Last week
the U.N. warned of a possible collapse of the US
dollar –if its value against
other currencies
continues to decline. The U.N. mid-year
review of the world economy
did not get extensive coverage. Their economic division said that a crisis of confidence in
the dollar, stemming from
the falling value of foreign
dollar holdings, would imperil
the global financial system. This trend had recently been driven by interest rate differentials between the U.S.
and other major economies
and growing concern about
the sustainability of the U.S. public debt, half of which is held
by foreigners including
the Chinese government.
There is a real sense of both desperation and denial about the debt crisis and the global nature of the debt
crisis. On Friday Moody’s threatened
the U.S. with a downgrade
if the ‘ceiling’ is
not raised by mid-July.
Bad labor figures made QE 3 more of a possibility and we see a continued slowdown in the developed world
economies.
The solution of creating more public debt to
cure a private debt crisis will be
seen as a blunder and will likely lead to greater financial and economic woes. Part of the
solution will be to utilize gold in the monetary
system in hopes that it will support and shore-up
the monetary system. What
else is there that is
trusted globally?
Is the U.N. economic division incompetent? Are their opinions
of little consequence?
The statement they made is huge. A collapse of the US
dollar! Maybe the news is
too much for the media
and the world to cope? Maybe
we’re in denial.
“So far, so good!” said
the man who fell off the
50-storey building, as he passed
the 12th floor…
Importance of the US Dollar
The US dollar replaced gold as the fulcrum of
the global money systems of the world in 1971 at a time when its value was falling alongside
the British pound. It was accepted
back then because it was tied
to the oil price. This made the US dollar
indispensable. If you used
oil you needed the dollar to pay for it. You had to convert every other currency to get oil. Everyone
sold it in the US dollar.
Moreover, the U.S. persuaded Europe (at the time led by President Charles de Gaulle) to stop converting
their dollars into gold
and accept them as vital currency. The link to oil forced their
hand. The dollar had no other
virtues at the time, and so that ingredient
changed their thinking.
We had thought
many times that the oil producers themselves would have broken the link as the dollar’s reputation floundered. But they all realized that their country’s power was, in a way, permitted by the kind
permission of the U.S. –as we saw in Kuwait, then in Iraq and
no doubt, by extension in Libya.
The U.S. guarantee of security
has made them putty in
U.S. hands.
Even O.P.E.C. realizes that
things are changing and their oil is
all they have. Middle Eastern
oil producers discussed setting up a Persian
Gulf currency the year before last, but nothing has
come of it. There will most likely be
no Gulf currency unless monetary chaos ensues. If the
dollar collapses, their incomes
will collapse with it, and in turn their power base. They mostly likely have a plan B. Until
then they will keep oil
prices in the US dollar and raise
them as the dollar falls.
Russia is another kettle of fish. They are not part of O.P.E.C. and will
accept the Yuan in payment
of their oil as well as the dollar. Iran is fearful, but independent of the
U.S. and has discarded all their
dollar reserves as well
as priced their oil in Euros. But the rest of
O.P.E.C. will keep their oil priced
in the dollar.
Since the oil price
fell back to $35 in the credit
crunch, they have demonstrated that they can manage the oil price. For the last year we’ve seen the price of oil more than compensate for the fall in the
US dollar. Right now it is holding the $100 level up from $80 last year, countering the fall in the
dollar against hard currencies.
As a result the oil price has been steady in the
euro.
Now that the U.S. consumer (and the U.S. recovery) is faltering we hear loud calls for increased oil supplies. This would
drop the oil price, but be unacceptable to O.P.E.C. The
U.S. government will accept higher oil prices because
of the importance of the $:oil
link.
It looked as though
the world was stuck with the US dollar.
Until two new elements emerged to change the picture…
Mismanagement of the US Dollar
Apart from U.S. gold reserves,
there are only a small amount of currencies to protect the U.S.
if the dollar were to become
unacceptable for international payment.
U.S. foreign exchange reserves
are structured so that the dollar is the only global reserve currency. It’s rather like the use of English
in the world. Why learn another language when English is the globally-accepted language? To
date foreigners have had
to accept the dollars because
there is no viable
alternative. If the States needs more they print more.
Because of its connection
with oil, the dollar will be used
until other nations can pay oil
producers in other currencies, and if that occurs then usage of the dollar
will shrink considerably. Furthermore, The
U.S. balance of payments developed
this perpetual trade deficit, a form of tribute exacted from the rest of the world.
Over the last forty to fifty
years, this has worked well as developing countries use the dollar to promote growth. It would work even
better if the management
of the dollar were handled
with its global reserve status in mind and not the
U.S. economic situation as the priority.
Who cares the world boomed
over the last half century?
Once dollar issuance increased to fund imports –as well as
to counter the credit crunch—global economic interests were subject to the health and integrity of the U.S. economy. From the day the euro was first issued in 1999 until now we have seen
a 46% decline in the value
of the dollar against the euro alone.
The rest of the world cannot
afford to allow the U.S.
to continue to take advantage
of the world. Still worse,
the government deficit in
the U.S. has ensured that
they are getting increasingly reliant on the reinvestment
of foreign (mainly Asian and oil-producing
nations) surpluses into
the U.S. for its solvency.
Now the U.S. is facing
a downturn and is heavily extended on the credit front. Nations are closer
to making changes to the currency
hierarchy in hopes they can overcome
a potential dollar collapse. There is a point when
actions against the dollar will
be precipitous. The poor, Friday labor report has
us watching the dollar fall
and points to levels beyond
€1: $1.50.
Holders of dollars have to act in the interests of retaining the
value of their reserves.
This can mean supporting the dollar on foreign
exchanges or it can mean selling the dollars for assets, resources and other foreign currencies. At some point, it will mean not accepting the dollar in payment of foreign goods. It is only a matter of time for the
dollar to be removed from its pole position, where it is
already causing so much volatility
and damage to profits.
The biggest potential damage that could blindside
the dollar is a switch by
Asian nations from pricing their products in the U.S. dollar to the Yuan or other currencies. This is so they
stop accumulating dollars; however,
they still need it for as long as oil is being
sold in the dollar.
This position can only be
changed if oil producers (other than O.P.E.C.) accepting currencies other than the dollar. These changes
are needed now, but they will not come until the damage to the dollar’s
value can be ‘contained’ by the surplus holders.
China is already using Roubles and the Yuan to pay
Russia for oil and the day may not be
far off when Europe does
the same. If O.P.E.C. felt
the pain of a dollar collapse (or even excessive
inflation inside the U.S.) it
might accept other currencies from buyers (U.S. excluded). O.P.E.C. cannot
continue raising the dollar oil
price because of the outcry it would
cause in the U.S.
The Emergence of Asia
U.S. global wealth and power is on the decline. China is the world’s second largest
global economy. If the current
rate of development is sustained it is only a matter
of time before China becomes
the world’s largest
–before the Yuan becomes
the world’s reserve
currency. It is only a matter of time before nations will need Yuan in their reserves to pay for Chinese imports.
Part of the emergence of Asia is the replacement of the dollar in global trade. The only dollars reserved are to pay for U.S. goods and oil. When other currencies
are used in place of the dollar, the purchasing power of the US dollar will
decline. This is
happening fast!
There is nothing to convince us that the will stop declining. From now until
then, the gold price will move in the opposite direction.
Gold in the Monetary
System, at what price?......
Julian
D. W. Phillips
Gold/Silver
Forecaster – Global Watch
GoldForecaster.com
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