Free Markets, Free People

Dumping The Dollar

While the Fed tries to assure us that when the time comes it can wring the excess money it has pumped into the economy without driving it into the ditch, Paul Krugman and others want more spending, and we’re staring at 9 trillion in additional debt, the rest of the worldhas seems to be quietly deciding that the dollar has become an unstable currency in which they’d rather not trade:

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

They’re talking about a whole range of different currencies to replace the dollar but the fact remains that the old buck ain’t what it used to be and those trading in oil are looking for a more stable means of trade.

The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

Which explains some of the growth in the price of gold. Of course this transition will take time as the various countries carefully get rid of their dollar reserves over the coming years. However, if they are as committed to this transition away from dollar as the base trading currency for oil as this article indicates, then obviously the strength of the dollar will be adversely effected over that transition period and beyond as dollars are dumped. Couple that with the excess dollars we’ve pumped into the system these past few months and you can begin to understand the possible economic disaster this may end portend.

Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America’s trading partners have been left to cope with the impact of Washington’s control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. “The Russians will eventually bring in the rouble to the basket of currencies,” a prominent Hong Kong broker told The Independent. “The Brits are stuck in the middle and will come into the euro. They have no choice because they won’t be able to use the US dollar.”

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years’ time. The current deadline for the currency transition is 2018.

We’ve been talking and hinting about this since it first began surfacing and warning of the dire economic consequences such a move would have. Of course it is the result of our own profligate spending and financial mismanagement, but I don’t think, for the most part people understand the implications of this move to replace the dollar. And it also doesn’t appear we have ability (much less a plan) to reverse this trend toward this change of the economic guard.

~McQ

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9 Responses to Dumping The Dollar

  • I see eventually a push to put our debt into another currency. So when we crash, we don’t get the consolation of dragging our debt down with us.

  • This is a matter of perception more than reality. We have not done ourselves any favors in how we’ve managed the value of our currency, but there are no currencies in the world backed by gold. Dollars, yen, euros etc all trade against one another based on perceptions of value. And the greater threat during this supposed transition is to the value of dollar denominated investments held by nations like China and Saudi Arabia. The actual “cash” reserves can be literally converted into Euros or Swiss Francs within seconds on Forex.

    OIl denominated in gold will still be paid for in currency. Gold will be the yardstick for trades. Nobody is suggesting that company A will deliver 500 lbs of gold to Iran for the purchase of a load of crude oil. And adopting a basket of currency approach is a needless complication. Simple is better, whether that be dollars, euros, gold or basset hound puppies.

  • Needless worry…every decade or so this comes up…and everyone wails and moans…to include Americans…Sack Up People…one bad recession and 8 bad months of governance hasn’t ended the US hegemony. The Euro, to replace the Dollar…and the underlying European economy? Or a Chinese currency, might as well replace it with the Indonesian currency, because just like Japan or Indonesia, the PRC is going to have a fiscal melt-down…who has the largest, most productive, stable economy in the WORLD? Why yes, thank you, that would still be the good ole’ US of A. And consequently the world reserve currency will be the good ole US of A DOLLAR….When the US has sunk to the level of Great Britain then something else will take the Dollar’s place…we aren’t there yet. Jeebus what a bunch of whiny @rsed-b!tches people can be….”Oh boo-hoo our salad days are behind us, because Barak Obama has been POTUS for 8 months! All is lost! Doom, Despair and Agony on me.”

  • The problem with this the following:

    Japan has even bigger deficits and bad demographics.

    China looks great on paper, except they lack rule of law, and have a controlled currency that may be overvalued or undervalued – no one knows for sure.

    UK is about as bust as we are.

    Arabs have political risk.

    That leaves Europe. They have some financial troubles as well.

    I am a big dollar bear, and have been avoiding dollar assets for years. Its not always that easy.

    • To say “Europe has had a few problems” is an understatement.

      Their unemployment rate has been over 10% for several years now, and their welfare states, much more onerous than ours, are killing them.

      Their economies are in the crapper as bad, and sometimes worse, than ours. Spain, you might have hears, bet a wad on “Green Jobs” and it backfired badly.

      As you said, their demographics are bad. They’re a bomb waiting to explode.

      OTOH, Europe is hinting it might move right, but I’m not convinced that it won’t be a short-term, feel good, response. If they do, it’s more likely to be a textbook example of crony-capitalism with a strong Green component added in.

      Just a hunch; if they do, they’ll win a political battle, but lose the economic war. With Russia and Iran on the war path, it’d not be smart to force theUS out of defending them.

      Or, then again, maybe they’d like living under the Russian/Iranian/Muslim heel.

  • This is our future in the U.S. until our leadership puts the future of the dollar over the political careers.

  • sorry for stupid question, not an econ guy – what happens if oil is priced in, say, euros instead of dollars? why do we care? how will it affect me?

    column fodder here

  • Joe,

    We only care in that it would lead to less use of the dollar internationally and that our price of gas could fluctuate due to USD/EUR changes.

    Its a pretty big deal, but maybe not such a big deal as some people imagine.