April 4, 2013
First on the Economics 101 “need to know” list is “reserve currency.” What is it, and why is it so important in the daily lives of every American?
The rise of the American Century following World War II found societies desperate to rebuild their lives and economies, and as a result the US. dollar was viewed as the stable and secure “must have” currency. That position continued to strengthen over the second half of the 20th Century with the political upheaval in Europe and the emergence of Brazil, Russia, India, China and now South Africa as economic powerhouses. Add the Internet and the easing of world travel that opened the world to multiple global trading options and the world needed a leader. The advent of these world-changing innovations made trading with foreign countries much more assessable and presented an opportunity for various countries to export their goods to a spendthrift American consumer.
However, the fluctuations between world currencies exacerbated trade between countries, which further reinforced the position of the US dollar as a stable and reliable arbiter in pricing goods and commodities as the world’s reserve currency. It provided a stable monetary system for the world to trade their goods without surprises.
The payoff to Americans as holders of the world’s reserve currency IS that American consumers escaped most monetary price fluctuations because we didn’t have to purchase foreign currency to trade worldwide. Also, nearly everything was priced in US dollars, unlike Brits, Europeans, Chinese, Indians, Brazilians and the rest of the world, who have to convert their money on a fluctuating world foreign exchange or Forex markets to buy crude oil from OPEC or cars from Japan. This simple monetary fact has been a factor that has kept the US. cost per gallon of gasoline among the lowest in the industrialized world. Take Europe for example, they pay nearly $10 per gallon to fill up the family wagon. As a result, higher fuel expenditures translate into more expensive grocery items, energy bills, clothing costs as well as the good ole morning cup of Joe. But been to the market lately to buy food or the gas station to buy gas?
America’s status in world affairs has changed substantially over the last 10 years. World entanglements in the political affairs of the Middle East and North Africa have complicated the way other nations view America, and it has weakened US monetary policies causing many emerging countries to seek alternatives to the dollar.
Proof comes from the new BRICS countries of Brazil, Russia, India, China and South Africa who committed to establishing a new world bank and reserve currency last week at their 5th summit in Durban, South Africa.
“We support the reform and improvement of the international monetary system, with a broad based international reserve currency system providing stability and certainty,” the five nations said in their declaration. “We welcome the discussion about the role of the [IMF’s] Special Drawing Rights in the existing international monetary system including the composition of SDR’s basket of currencies.”
South African President Jacob Zuma, a communist leader of the ANC responsible for running his economy into the ground said, “Not long ago we discussed the formation of a developmental bank, today we are ready to launch it.”
Now American and European nations must contend with the up-and-coming BRICS bloc countries. While America was busy exporting democracy to unwilling Middle Eastern countries, BRICS was evolving into a serious economic challenger in the world economy, representing 40 percent of the world’s population, and one fifth of global GDP.
So why is there a global shift from the traditional dollar? Through the Federal Reserve, Ben Bernanke has been monetizing America’s debt and flooding the economy (and world) with devalued dollars (dollar has dropped from 71.5 percent in 2001 to 62 percent in 2012 . The result equals mal-investments that permeate into the American economy and corrupt the free marketplace sending investors seeking other safe havens, including the traditional gold and silver.
“In short, you can print money, but you can’t print metals. And this explains the spike in gold and silver over the last four years,” a Porter Stansberry Investment Advisory newsletter said in February 2013.
Taking it a step further China has already negotiated currency trade agreements with Germany, Russia, Brazil, Australia, Japan, Chile, UAE, India and South Africa. They want to replace the US. dollar with a gold-backed renminbi (RMB). Unlike most Americans’ view, the Chinese see the US. as competitors and are working strategically to make deals with other emerging nations to attain their goal atop the world. By cornering the market on gold and other precious metals, rare earth minerals, all energy and natural resources (Link to Chinese worldwide investments), China continues its momentum of becoming the new world superpower.
Word of China’s rise in world status came at the annual Davos-Klosters January 2013 symposium in Switzerland. “We spent the last half-century trying to understand Washington,” said Kevin Rudd a Member of Parliament in Australia. “Now it’s time to study and learn how Beijing sees the world.”
Australia just signed a trade deal with China last week that excluded pricing and payments in US dollars.
Back in the languishing US. economy, Bernanke’s tinkering is sending America down a road less traveled.
“The Federal Reserve’s unprecedented intervention into the US. mortgage and sovereign bond markets has led the world economy into a blind alley,” according to Stansberry. ”If the Fed continues to print unlimited amounts of money to maintain essentially a zero cost of capital for the world’s biggest banks, then, eventually enormous financial imbalances (bubbles) will develop and spill over into the real economy, producing a massive inflation (think grocery and fuel costs).”
Americans should not be fooled by government claims of near-zero inflation costs. The Consumer Price Index (CPI), that the government uses to report inflationary costs, conveniently excludes food and energy price increases as Americans can see everyday in escalating costs at grocery stores and gas stations.
“Maintaining zero cost of capital will, eventually, produce capital of zero value,” Stansberry explains. “To prevent this outcome, the Fed must, sooner or later, begin to re-instate a real yield on US. sovereign debt.”
To reintroduce interest rates the Fed will ultimately begin to sell portions of its huge accumulation of government bonds.
“The problem is… all of the other traders in the world know the Fed must eventually sell. Thus, the moment the Fed begins to unwind its massive portfolio the world’s currency traders, whose daily volumes dwarf all of the world’s stock markets, will attempt to sell in front of the Fed. This will produce a cascade of selling and could begin a run on US. sovereign bonds,” Stansberry explained. He fears this effort would fail to find enough buyers for the US. paper.
“Such a situation, which seems inevitable given the size of the Fed’s stockpile of bonds, would make the bond market crash of 2008 look like a tiny correction,” Stansberry concludes. “One thing is for certain… the dollar cannot continue to be both the banking system’s currency of last resort, printed in unlimited quantities to bailout irresponsible lenders and governments, and also the world’s reserve currency, the paper currency that billions of people around the world trust with their savings, their hopes and their dreams of a better life.”
So far American monetary policy makers and lawmakers have not stepped up to challenge the Federal Reserve’s irresponsible monetary practices. The reason may be that they are afraid the Fed’s balance sheets hold trillions more in US. debt than it admits– making the Fed a lot worse off than advertised. If true, could it be too late to reverse …
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