More signs of looming demise of dollar as reserve currency

| April 2 2013
Christopher Cook

If the U.S, dollar loses its status as the global reserve currency, we are in for a rocky ride. We’ve pointed this out before, here . . .

The dependence kills good-paying jobs thereby reducing both household purchasing power and government revenue. It creates a serious trade imbalance righted by the sale of paper securities. Yet the value of those securities depends on a dollar whose strength has been steadily diminishing as our debt increases and the Federal Reserve maintains unusually low interests rates. The Fed’s resort to “quantitative easing” similarly weakens the dollar. If the dollar’s value is preserved only through its status as a global reserve currency used for international transactions, loss of that status will make the “mess” of ’08 look trivial.

here . . .

We cannot confiscate enough wealth to cover anything close to what we need. We could confiscate the wealth of all the richest people in America and it wouldn’t even cover our budget deficit for one year, let alone our debt, let alone our unfunded liabilities. And, just like the taxation, such wealth confiscation would destroy the economy.

If we inflate the currency to the degree needed to pay our debts, the dollar will cease to be the world’s reserve currency, its value will crater, and we will have economic chaos followed by economic collapse. The kinds of hyperinflation required to pay the debts we’re talking about would take us into Weimar Republic and Zimbabwe territory and beyond.

. . . and elsewhere. Most economists will tell you that being the reserve currency for most of the world has distinct advantages. Some economists will be honest enough to admit that the end of that status carries with it potential for serious economic woes, especially for a country with our addiction to borrowing and our levels of debt.

Ominously, the signs are increasing that such a day of reckoning may be nigh:

A month ago we pointed out that as a result of Australia’s unprecedented reliance on China as a target export market, accounting for nearly 30% of all Australian exports (with the flipside being just as true, as Australia now is the fifth-biggest source of Chinese imports), the two countries may as well be joined at the hip.

Over the weekend, Australia appears to have come to the same conclusion, with the Australian reporting that the land down under is set to say goodbye to the world’s “reserve currency” in its trade dealings with the world’s biggest marginal economic power, China, and will enable the direct convertibility of the Australian dollar into Chinese yuan, without US Dollar intermediation, in the process “slashing costs for thousands of business” and also confirming speculation that China is fully intent on, little by little, chipping away at the dollar’s reserve currency status until one day it no longer is.

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Why is this so very critical? For the simple reason that the free lunch the US has enjoyed ever since the advent of the US dollar as world reserve currency, may be coming to an end as other, more aggressive alternatives – both fiat, and hard-asset based – to the USD appear. And since there is no such thing as a free lunch, all the deferred pain the US Treasury Department has been able to offset thanks to its global currency monopoly status will come crashing down the second the world starts getting doubts about the true nature of just who the real reserve currency will be in the future. 

The moment for battening down the hatches may not be imminent, but there are storm-clouds in the distance. If the storm materializes, especially with our levels of debt, it would be . . . bad.

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