The Dollar - World Currency or World Pain ?

Used to be that the US Dollar was a respected commodity. The Dollar was everywhere, all countries were eager to accumulate this currency. But in the last year or so, something has happened to the Dollar. In its recent extended crash and volatility, what are its chances for recovery?

Well, if you don’t want to read the rest of the reasons — in short — it ain’t gonna recover. Pure and simple. If you want the reasons — read on, but it’s not pretty and you might be offended if you are an American.

Since its determined inception in 1944 with the Bretton Woods agreement, the Dollar went stellar in its world importance as the new World Reserve Currency. The new Greenback position fueled the start of the modern American Way, easy living with abundance for all. Then came credit for all in the 70’s and ’80s and again there were the good times. So, what happened?

Certain key events happened along the way that have fueled the inevitable crash. In 1971, Nixon turned around to the IMF and refused to pay back his countries huge debt. Instead, on his own — and for the benefit of just the US and not the World — he disconnected the world trade dollar from gold and set the dollar free. Because, as a stipulation under the Breton Wood agreement the dollar became the World Reserve Currency, the whole world must pay for important basic commodities like food, oil, metals etc. in Dollars, there was no real problem for Nixon in his actions. So, without any gold backing, the dollar only relies now on political goodwill and mainly oil for it’s position and value.

First political goodwill. Well what do you think? How have the past Presidents fared in terms of peaceful and friendly world diplomacy? How does the current Bush administration shape up in terms of world sway and respect? I guess I really don’t have to explain this. So much for the political goodwill then…

Secondly, the dollar has always been linked to oil. When oil went up in price, the dollar’s value was forced down. This was a wonderful mechanism to keep the oil price low, steady and cheap. After all, oil is the commodity that has always both fueled the American Way, and kept those stroppy OPEC countries in their place. Right?

Well, even an idiot must except that the positions has changed. With oil prices popping their top, all OPEC has been saying is, “Oh…well we never realized that there would be such a demand for oil by Asia and particularly China. We certainly have enough oil, it’s just….well…we haven’t got enough refineries to process the oil. Terribly sorry.” OPEC is a rich, modern, high level business organization, with everything at its fingertips — and they couldn’t accurately project the demand for oil increasing in 2008 ? Yeah, right…

So oil skyrockets and the dollar is left out in the cold. More and more countries are unlinking their currencies from the dollar now. Brazil, Russia, China, India, Argentina, Kuwait and many others have done this. Numerous countries have also started to trade commodities in Euros. How dare they do this I hear you cry, what about the Bretton Woods contract? Well what about it? One of the stipulates of Bretton Woods was that the US dollar must always be backed by gold. So, if Nixon can break the contract …. Perhaps another memorable lesson in America leading by selfish example ?

This consequent loss in dollar confidence is stinging the dollar badly and still the US government does nothing effective.

I read one angry blog — by a cerebrally deficient American — who more or less said how dare the EU allow the Euro to get so strong against the dollar. Goddamn — how dare they, after all we did to win the Second World War — we should punish them harshly and teach them a lesson !! I was amazed at the sheer, blind stupidity of his blog. Another example of current clear-thinking and subtle US diplomacy perhaps? And as if America ever pays its debts — what about Nixon when he refused to pay the huge IMF debt? What about their current National Debt? — which stands at over $9 trillion dollars now, and is increasing by $1.63 million every single day. This is a big yawn to all US governments and is not seen as a problem. Every time the debt approaches the limit set by Congress they just pass another Bill, raising the bar. Trouble is, it’s not the US that pays the debt — its every other country in the world that holds US dollar reserves and Treasury Bills etc…And all to fuel the cheap, American Way. In other words, Europe and the rest of the world have been paying back America’s national debt for years and years. It is fairly apparent from all this that the US Government really does believe that the trade dollar should be looked after and supported monetarily by the rest of the world. After all, they’re the one’s that need the dollar, isn’t that right?…..

So what’s left? Will there be a recovery of the dollar? I don’t think so. For the simple reason that the US government has lost control of its own currency and is only just realizing this painful circumstance. But other forces are at work here, outside forces that are not good for the Western World. It is interesting that the Free World Markets — the very fabric of democracy — are probably or at least partially to blame for the dollar’s rapid demise. There is about $1.8 trillion dollars outside America now. China and Japan both hold over $1.1 trillion of this. So, as a practice scenario, what would happen if say China were to dump all its reserve dollars and buy Euros? Yes, all those worthless dollars would come back to America, and there would be massive uncontrolled inflation, and a long-term recession not seen since the killing inflation that Germany had to suffer after World War ll.

There are other more significant threats and questions related to all the above. Now I come to the what if scenarios. What if China and Russia are using the Middle East as pawns in a greater game, to drain and strain the US economy? What if China does dump all her dollar reserves? What if oil really is running out? What will happen to the US ?

After all, before you go to war, you always try and weaken your opponent economically first.