The Death of the Dollar and the Demise of the USA

By Tim Haydon.

 

The Dollar’s Days are numbered. And that means Trouble with a Capital T.

The United States Dollar has enjoyed a tremendous advantage over other currencies post WW2.  The 1944 Bretton Woods international agreement created a new, gold–backed monetary standard which relied heavily on the Dollar as the World’s reserve currency, supplanting the Pound Sterling. This arrangement, which gave the Dollar great strength, effectively ended when Nixon took it off the Gold standard in 1971.

Kissinger’s Diplomatic Master-Stroke

But in order to try to maintain some of the advantages of a Gold-backed system without the need for Gold, however weak such a substitution might be, in 1973 a deal was struck between the US Secretary of State Kissinger and the Saudis whereby, in exchange for American arms and protection from neighbouring countries, including Israel, the Saudis would require the sale of their oil to be denominated in Dollars. Since then, when any country has wanted to buy oil from the Saudis and since 1975 from other OPEC suppliers under the same arrangement, they have had first to buy Dollars – Petro Dollars, as they came to be called.

Printing Dollars to Pay Debts

The resulting ongoing demand for Petro Dollars which inevitably spread to other commodities has provided a floor for the value of the currency.  So the USA has been able to continue to buy its oil with Dollars that it has simply printed off. What’s more, there is another benefit still.  In order to get Dollars, countries who need oil have tried to ensure an export- derived balance of payments surplus in their favour. The Dollars they have earned have then been used to buy United States Government Debt.  This has helped to keep USA interest rates low. It also accounts for the huge exports of the Japanese and Chinese and others to the USA.  Because of this Chinese alone have in excess of a trillion Dollars in US bonds.

The American Way of Life is Dependent on the Petro Dollar

The result is that the USA has been able to have access to extraordinarily cheap energy supplies and enjoy a standard of living higher than it would otherwise have had, bought with borrowed money and with a steadily depreciating, printed currency.  Mortgage rates are lower, food costs are lower, the price of petrol is lower, goods bought in from all over the world cost less than they would otherwise… This has meant that even people on the lowest rungs of the socio-economic ladder have been able to shop for cheap goods at Wal Mart. But all good things come to an end. One can’t live cheaply off other people in this way for ever.  That dark cloud on the financial horizon spells stormy weather ahead for the United States and the World.

Lenders want their Money back – All of It

Debt repaid with a depreciating currency does not sit well with lenders.  Not unnaturally, moves have been afoot to bypass the Dollar for some time. These moves have gathered pace tremendously as a result of the recent financial crash which has shaken international confidence in the US. This is especially the case with the onset of Quantitative Easing which, it is feared, will eventually lead to further financial crisis – perhaps a burst of very high inflation indeed.

Ukraine exposes the Weakness of the USA

As a result of the problems in the Ukraine Obama went to Brussels and tried to coordinate a sanctions programme against Russia. He told the Russians that they couldn’t take money out of the West and take it back to Russia. He put sanctions on the Russian banks designed to prevent them getting any oil money. But it is not Saudi Arabia which is the world’s largest oil producer. It is Russia.  These sanctions immediately backfired. They will have the effect –are having the effect – of encouraging the Russians to further ditch the Dollar.

Ditching the Dollar

‘Further ditch’ because large Russian companies like the natural gas giant Rosneff have already signed agreements with China which remove the Dollar from several large contracts. This company is now working on several similar deals with India.  Russia is also finding ways to get round US-inspired sanctions elsewhere in the world. Thus they are discussing a barter system with Iran on a goods–for oil deal. Iran already has such an arrangement with China. (Iran is of course itself the target of US sanctions as a result of which it has set up its own Oil Bourse on the Persian Gulf Island of Kish. This trades petroleum, petrochemicals and gas in non-Dollar currencies, but could easily trade oil as well).

The Rouble to Supplant the Dollar?

But, for the USA, the Russians may be preparing something even more radical.  Is it entirely a coincidence that the Central Bank of Russia has just changed its Logo to a golden Rouble? At the very least, this is saying that in contrast to the declining Dollar, the Russian currency is  backed by substantial gold reserves (Official gold holdings: 934.9 tonnes; Percentage of foreign reserves in gold: 9.8). Russia has been building its gold reserves since 2006 to diversify its Forex reserves, and to help build the Rouble as an international trading currency, bypassing the Dollar. Vladimir Putin may well be considering offering Russian oil sales denominated in Roubles or the Euro rather than in Dollars..

The  Yuan to supplant the Dollar?

If this is the case, Russia has competition, chiefly from China.  China, like other countries with large US Debt holdings is ditching the Dollar as fast as it can. In the last 5 years, as well as being the world’s biggest gold producer, China has become the world’s biggest gold buyer. The Chinese imported more gold in each month of 2013 than it did in the same months in the previous year. They imported 1,500 tons though Hong Kong last year, roughly half the total produced world-wide. Their whole gold holdings may now total 5000 to 6000 tons, up from 1,500 tons five years ago.

The Chinese View of Impending Dollar Disaster

Why are they doing this? The answer seems pretty obvious. They think that the measures the West is taking to cure its debt sickness; holding down interest rates with Quantitative Easing to encourage its economies, will fail in the end, and that the net result will be a further financial crisis, likely centred around the Dollar. If the crisis the Chinese fear does arrive, their holdings of gold, the only ‘currency’ to have survived for millennia, could be worth half a trillion Dollars when its value rises during the crisis.  They could also, like the Russians, be positioning their own currency the Renminbi or Yuan, as a gold-backed replacement for the Dollar as a trading currency, and eventually as a reserve currency, that is, one which invites investment in the issuing country.

Where is the Chinese Gold Coming From?

As noted, China has been importing huge amounts of gold. Where is this gold coming from? Amazingly, much of it is probably coming from the United States. The USA has been the world’ largest net seller of gold since it abandoned the gold standard.  Some people think that there is precious little left of it within the walls of Fort Knox.  Just how much, or how little, is something the US authorities have refused to divulge, but Bill Gross, founder of Pimco, the world’s largest bond fund, calls the idea that there is much gold in Fort Knox ‘the Fort Knox Fairy Tale’.

When China reveals its current holdings, possibly this month (April) – It likes to do this once every five years – it may be possible to put two and two together, based on known world production of gold and stocks held publicly and privately in the USA. If that happens and the true state of US gold reserves is revealed, there may be severe financial repercussions.

The Islamic Attack on the Dollar

But there are yet further attacks on the Dollar. The Libyan Dictator Gaddaffi had 144 tons of gold, the largest amount of any country in Africa and a fortune of $200 billion. He had launched the African Union, a political bloc of 54 nations with a combined population of nearly 900 million people. Gaddaffi wanted to take this to a further level by uniting the continent economically with a common currency. This was to be the relaunch of the Arab gold Dinar.  If successful, the Dinar would have been the first fully gold-backed currency in over 78 years world-wide.

Killing Gaddafi to preserve the Petro Dollar and the US Standard of Living

Such a currency would have been seen, and was seen as an assault on the PetroDollar. That this is so was one good reason why Gadaffi was squelched by the West who took advantage of the crisis in Libya to do so.  After all, Gadaffi had changed since 2000 from the terror chief he had been. He had paid $2.7 billion compensation for Lockerbie and had dismantled his weapons of mass destruction. Under him, Libya had risen from being officially the poorest country in the world in 1951 to a point where Libyans had a higher standard of living by the 1970’s than the UK and Italy and higher than the USA after the credit crunch.  Every Libyan had free housing, free education up to postgraduate level (25% of Libyans had a degree) and free water and electricity. Every Libyan could receive a 50% grant to purchase a car. Every  family received $400 a month from oil revenues. Gaddaffi had built a water supply system for his country so huge it was called the eighth wonder of the World. If a person wanted to go into farming, he was supplied with a house, land, animals, stock and equipment And so on.

Much of the US foreign Policy in the Middle East is directed to protecting the Petro Dollar and so the standard of living of the Americans.

Despite Gaddafi’s demise, inspired by his initiative, Iran, Malaysia and Indonesia, also Islamic, now have pilot programmes issuing gold Dinars. These experiments have proved wildly successful.

When the Dollar collapses…..

What will happen to the USA as a result of these trends?  When the demand for Dollars completely collapses, its value will also collapse.  Dollars held abroad will flow back into the United States. Foreign goods including oil products will rise dramatically in price. Mortgage rates and other interest rates will rocket, crucifying millions financially. There could be riots and civil unrest across the country. There would be increased difficulty for the authorities in paying the the country’s staggering interest amounts on its colossal national debt. Countries which have relied on exporting to the USA – China, Japan and many others will be badly affected. And US hegemony and world leadership will be at an end.

The Dollar – an Object Lesson in Post Modern Disaster

Doomed fiat currencies like the Dollar are perfect representations of the liberal rejection of absolute standards and tradition and the disaster which almost inevitably follows sooner or later. In this case the traditional anchor and absolute standard is of course, gold.

Once money or anything at all is cast adrift from its anchor in long-tested traditional absolute standards; once a principle has been sacrificed, thanks to human weakness there is nothing to stop a slide down the slippery path to perdition. It may take years, decades, even centuries, but disaster in the form of reality will arrive.

In the case of the Dollar, we will have to hang on to our hats sooner rather than later.