“In the department of economy…. It almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come…” Frederic Bastiat, That Which is Seen, and That Which is Not Seen
Let us assume you were handed a checkbook and told to write as many checks as you want in any amount you desired and, most importantly, no one would refuse to take your check, and no one would cash it because the checking account has no money. Whoever gets the check can only pass it along, via ordinary trade, to someone else. You have created money that will never be destroyed, money that will continue to grow every time you write a new check.
Now let us assume that when given this magic checkbook, you had been a frugal and responsible person. For a while you continue to live frugally but over the years your self-control breaks down and you start to spend far above your means.
To placate your conscience for having so much power you decide to spend some of the money on others – the poor the elderly, the disabled, etc. Eventually, you succumb to increasing demands for even more money to compensate the victims of all kinds of disasters. So, you increase your spending to stay in the good graces of humanity. Then you decide that you should also spend money on rehabilitating humanity, exploring the solar system, funding higher education, etc. The demand for your magic checkbook money grows and grows. Things get out of hand.
But this isn’t the end of the story. Spending from the magic checkbook has created massive price increases and funded a class of sycophants, deadbeats and megalomaniacs. A splinter group decides to spurn the magic checkbook and develop their own medium of exchange. Following suit, more and more people begin to refuse your checks.
This is where the world is headed, because the USA cannot force sovereign nations to accept the dollar, especially if there is another and better choice.
The USA has not lived up to its responsibility to protect the purchasing power of the dollar via controlling its supply.
Prior to 1944 gold was used internationally as settlement of trade but that changed under the Bretton Woods Conference Agreement when the U.S. dollar became the only currency accepted as settlement. The Agreement created a fixed international currency exchange rate that established the dollar being equal to an ounce of gold at $35.00 for currencies around the world. This agreement also facilitated the creation of the International Monetary Fund (IMF) and what is known today as the World Bank.
After twenty some odd years the international market became concerned that the US was not living up to its obligations under the agreement and France wanted to redeem 80% of its dollar reserves for gold. Other central banks followed suit and a bank run developed. As gold reserves reached critically low levels, President Nixon took the dollar off the gold exchange standard in the summer of 1971.
This eventually led to the Fed creating as many fiat dollars as the world market would accept and they accepted a lot especially after the US entered into an agreement with Saudi Arabia in 1974, to price all their oil in dollars and invest some of their profits in Treasury Securities. In exchange, the U.S. provides weapons to the Saudis, along with U.S. military bases to “protect” the Saudi oil fields. The US made the same deal with other oil producing Middle East countries.
The “petrodollar” system was a brilliant political and economic move that forced oil money to flow through the Fed creating a demand for dollars and debt. Now, as the U.S. economy weakens our enemies are looking for alternative currency.
Russia signed a contract to sell its oil to China in Rubles. Brazil, Russia, India, China and South Africa, aka the BRICS, have started bypassing the dollar altogether by establishing the New Development Bank, a competitor to the Western backed IMF. The Shanghai Cooperation Organization and the Eurasian Economic Union have formed a working group to develop a commodity-based exchange to replace the dollar. Saudi Arabia recently
announced that they were considering pricing oil sales to China using the Chinese yuan instead of the dollar.
Brazil and Argentina are working on a new proposed “sur” currency to run parallel to the Brazilian Real and the Argentinian Peso. But the ultimate goal will be “inviting the rest of the region” to join the bloc, according to Argentine Economy Minister Sergio Massa, because they can no longer rely on the dollar.
The value of the dollar is determined in large part by the fact that oil is sold in dollars. If that trade shifts to a different currency, countries around the world won’t need all their US money. The resulting sell-off of US dollars would weaken the currency dramatically.
Currency is the number one thing that the U.S. exports, and if the rest of the world decides it doesn’t need our currency anymore, we could be on the cusp of a historic financial earthquake, one that could alter the direction of the US forever and mark the biggest economic event of our lifetime.
Source: World Dollar Hegemony Is Ending (and That May Be a Good Thing) by Patrick Barron, Mises Institute; Now We Could Lose the Petrodollar… by Michael Snyder, The Washington Standard; Sasse: Saudi oil deal with China is ‘big, bad thing,’ that could be sign of global shift away from US by Ronn Blitzer, Fox News