How The U.S. Dollar Will Be Replaced
May 15, 2012 by Brandon Smith
The great frustration of being actively involved in the liberty movement is the fact that many people are rarely on the same page (or even the same book) during political and economic discussion. Where we see the nature of the false left/right paradigm, they see “free democracy.” Where we see a tidal wave of destructive debt, they see a “responsible government” printing and spending in order to protect our “best interests.” Where we see totalitarianism, they see “safety.” Where we see dollar devaluation, they see dollar strength and longevity. Ultimately, because the average unaware citizen is stricken by the disease of normalcy bias and living within the doldrums of a statistical fantasy world, he simply has no point of reference by which to grasp the truth when exposed to it. It’s like trying to explain the concept of “color” to a man who has been blind since birth.
Americans in particular are prone to reactionary dismissal when exposed to facts that disrupt their misconceptions. Our culture experienced a particularly prosperous age, not necessarily free from all trouble, but generally spared from widespread mass tragedy for a generous length of time. This tends to breed within societies an overt and unreasonable expectation of ease. It generates apathy and laziness.
Several economic events are likely to take place this year, including the exit of peripheral countries from the European Union, the conflict between austerity and socialist spending in France and Germany, the development of bilateral trade agreements between China and numerous other countries that cut out their reliance on the U.S. dollar and the announcement of quantitative easing III (aka QE3) by the Federal Reserve. All of these elements are leading in one direction: the end of the greenback as the world reserve currency.
Some people question how it would be even remotely possible that the dollar could be replaced. The concept is so outside their narrow worldview that they cannot fathom it.
The question is a viable one. How could the dollar be unseated?
The Dollar A Safe Haven?
Believing that the dollar is a safe haven is lunacy based on multiple biases. For some people, the dollar represents America. A collapse of the currency would suggest a failure of the republic and, thus, a failure by them as individual Americans. By extension, it becomes “patriotic” to defend the dollar’s honor and deny any information that might suggest it is on a downward spiral.
Other people see how the investment world clings to the dollar as a kind of panic room, a protected place where one’s savings will be insulated from crisis. However, just because a majority of day-trading investors are gullible enough to overlook the greenback’s pitfalls does not mean those dangerous weaknesses disappear.
There is only one factor that shields the dollar from implosion: its position as the world reserve currency. Without this exalted status, the currency’s value vanishes. Backed by nothing but massive debt that cannot be repaid, it sits frighteningly idle — like a time bomb waiting for the moment of ignition.
The dollar is valuable only so long as foreign investors believe we will pay back the considerable debts we owe, and that we will not hyperinflate in the process. If they ever begin to see their purchases of dollars and treasuries as a gamble instead of an investment, the façade falls away.
The epic dysfunction of the dollar is rooted in its reliance on perception instead of tangible wealth or strong fundamentals. Indeed, it is like any other fiat mechanism, with all the inevitable pitfalls built into its structure.
Ironically, the value of the U.S. Dollar Index is measured not by its intrinsic buying power or its historical buying power, but its arbitrary buying power in comparison with other collapsing fiat currencies. The argument I hear most often when pointing out the calamitous path of the dollar is that it is the go-to safe haven in response to the crisis in Europe. What the financially inept don’t seem to grasp is that the shifting of savings back and forth between the euro and the dollar is just as irrelevant to our currency’s survival as it is to Europe’s. Both currencies are in decline, and this is evident by the growing inflationary pressures on both sides of the Atlantic. Ask any consumer in Greece, Spain, France or the U.K. how shelf prices have changed in the past four years, and they will say the exact same thing as any consumer in the United States: Prices have gone way up. Therefore, it makes sense to compare the dollar’s value not to the euro, but something more practical, like the dollar of the past.
In 1972, just as President Richard Nixon was removing the dollar from the last vestiges of the gold standard, a new car cost an average of $4,500. A home cost about $40,000. A gallon of gas cost 36 cents. A loaf of bread cost 25 cents. A visit to the doctor’s office cost $25. Wages were certainly lower, but they kept much better pace with the prices of the era. Today, the gap between wages and inflation is insurmountable. The average family is unable to keep up with the pace of rising prices.
According to the historic buying power of the dollar, the currency is a poor safe-haven investment. With the advent of bailout efforts and debt monetization through quantitative easing, its devaluation has been expedited dramatically. The question then arises: Why do foreign countries continue to buy in on the greenback?
The Dollar Dump Has Already Begun
One of my favorite arguments by those defending the dollar is the assertion that no foreign country would dare to dump the currency because they are all too dependent on U.S. trade. The reality is that foreign countries are calmly and quietly dumping the dollar as a global trade instrument.
To those people who consistently claim that the dollar will never be dropped, my response is, it already has been dropped! China, in tandem with other BRICS nations (members of the bloc of Brazil, Russia, India, China and South Africa), has been covertly removing the greenback as the primary trade unit through bilateral deals since 2010. First China and Russia turned their backs on the dollar; the entire ASEAN trading bloc (Association of Southeast Asian Nations) and numerous other markets, including Japan, have followed suit.
China in particular has been preparing for this eventuality since 2005, when it introduced the first yuan-denominated bonds. The bonds were considered a strange novelty back then, especially because China had so much surplus savings that it seemed outlandish for them to take on treasury debt. Today, the move makes a lot more sense. With the proliferation of the yuan and the conversion of the Chinese economy away from dependence on exports toward a more consumer-based economy, the Chinese have effectively decoupled from its reliance on U.S. markets. Would a collapse in the U.S. hurt China’s economy? Yes. Would it survive? Oh, yes — far better than America would, at least.
In 2008, I warned of this development and was attacked on all sides by more mainstream economists and Keynesian proponents who stated that such a development was impossible. Today, it’s common knowledge that our primary creditors are “diversifying” away from the dollar, though mainstream media talking heads and those who parrot them still claim that this is not a threat to our economy.
The true threat to the dollar’s supremacy is not the constant printing by the private Federal Reserve (though that is a nightmare in the making), but the loss of faith in our currency as a whole. What’s the bottom line? A dollar collapse is not “theory” but undeniable fact, driven by concrete action on the part of the very nations that have until recently propped up our debt obligations. It is only a matter of time before the dollar diminishes and fades away. All signs point to a loss of reserve status in the short term.
What Will Replace The Dollar?
My next favorite argument in defense of the greenback is the assertion that there is “no currency in a position to take the dollar’s place if it falls.” That assertion is based on a naïve assumption that the dollar will not fall unless there is another currency to replace it. I’m not sure who made up that rule, but the dollar is perfectly able to be flushed without a replacement in the wings. Economic collapse does not follow logical guidelines or the personal pet peeves of random economists.
But, to be fair, there is actually a replacement already conveniently ready to roll forward. The IMF for a couple of years now has openly called for the retirement of the dollar as the world reserve currency, to be supplanted by the elitist organization’s very own “Special Drawing Rights” (SDRs).
The SDR is a trading mechanism created in the early 1970s to replace gold as the primary means of international trade between foreign governments. Today, it has morphed into a basket of currencies that is recognized by almost every country in the world and is in a prime position to take the dollar’s place in the event that it loses reserve status. This is not theory; this is cold, hard reality. Even the U.S. Post Office now uses conversion tables that denominate costs in SDRs.
Men who promote the philosophies of globalization greatly desire the exaltation of a global currency. The dollar, though a creation of a central bank, is still a semi-sovereign monetary unit. It is an element that is getting in the way of the application of the global currency dynamic. I find it rather convenient (at least for those who subscribe to globalism) that the dollar is now in the midst of a perfect storm of decline just as the IMF is ready to introduce its latest fiat concoction in the form of the SDR. I find the blind faith in the dollar’s lifespan to be rife with delusion. It is not a matter of opinion or desire, but a matter of fact that currencies in such tenuous positions fall and are replaced. I believe the evidence shows that this is a deliberate process, leading toward the globalist ideal: an unaccountable economic or governing body that operates an economic system utterly devoid of transparency and responsibility.
The dollar was a median step toward a newer and more corrupt ideal. Its time is nearly over. This is open, it is admitted, and it is being activated as you read this. The speed at which this disaster occurs is really dependent on the speed at which our government and our central bank decide to expedite doubt. Doubt in a currency is a furious omen, costing not just investors, but an entire society. America is at the very edge of such a moment. The naysayers can scratch and bark all they like, but the financial life of a country serves no person’s emphatic hope. It burns like a fire. Left unwatched and unchecked, it grows uncontrollable and wild until there is nothing left to fuel its hunger, and it chokes in a haze of confusion and dread.