Only one “party” can speak truth about the U.S. dollar
By Lee Cary
The Tea Party is the only political movement in America that can tell the truth about the coming end of the US dollar’s (USD) role as the world’s reserve currency.
Will it? And if so, how will it?
Both Democrat and Republican Party leaders know the truth, but, to date, neither has leveled with the American people; nor offered an explanation of the transition underway; nor reviewed the known and unknown consequences.
For their part, the media, across the ideological spectrum, runs from one fiscal puppet show to another, choreographed by the Obama regime, featuring the budget crisis du mois. It’s an odd drama since we have no federal budget these days beyond Continuing Resolutions (CR’s).
All the while, the irreversible path to the USD’s demise as the world’s reserve currency advances, with increasing speed.
Here are a few benchmark events that mark that path:
March 23, 2009: The People’s Bank of China released a statement by Zhou Xiaochuan, Governor of China’s central bank, wherein he called for replacing the dollar as the dominant world’s reserve currency with “an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.”
Here’s an excerpt from Zhou’s statement:
“A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity. A super-sovereign reserve currency managed by a global institution could be used to both create and control the global liquidity. And when a country’s currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.”
China’s top banker suggested that, “Special consideration should be given to giving the SDR a greater role.”
SDR stands for the International Monetary Fund’s (IMF) Special Drawing Right, defined on the IMF website as,
“…an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.
The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations.”
March 25, 2009: Marketwatch.com reported on Secretary Treasurer Timothy Geithner’s evolving response to Zhou’s statement.
“The U.S. dollar fell sharply Wednesday [March 25] following comments by Treasury Secretary Timothy Geithner, who said that the U.S. is ‘quite open’ to China’s suggestion of moving towards a Special Drawing Right (SDR) linked currency system…”
And,
“…Geithner said Wednesday the U.S. dollar remains the main global reserve currency and he does not see a change in that status in the foreseeable future. Earlier this week, People’s Bank of China Gov. Zhou Xiaochuan called for a new international reserve currency to replace the dollar. Speaking in New York, Geithner said that Zhou was ‘a sensible man’ and that ‘everything he said deserves consideration.’ The dollar fell sharply after those remarks, prompting a clarification from Geithner.”
Geithner quickly walked-back his favorable comment about Zhou’s suggestion to replace the USD as the reserve currency.
The ping-pong exchange prompted by Zhou’s statement continued as the FED Chairman weighed in:
“Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Timothy Geithner Tuesday flatly rejected on Tuesday a call earlier in the day from a senior Chinese official to drop the dollar as the world’s key reserve currency.”
So, in less than three days, Zhou’s suggestion went from an idea worth considering to one “flatly rejected” by the two leading financial spokespersons for the United States.
June 1, 2009: During a visit to China to assure Beijing that its assets in USDs are safe, Geithner gets laughed at by college students.
“U.S. Treasury Secretary Timothy Geithner on Monday reassured the Chinese government that its huge holdings of dollar assets are safe and reaffirmed his faith in a strong U.S. currency… ‘Chinese assets are very safe,’ Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.”
“His answer drew loud laughter from his student audience, reflecting skepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.”
{snip}
“In his speech, Geithner renewed pledges that the Obama administration would cut its huge fiscal deficits and promised ‘very disciplined’ future spending, possibly including reintroduction of pay-as-you-go budget rules instead of nonstop borrowing.”
“‘We have the deepest and most liquid markets for risk-free assets in the world. We’re committed to bring our fiscal deficits down over time to a sustainable level.’”
“‘We believe in a strong dollar … and we’re going to make sure that we repair and reform the financial system so that we sustain confidence,’ he said.”
In an interview with businessinsider.com, Geithner made other claims:
- “And, you know, you’re seeing the early– very early administration, in the middle of an extraordinarily challenging recession. That the President work with Congress to lay a foundation for health care reform. It’s gonna bring down growth in health care costs.”
- “Reform of the international financial system of the IMF and other institutions is very important to us.”
- “A recession that’s losing some of its force. Early signs of stabilization in economic activity and demand around the world.”
- The reporter asks, “The Fed is buying $300 billion of treasuries (UNINTEL). Why is this not the dreaded concept of monetizing the debt which so many economists would warn against?” Geithner responds, “There’s no risk of that in the United States.”
- The reporter follows up with, “…you’re saying that buying $300 billion of debt by the Fed is not monetizing?” Geithner responds, “Absolutely not. Again– the– no conflict between the Fed’s responsibilities for a financial stability, the measures they’ve taken to help make sure that there’s liquidity for markets.”
February 25, 2010: While testifying on Capitol Hill, Bernanke warns lawmakers that the “United States could soon face a debt crisis like the one in Greece, and declared that the central bank will not help legislators by printing money to pay for the ballooning federal debt.”
According to the Washington Times, Bernanke added:
- “We’re not going to monetize the debt.”
- “Despite his gloomy testimony, Mr. Bernanke dismissed concerns that the United States will lose its gold-plated AAA credit rating any time soon.”
The accuracy of Bernanke’s last prediction depends on the definition of “soon.”
January 7, 2011: The IMF released a 42-pages report entitled “Enhancing International Monetary Stability—A Role for the SDR?” It suggests an enhanced role for the IMF in transitioning toward greater international financial stability. In other words, after the USD ceases to be the dominant reserve currency, there will be a more significant role awaiting the IMF.
Under the paragraph heading of “Way forward,” we read:
“These obstacles may not be insuperable, but significant political will and consensus across the membership would be needed to address them. That said, most other potential solutions to the problems in the IMS likewise require substantial investment of political will and consensus-building. With this proviso in mind, the rest of this paper outlines some concrete steps that could be taken to enhance the role of the SDR as an alternative reserve asset and unit of account, along with an initial discussion of their benefits, realism, and potential downsides. Clearly, none of these ideas is ready for implementation overnight, but the paper aims to stimulate an open-minded debate that could lead to identifying steps worth further consideration. Needless to say, enhancing the role of the SDR cannot on its own provide a remedy to all the ills of the IMS. But combined with the other efforts intensified in the wake of the crisis—global policy coordination and stronger surveillance; improved global safety nets; orderly capital account liberalization and financial deepening in emerging markets—a greater role for the SDR might help achieve stability as the IMS transitions to a more multipolar equilibrium, and beyond.” (highlighting added)
January 16, 2013: Germany’s Bundesbank announced it would “move 647 tons of gold back to Frankfurt from central-bank vaults in the U.S. and France by 2020.”
A blogger for the Washington Post blamed it on the Germans, writing that “the decision reflects a real, and somewhat disturbing, current in German politics.”
The Huffington Post reported that “Germany’s gold angst is not always rational,” and then characterized Germany as Ron Paul-like.
CNBC business news edged closer to the truth when it quoted Bill Gross, managing director at PIMCO, who tweeted, “Report claims Germany moving gold from NY/Paris back to Frankfurt. Central banks don’t trust each other?”
Forbes mirrored Gross’ tweet by suggesting that Germany’s move may be “the first major sign that trust between central banks across the globe could be deteriorating.”
Conclusions:
The USD’s days as the world’s reserve currency are numbered. The key questions are: (1) How many days until it formally ends? (2) How far will the USD fall, accompanied by what level of inflation? And, (3) what sort of international currency exchange arrangement will replace it?
It’s reasonable to assume that the USD’s fall has long been expected by the leadership of both major political parties.
A case can be made that the fiscal and monetary policies of multiple Republican and Democrat administrations contributed to this now inevitable outcome.
A case can, also, be made that that outcome was a foregone conclusion once globalization kicked into high-gear after the fall of the old Soviet Union and the reunification of Germany in 1989.
The current administration’s policies, led by Bernanke and Geithner, have accelerated the demise of the USD.
Despite claims to the contrary, the Fed is monetizing the debt and the Chinese students were right to laugh when Geithner tried to persuade them otherwise.
It’s also clear that, on those occasions when Bernanke claimed that the Federal Reserve would not monetize the debt, he was lying. Perhaps he lied because it would have been too painful to publically tell the peoples’ representatives the truth, although most of them probably knew it.
In the arena of global markets and the role of the USD, its demise as the world’s reserve currency isn’t the elephant in the room. It is the room.
Because neither Democrat nor Republican politicians will come clean with the American people, they share a bipartisan silence, to their collective shame.
That only leaves one “party” to tell We the People where the USD is going, and what it will mean.
Will it? And if so, how will it?
I am part of the Tea Party and would be happy to explain the truth about the collapse of the dollar but I don’t know what it is. Perhaps someone will attempt to educate me if that is possible.
Here is the basis for my confusion. A foreign reserve currency is not an official designation, it occurs because a large economy has been able through foreign trade to place large quantities of its currency in foreign banks. These banks then designate this currency as a reserve currency and use it for trade with other countries. The dollar is not the only reserve currency but it is the largest (62% of the foreign reserved currency) with the euro next (24%). Although there has been much talk about not using the dollar as the reserve currency the percentage has not changed much in the last decade.
What happens if the foreign banks no longer want the dollar? First what are they going to do with what they have, they are not going to burn them. No other countries would want them either so they would have to come back here to be exchanged for American goods, I would think. That doesn’t sound too bad.
Right now when we borrow money from abroad, we receive dollars and give bonds redeemable in dollars in the future. If foreigners don’t want dollars very much now or in the future then interest rates on the bonds goes up possibly by a considerable margin. That would shut down the ability of the government to borrow from foreigners as it has in Greece. Turmoil would ensue but since our government could not print money to cover new foreign debt it would have to essentially pay off new debt in some other currency if it could borrow at all. Not being able to increase our debt doesn’t sound like a bad thing.
We could pay off existing debt in dollars but most of that is short term so that privilege wont last long. The short term nature of our debt means it usually gets refinanced at the then current interest rate and is then new debt not backed by dollars.
What would happen inside our country? Interest rates would go up as mentioned so the economy would probably go into recession. Foreign goods prices would increase rapidly causing inflation. Government services and entitlement payments may be severely cut back reducing demand and somewhat countering inflation. The government would be in a real bind. Printing dollars to pay existing debt and to continue government handouts would only further debase the dollar which would make the borrowing situation and inflation even worse. But not printing dollars to make up for not being able to borrow would cause those no longer receiving government largess to riot in the streets.
The end result if the country survives would be a country living within its means and no longer able to borrow and spend beyond limits. Isn’t this inevitable? The generation coming into its own at this time will be hurt badly but those that follow may possibly benefit from the difficult lessons as at least one generation benefited from the lessons learned by those suffering through the great depression.
Well like I say I am confused. It appears the rest of my life and that of a generation younger would not be very comfortable, to say the least, but perhaps the dollar needs to crash now for the benefit of those to follow. On the other hand I suppose there is a worst case scenario where the rioting in the streets allows a Marxist government to come to power (remain in power?) and that is the end of American exceptionalism. Like I said I don’t know what the truth is.
I suggest the book Currency Wars by James Rickards as a place to start. We’re in the early stages of a currency war already, being led by Japan which has a higher debt-to-GDP ratio than do we (after a decade of “stimulus spending” that’s failed). They recently indicated an intent to print money indefinitely. It’s a tacit confession that only by depreciating the currency can they hope to remain solvent. We’re, essentially, in the same fix.
It’s not the debt that’s short term crunch – it’s servicing the debt by just paying interest on the principle that’s the problem immediately.
The dollar as the dominant reserve currency is on life support. The trajectory seems to be moving toward a basket of reserve currencies with the USD along with others (Euro, Yuan, a few other strong but considerably smaller economies, and perhaps 1 or2 emerging currencies e.g., Brazil, Russia, plus gold, and the IMF’s SDR).
When other countries stop buying our treasuries at very low interest rates because they ralize that by maturity they’ve actually lost value, we’re in a world of hurt, and the only bullet left in the gun is to keep “printing” money (we’re at $85,000,000,000.00 a month now!!). That further depreciates the value of the dollar, inevitably leading to hyperinflation. The classic case of that is the Weimar republic in pre-Nazi Germany.
What I have read in the last day or so is that the problem is already here in that the money supply has increased three fold during this administration. Printing $85B per month is over $1T per year about equal to our annual deficit. They don’t need to borrow from foreigners they just continue printing. Of course our deficit will keep increasing so the amount printed will have to keep increasing.
Inflation has not reared its ugly head because the money is still in the banks and other financial institutions but it will shortly make its way to the economy.
If that is the case the question is how do we protect our assets during rapid inflation rather than how do we stop the collapse of the dollar. When do we hit bottom rather than are we about to go over the cliff.
I’d suggest precious metals, a stable foreign currency (if you can find one), and commodities.
I also read that money markets would be a good investment and that really surprised me. The logic was that when inflation goes up so do interest rates. I remember back when inflation rates were high I had a CD paying over 14% interest.
They said stay away from real estate and the stock market since high interest rates would devastate those markets. They also suggested precious metals and foreign currencies like the Swiss franc.
I don’t know; real estate might be a good idea, but only if your interest rates are fixed. You’ll be paying for your property with worthless dollars, but the land could be worth its weight in gold.
UPDATE:
China “fully prepared” for currency war: banker
http://www.france24.com/en/20130302-china-fully-prepared-currency-war-banker-0
“Yi Gang, deputy governor of China’s central bank, delivers a speech at a seminar in Tokyo, on October 14, 2012. Yi said Beijing is “fully prepared” for a currency war as he urged the world to abide by a consensus reached by the G20 to avert confrontation, state media reported on Saturday.
AFP – A top Chinese banker said Beijing is “fully prepared” for a currency war as he urged the world to abide by a consensus reached by the G20 to avert confrontation, state media reported on Saturday.
Yi Gang, deputy governor of China’s central bank, issued the call after G20 finance ministers last month moved to calm fears of a looming war on the currency markets at a meeting in Moscow.
Those fears have largely been fuelled by the recent steep decline in the Japanese yen, which critics have accused Tokyo of manipulating to give its manufacturers a competitive edge in key export markets over Asian rivals.
Yi said a currency war could be avoided if major countries observed the G20 consensus that monetary policy should primarily serve as a tool for domestic economy, the Xinhua report said.
But China “is fully prepared”, he added. ‘In terms of both monetary policies and other mechanism arrangement, China will take into full account the quantitative easing policies implemented by central banks of foreign countries.’
South Korea’s incoming president Park Geun-Hye has also signalled her willingness to step in to stabilise the won and protect exporters battling a stronger Korean currency and a weaker yen.”
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While the media and politicians focus on decreasing the “budget,” based on a continuing litany of CR’s, a small cut in the increase from last year, diverts the sheeple’s attention from a much more serious issue. Where is the Tea Party?????
I am beginning to feel a lot better after I read what Major Bloomberg said recently. We obviously don’t have a problem.
Major Bloomberg said:
“We are spending money we don’t have. It’s not like your household. In your household, people are saying, ‘Oh, you can’t spend money you don’t have.’ That is true for your household because nobody is going to lend you an infinite amount of money. When it comes to the United States federal government, people do seem willing to lend us an infinite amount of money. … Our debt is so big and so many people own it that it’s preposterous to think that they would stop selling us more. It’s the old story: If you owe the bank $50,000, you got a problem. If you owe the bank $50 million, they got a problem. And that’s a problem for the lenders. They can’t stop lending us more money.”
What a relief! Bloomberg says we don’t have a problem. I’ll sleep better now.
If local Tea Party groups (“local” to DFW) want to take a stand, gather, say, 10,000 people outside the Dallas Federal Reserve Bank building at 2200 N. Pearl St., in Dallas dressed in red, and pass out play (as in Monopoly) money.
It’s what the Fed is doing to the dollar. We have begun the next currency war.
No speakers. And only one, very big sign depicting a play dollar with Helicopter Ben’s picture at the center.
Tea Party supporters whose primary allegiance is to the G.O.P., aren’t likely to go for that idea. Bush II appointed him Fed chair, and Obama’s kept him there.