US Dollar in Decline: Part III - Global Reserve Currency

Michael Cerkas's picture

As it is common to see an overweight chef that over-indulges their own creations, so it has become for the United States as it increasingly consumes more of its own money as debt to foreign countries and continues its voracious appetite for still more.

The US dollar has been the main course on the financial plate of the world since the end of World War II. In the now famous Bretton Woods Conference held in New Hampshire during July 1944, 730 delegates representing 44 Allied nations met to discuss the creation of a world monetary system to assist in rebuilding and supporting the international economic system left ravaged and in ruins by the war.

The Bretton Woods System, as it was called, was aimed at restoring global economic security and was comprised of rules, institutions and procedures to regulate and control a global monetary system. The primary institutions created to serve as the watchdogs were the IMF (International Money Fund) and the IBRD (International Bank for Reconstruction and Development), known today as the World Bank Group.

In its simplest form, Bretton Woods brought about the creation of monetary policy by each member nation, effectively connecting its currency to the US dollar, most notably at the time, still backed by gold. No other world currency was backed by gold, making the US dollar “as good as gold”.

The key ingredient of the Bretton Woods System was the creation of fixed exchange rates, that would serve to maintain exchange rates in a parity within plus or minus 1% by buying or selling foreign money.

To strengthen faith in the dollar, the United States overtly linked the dollar to gold, assigning it an initial value of $35 per ounce of gold. Consequently, the US dollar effectively became the de facto Global Reserve Currency. And, like the Gold Standard that supported it, every participating country at Bretton Woods agreed that the US dollar would become the standard currency by which all others would be assessed and valued. The stability and strength of the dollar offered minimal risk and a comforting security blanket.

Considerations for the US Dollar as Global Reserve Currency
One of the most important features of the US dollar becoming the global reserve currency was the exclusive ability of the United States to print more currency; as long as it possessed enough physical gold as an asset to secure it.

At the time, the US dollar represented authentic value as a result of its relationship with gold. All that changed, however, in 1971, when the United States began running trade deficits as a result of overcompensating for prior trade surpluses and excessive military spending. This caused inflation, devaluation of the dollar and escalating federal borrowing that began to define a powerful nation building an increasingly uncontrollable and insurmountable debt.

Notably referred to as ‘Nixon Shock’, President Richard Nixon made a unilateral decision in August 1971 to decouple the US dollar from the Gold Standard, effectively, causing the value of the dollar to be determined by intangible factors, the free market and foreign investment.

Since that point in United States Economic history, the US dollar’s value has continued on a downhill path, forcing increased borrowing and the resulting indebtedness to foreign countries. The United States largest creditor is China. The current national budget deficit is in excess of $14 trillion, i.e., 14,000,000,000,000 or more aptly 14 times 10 raised to the 12th power.

As the strength of the US dollar continues to deteriorate, the cost of borrowing money to pay debts will increase. Additionally, the inability of the US Federal Government to control, much less reduce spending, creates the conditions that support an increasing probability for economic collapse in the near future.

The largest economic risk for the United States moving forward will materialize if or when another currency supplants or replaces the US dollar as the Global Reserve Currency. Until then, the US simply continues to print more and more money, further devaluing the currency and weakening the economy.

St. Louis Adjusted Monetary Base Chart

The most likely competitor to challenge the US dollar as global reserve currency is the Chinese Yuan, also referred to as the RMB (renminbi).

Watch a brief tutorial about the US dollar as Global Reserve Currency:

Return to HULIQ to read:
The US Dollar in Decline: Part I – A Brief History Lesson
The US Dollar in Decline: Part II – The Gold Standard

Image credit: Desktop Nexus

You can reach Michael Cerkas via email at mcerkas@gmail.com

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