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Death Star Washington Mulls The U.S. Dollar's End

Politics / US Dollar Aug 14, 2011 - 07:22 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleWhat is is not in doubt is that the world's single reserve currency is nearing the end of its viability at least in its current form. The only other two options, the euro and the yen, are in as bad or worse shape regarding the fundamentals of the economies they are based on. The end game has arrived for the current monetary system which began for the US in the 1930s, and for the world with Bretton Woods in 1944. The US sub prime crisis, Japan's Fukushima disaster, and Europe's PIIGS rout are the final nails in the coffin of the dollar reserve system, which in "gold money" terms already died a long time ago - in 1971 - when Nixon pulled the plug on official and fixed dollar convertibility with gold. This system was far from ancient and only dated from 1933, with Roosevelt (who pegged the dollar to .888 grams of gold, or $35 per ounce). This was therefore at maximum a 38-year "gold money interlude", suspended during the war years and only covering, in fact, about 33 years.

In Death Star Washington of today, 40 years after the "hard dollar" died, the verdict of international commentators from Marc Faber and George Soros to Jim Rogers, but absolutely not Warren Buffett are normally tucked out of view and given "restrained" primetime mainstream media attention. If they talk about the dollar, they tend to forecast anything from a relatively slow to a very fast, credible or incredible demise, with a short-term but magnificent Suckers Rally in gatheringly worthless equities - denominated basically in dollars - faltering on the brink of a 1929-style or 1979-style rout.

In Death Star Washington, dollar demise is eluded by deciders more concerned with printing dollars this week, keeping China in buying mood for US debt next week, and keeping Happy Changey Obama re-electable in a few months time, in theory that is. Polite debate focuses US debt by deflecting the subject to how Standard & Poors was doing untoward things with US debt numbers, and how much worse the European and Japanese debt crises really are, relative to the US situation.

Active players who defend the president and the party use a much more simple question to short out discussion of the real issues. They ask: replace the dollar with what ?


Answers to that question start strange and get more so.

Usually not figuring in the arguments for why it is "simply not possible" to replace the dollar, we have the sure and certain, but unquantifiable, deflation and devaluation impact on all asset values when or if the dollar was replaced, suddenly demonetized, removed from circulation outside the USA, or heavily restricted in its use and ownership. To be sure some asset values - gold, oil, food - would break free, and start the inflation spiral in real asset prices, but making the economic and social impact of "dollar disappearance" all the more apocalyptic, we would certainly have a radical mark down or outright collapse in equity values. This would develop its own momentum and all by itself would implode the global economy and collapse world trade activity, a true zero sum game.

In pure theory however nothing prevents the replacement of the dollar "by something else" but whatever that something else is, it will need to get approval from the owners and holders of US dollars outside the USA. Overseas and non-US parties could hold as much as $ 20 trillion, possibly more, one way and another. If the dollar was demonetized or removed from non-US ownership (how is a different question) it would be the overseas holders who would stand to lose the most. Logically therefore, they do not want the end of the dollar for international trade, investment and capital flows, equity trading, tourist trips - or anything else.

Since the non-American holders of US dollars probably own or control more dollars than Americans, and include the Chinese government, and other net creditor nation governments, their voices count. Supposedly, as of August 2011, these rightly named players would like international control and supervision of how many US dollars are printed or issued, and other limitations on the dollar's Exorbitant Privilege, but are not interested in replacing the dollar. However, we can be sure their opinion is able to change, possibly very fast, depending how the roulette wheels of global markets and ratings agencies turn, and depending on the circumstances surrounding "the end of the dollar".


More important than so-called technical questions of how the dollar could be replaced, we have a serious political or geopolitical problem for creating and using a new world reserve currency replacing the dollar. The currency used for well over 65% of world trade, and sometimes almost exclusively, as in the $ 5 billion-a-day world physical crude oil trade (ranking a year's world oil trade for over 190 nations equal to one year's US Federal deficit), is not going to magic itself away like a Black Swan on a nighttime flight to Venus.

Something credible has to be put in its place, first, before the switch can take place - although this confidence building move is in fact not the time-honored way of ending a money's reign: the traditional way of ending a fiat money is by a fiat take-it-or-leave-it political announcement. Only humorists including Dominique Srauss-Kahn before his disappearance in exotic or erotic circumstances from the international scene could imagine that IMF SDRs might be able to replace the dollar. National or regional "flavoured" SDRs, with different parities and relations to solid yardsticks like gold, silver, food and petroleum could or might be more attractive. The 2010 trial balloon of Strauss-Kahn pushing a new World Carbon Money is now long dead.

Since the question is basically political, we have to look at the models available. Two models could be offered for how to create and maintain a new money, or in fact new moneys of the plural variety: the American-type revolution and the French-type revolution.

The first of these 18th century revolutions is a small-scale mostly rural anti-colonial revolution, throwing off the shackles of the parasitic and already degenerate British empire. The revolution has plenty of anarchic strands, doesn’t like Big Government, and is not money-oriented. The other 18th century revolution is also not money-oriented and is generated by the same pressures and same public rage among majority-poor people against a dark, menacing and distant ruling elite, but ends with the ultimate in Big Government issuing fiat paper money - before the arrival of the Soviet state.

Post-revolutionary America and France, to be sure, were soon faced with creating and supporting a money system. Both tried a lot of nice ideas, and plenty of others, before being forced by no alternative to preach gold-backed money but practice armed isolationism. One point has to be underlined: sound money of the gold-backed type in both these case examples went with autarky, or its opposite - aggressive mercantilism - and not very often in some sweet spot half away along the political cursor. Gold-based (rather than gold-backed) money is not a trade expansionist concept, despite what its defenders will claim. If we want full metal money of the yellow-colored variety, gold that is, we must be prepared for an implosion of world trade, for starters.

Both the USA and France abandoned their gold-related moneys, the USA only in 1971, partly driven by political-motivated action by the France of Charles de Gaulle, in 1965, followed by many other countries demanding Roosevelt-era gold parity for their dollars. Nixon pulled the plug 6 years later. History has a way of giving us formal and basic insights on what happened in previous times of relatively short-lived, or slightly longer-lived "gold money interludes". For the last couple of hundred years, during gold money interludes the economy and global trade nearly always tanked. Why this did not happen after 1971, making us have to wait for the post-2008 context is complicated, but we can suggest the fiat money confidence trick - call it No Alternative to paper money - is one sure factor.


To be sure, we could have a return to Gold Standard money, as in the 1920s. Countries like the UK, France and Germany could very possibly be onboard, but there wold be predictable 1920s-type and 1930s-type consequences. One thing would be almost certain: world liquidity would decrease and this would entrain a vast compression of world trade and commerce, unless "some other mechanism" was in place to prevent this. What is this mechanism ?

Whatever it is, it would need global governance to be enforced and world governance, we can note, was an also-ran Nice Idea along with strong money, in the 1920s and 1930s. Both were tried, albeit in a half-hearted way, and both gambits failed. The gold standard was abandoned; global governance of the Society of Nations type was abandoned. The global economy and trade tanked.

This in fact brings us straight back to the War Option. The 18th century founding revolutions of the USA and France were supposedly anti-war and pro-commerce, summarized by Ben Franklin who said, almost on his deathbed: "The policy of America should be commerce with all, and war with none." Unfortunately the exact opposite was often true, with the isolationist warfare state hiding behind tariff walls as it waged war and paid wages to its people with borrowed cash or IOUs and redeemable credits for meat, tobacco, heating wood, glass beads, dried fish and other inflation-resisting real assets. When the isolation wore thin, and periodically, we shift to the Imperial Expansion and mercantilist mold, in part because early America, just like post-revolutionary France, were major targets for mercantilist economic attack by other Big Players.

French revolutionaries were more openly gung-ho pro-war from early on. Their early model police state and its trade protection-oriented economy were hallmarks of this policy, from the start. Despite their different origins and starting points, this in no way prevented the US or France converging in long and often unsuccessful global wars and a string of losing colonial adventures, continuing to this day as the two allies fight, for nothing, in Afghanistan-Pakistan and Libya using borrowed money to do so. It is easy to argue that failed attempts at creating and maintaining strong money quickly lead to "managed trade" policies or strategies at state level. Conversely, we can also argue the opposite: free trade is not possible with strong and solid money because credit is not so easy to engineer, making fiat money printing the winner when it concerns running permanent trade deficits. Surprise announcement of new moneys, or new parities for old moneys are always recommended, in this context.

Since the US dollar has already devalued by 10% to 15% against gold in the first two weeks of August 2011, Obama could try that angle, if he wanted. He could decree the new US Gold Standard of $ 2500 per Troy ounce of gold, anticipating market movement by several months.

In some ways the New Global Dollar could or might be quite easy to launch: the world's creditor nations are few, and can be polled or sounded out fast. Their core members are China, India, the Arab petro-states, Russia, Brazil and a few others. When or if they accept a new money, the project is viable and feasible and will almost surely have to include some type of state-level debt-for-equity deal.

Creditors' interests have to be protected as in any debt-for-equity bailout, meaning the US, European, Japanese and other major debtor countries will have to accept new ground rules and constraints. As already made plain and clear by China and Russia, these constraints will especially limit the "prime emitter's" money printing rights after the world money shift, with the objective of generating new productive economic resources in a transparent and equitable creditor-debtor framework.

To be sure the discussions and negotiations are going ahead now - behind closed doors. In Death Star Washington mum is the word, but sudden change is more likely than no change.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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