from now, a year from now or even tomorrow.
The foreign banks and governments reported by Mr. Fisk to be holding “secret meetings” are probably not conspiring to destroy the dollar—they are most likely meeting to prepare to survive and even profit from the dollar’s inevitable collapse.
Those nations must recognize that the US debt is too large to ever be repaid. That means either 1) the creditors must be destroyed so they can’t collect on the debt; 2) the US must declare bankruptcy to avoid paying the debt to the creditors; or 3) the US must inflate the currency so much that it can “technically” repay the debt with dollars whose purchasing power is only 10% or 20% as compared to the purchasing power of the dollar when the debt was entered into.
So far, the US has chosen to inflate the currency in order to repay the debt with enormously depreciated dollars. For example, the US dollar index has fallen by almost 40% since A.D. 2001. Result? If the US borrowed $1 million in A.D. 2001, it might repay “$1 million” today, but today’s $1 million would have only about $600,000 in purchasing power as compared to the purchasing power of the $1 million that was borrowed in A.D. 2001. By means of inflation, the US debtor would thereby “cheat” the creditors out of 40% of their return.
I’ve predicted for 15 months that the total American debt is so great that no more than 20% (perhaps as little as 10%) can ever actually be repaid. If I’m right, one way or another 80% to 90% of the existing debt must be repudiated by 1) killing the creditors; 2) national bankruptcy; 3) inflation; or 4) some combination of the first three.
I suspect that foreign governments generally agree with my analysis. They might conclude that I exaggerate the magnitude of the repudiation (80-90%), but they should still agree that some enormous repudiation (50%? 70%?) is virtually inevitable. (What can’t be paid, won’t be paid.)
How much of the total debt can Americans pay without deciding to start shooting the creditors? I’d guess, at most, 20%. Foreign governments might say more. But the fact remains that a day of reckoning is approaching when Americans in general and the US gov-co in particular will be forced to admit that they can’t pay their debts. When that happens, the paper/fiat dollar should collapse.
I believe foreign countries are holding “secret meetings” to “brace” for this inevitability. After all, if the dollar dies, it will cause catastrophe for both the US and global economies. But I don’t believe for one minute that foreign countries are meeting to determine what “basket of currencies” will replace the dollar nine years from now. They’re meeting now in anticipation of a dollar collapse that is virtually certain within the next three years, but which could be imminent.
When the dollar went completely off the silver standard in A.D. 1968 and completely off the gold standard in A.D. 1971, it became a pure “fiat” currency with absolutely no intrinsic value. Ordinarily, that would’ve caused our country to suffer an economic depression in fairly short order. However, the Nixon administration negotiated agreements with Saudi Arabia and then OPEC that were almost astonishingly audacious and brilliant. Under these agreements, the world’s oil-producing nations agreed to sell their crude oil on the international market for only U.S. dollars. Result? Any nation that wanted oil, had to first have dollars. Result? The dollar—no longer backed by gold or silver—became implicitly “backed” by oil and thereby continued as the world’s “reserve currency”.
In A.D. 2000, Saddam Hussein challenged the oil-backing-for-dollars scheme by selling Iraqi oil for euros. Eighteen months later, somebody knocked down the Twin Towers at the World Trade Center on September 11th, A.D. 2001. Based on that 9/11 pretext, we invaded Iraq in March of ‘03 to stop Saddam’s economic blasphemy—but we were too late. What started with Saddam has continued with several other oil producing nations: They’re already selling their oil for currencies other than the dollar.
However, so long as the Saudi’s continue to sell their crude for only US dollars, the dollar retains some significant support. But if Fisk is right in reporting that even the Saudi’s are participating in “secret meeting” to abandon the dollar, the dollar’s end may be near.
Already, the dollar is no longer the only currency that can be used to purchase crude oil on the international market. Therefore, the dollar is no longer uniquely backed by oil. Yes, the dollar is still “partially” backed by the crude oil of Saudi Arabia and several other OPEC countries who still sell their crude only for US dollars. But given that the US dollar lost at least 40% of its purchasing power in the last eight years, there’s no way that those oil producing countries want to keep taking dollars for oil. They want to be paid in a currency that holds its value. They want to be paid in a currency that is not being intentionally inflated by its own government. They want to be paid in a currency that’s likely to still be here in three, five or twenty years. Those characteristics can no longer be attributed to the US dollar.
More, Robert Fisk now reports that there have been “secret meetings” to completely abandon the dollar’s role as a currency for purchasing crude oil. If the Saudi’s abandon the dollar—and self-interest will compel them to do so—the US dollar will be acknowledged by all to be a pure fiat currency and virtually dead.
In the meantime, while we wait to see how much longer the Saudi’s will continue to accept depreciated dollars for oil, the purchasing power of the dollar slides inevitably downward.
And the value of gold and silver climb inevitably upward.
One more point: Remember my opening observation that China’s public call for replacement of the dollar as the global reserve currency indicates China’s willingness to suffer the loss of hundreds of billions of dollars in the purchasing power of their foreign exchange reserves? That such willingness to make enormous national sacrifice is usually seen only in an act of war?
Well, remember also that Robert Fisk’s information on the “secret meetings” was “discovered” from several sources—principally banks in Hong Kong. How did several sources simultaneously discover and then reveal information that we might expect to be classified “Above Top Secret”? I’d bet that the information was intentionally leaked by one or more parties privy to the “secret meetings”. Such leaks could be expected to accelerate the demise of the dollar. Such leaks would probably not take place except as an intentional act of economic warfare.
We can infer that while some foreign governments may want the dollar to die slowly, others want the dollar dead now. Why should a foreign government that is seriously antagonistic to the US take a chance and allow the dollar to die slowly? If the decline is dragged out long enough—who knows?—the US might regain its footing and begin to regain its power. From an adversary’s strategic perspective, if the dollar can be destroyed now, it should be destroyed now.
We can reasonably suppose that if the “die now” crowd can precipitate enough anti-dollar sentiment, that sentiment snowball, take on a life of its own, and cause a free-fall in the dollar’s value. And it could happen at any moment.
My point is that it appears that at least some powerful international forces want the dollar to die and may be willing to pay whatever price is associated with causing the dollar die as quickly as possible.
Of course, our gov-co could stop the dollar’s slide in value by simply backing it with gold. But our gov-co doesn’t want to do that. Gov-co wants to massively inflate the dollar so as to seemingly repay its massive debts, but do so with massively depreciated dollars. Gov-co wants to rob its creditors, so gov-co doesn’t want the dollar to stop depreciating. That means that, whether they like it or not, the US gov-co is ultimately in favor of a falling dollar and a rising price for gold.
More importantly, no one—not the US that stands to “profit” massively from the depreciated dollar by evading its debts—and not even China that stands to lose massively if the dollar is depreciated—is defending the dollar.
Think about that: it’s true and unsurprising that the major dollar debtor (the US) will not defend the dollar; but it’s also true and astonishing that not even the major dollar creditor (China) will defend the dollar. Instead, both the major debtor and the major creditor want the dollar significantly depreciated. Has the world ever before seen such circumstances?
The implications are hard to believe but apparent: 1) the dollar’s demise may be imminent; 2) even if it’s not imminent, it’s inevitable; 3) ditch dollars; 4) acquire gold.
Alfred Adask
2 Comments
October 22, 2009 at 1:04 PM
Do you suppose that the Global Control Inc. {Bankers} have some leverage in/on China ? Wasn’t it the banker’s {lucifers’ children} who bankrolled the Bolsheviks ? Any near count of Chinese that perished like the “belorussians” in the unmentionable “holocaust”{S} in the last century ? …Quarantine the LIARS!
October 22, 2009 at 4:54 PM
The essence of the bankers control over anyone is the fact that the bankers appear to have “money” while the rest of us don’t. Therefore, if we want “money,” we need and must obey the bankers. I.e., the bankers only have control over debtors and borrowers.
The Chinese people are notoriously frugal and are probably saving 25 to 40% of their income. The Chinese government reportedly has about $2 trillion in foreign reserves. Thus, the Chinese people’s and government’s appetite for loans is, at most, modest. Insofar as that’s true, the Chinese don’t really need the world’s bankers and the bankers, therefore, would have relatively little influence (let alone control) over the Chinese.
I’m sure the bankers are working hard to seduce China into taking more and more loans and accepting debt servitude. We’ll see if the Chinese are dumb enough to succumb to such temptations.
Borrowers are naturally subject to the bankers. Savers have the capacity to be free men. For now, the global bankers influence on China may be minimal.