The reserve currency issue is an issue that should transcend partisan politics, as leaders of both parties have ignored this issue over the years to our country’s possible peril. I want everyone to really think about this issue, because the financial storm that would ensue following the end of our reserve currency status and the eventual collapse of the dollar would make the 2008 housing crisis look like a spring shower. Here’s an excerpt from a 2011 article from CNBC warning of the prospects of losing reserve currency status:
“I think you could see a 25 percent reduction in the standard of living in this country if the US dollar was no longer the world’s reserve currency. That’s how valuable it is.”
That was a comment made back in 2011, and since then we have added a few more trillion dollars of debt, and printed a few more trillion dollars of QE (quantitative easing), “stimulus” money. For those of you unfamiliar with QE – this is a policy that started in 2009 wherein the federal reserve is literally printing and pumping into the economy approximately $80 billion a month, and the mere mention from Bernanke that he was going to slow down the printing presses made the DOW tumble a few hundred points. He quickly backed off that statement. QE is not only used to prime the DOW but it is also used to keep inflation and interest rates in check. In the article, it is mentioned that if the CPI were adjusted for actual economic realities, we would see 5% – 7% inflation on food and energy prices.
Fast forward to 2013. Recent international economic signals do not bode well for the continuance of our reserve currency status:
- China’s subtle dumping of the dollar — using bilateral trade agreements with other developing nations and, more recently, major economic powers like Germany and Japan
- The massive gold-buying spree undertaken by China and Russia — even in the face of extreme market manipulation by JPMorgan Chase and Co. and CME Group Inc.
- The dumping of long-term U.S. Treasuries by foreign creditors in exchange for short-term Treasuries that can be liquidated at a moment’s notice.
- The fact that bonds now are supported almost entirely by Fed stimulus. When the stimulus ends, America’s ability to honor foreign debts will end and faith in the dollar will crumble.
- Blatant statements by the International Monetary Fund calling for the end of the dollar’s world reserve status and the institution of special drawing rights (SDRs) as a replacement.
These bullet points were taken from another excellent article on this issue found here, (hat tip to Spook for sending me this article) and it is a must read. Why the loss of faith in the US dollar? The fact that our government spends approx. $1 trillion more than it brings in, the fact that our government does not work within a defined budget and funds the government from continuing resolution to continuing resolution (CR’s), the fact that our debt to GDP ratio is now 101%, and the fact that there are no imminent signs of financial discipline or restraint by our federal government. This year our federal government is expected to bring in approx. $2.5 trillion in revenue, which would equal an historical high, yet they are spending $3.6 trillion and they say they need more. So the next time you hear a politician say that we need more money for education, and/or more “investment” in infrastructure, know that they are pushing us closer to the brink of financial collapse.
In spite of all of this, I remain the eternal optimist. We can avoid the loss of reserve currency status and the eventual collapse of the dollar but it will require that our elected officials define our nations priorities, put in place a budget that reflects those priorities and operate within it. It will also require that we aggressively act upon the impending economic boom of the 21st century and that is – energy. We must tap into our domestic crude oil and natural gas reserves to not only fuel our current society, but also to become a net exporter of these resources. That will generate the money necessary to put our country back on sound financial footing, but will also fuel the eventual transition to a new, greener, more sustainable energy platform.