The dollar devalution - a new Weimar?

Ben Bernanke: destroyer of money

The writing has been on the wall for some time now, and over the last several months there have been many none-too-subtle hints from China, France and a host of other nations about what they think of the dollar. The recent G-20 meeting in Pittsburgh was very much a consensus on abandoning the U.S. dollar as the world’s reserve currency and creating a new global reserve currency. Many scoffed at the viability of such an undertaking, declaring it to be unattainable, but anyone who has been paying attention to what our own Federal Reserve has been doing, who has grasped an even cursory understanding of the history and theory of money, and who has been observing what the other members of the G-20 have been quietly up to were not surprised by today’s announcement that the Arab gulf states, China, Russia, France, Japan and others are planning to divest themselves of their U.S. dollars and end all dollar transactions for oil.

This is a monumental and historic change in global monetary policy, and could soon prove devastating to the dollar. Indeed, it begs the question: will the dollar collapse? Unfortunately, the possibility is becoming increasingly likely despite the pictures of rainbows, sunshine and lollipops emanating from top policymakers, central bankers and analysts in and around Washington and New York. This is most unfortunate because very many people in this country stand to be completely blindsided by these unfolding events and just about the only source for information is foreign press. Too many Americans are right now under the illusion that the “recession” is all but over, that we are in the process of a “jobless recovery” and that our continuing to spend trillions of dollars that we don’t have is of no consequence because the Federal Reserve knows exactly when to begin reducing the money supply to stave off any harmful inflation. There are several serious problems with this entire situation that warrant attention.

The first problem is the issue of inflation. Like many other key concepts and terms, the word “inflation” has become understood and used by lay folk, politicians and central bankers in an incorrect sense. What they say is inflation is a rising of interest rates and prices to higher levels that could be harmful to the consumer. But what inflation has to do with in actuality is not interest rates or prices, but the supply of liquid money: if the supply becomes greater, meaning if the quantity increases, then it can be said also that the money supply has been inflated. Money supply of a fiat currency, that being a currency that has only an arbitrary basis of value, can be increased at will in two ways: it can be printed or it can be “created” as credit. Since the Fed has been printing money and creating credit in its efforts to purchased or monetize the burgeoning U.S. debt to the tune of approximately $13 trillion that we know about, it must be understood that inflation is already here – it is the effects of that inflation that have not been felt severely as yet, but they certainly will be in due time. Inflation, then, is a matter of quantity of supply and not of price. Rapidly rising prices is the inescapable result of inflation.

Second, even if the Fed knew exactly the precise moment when to decrease the money supply, this is of no consequence because if other nations indeed do abandon the dollar as the world reserve currency, then they will be divesting themselves of those dollars in exchange for whatever currency they will be replacing the dollar with. In divesting themselves of dollars, these dollars will ht eventually flooded into the market to make their way back to the U.S., as no one else will want them. These dollars while held in reserve in various central banks were not actively in the market, and so did not have an adverse affect on the value of the dollars that were circulating in the market. Once take out of reserve and sold or traded, the supply will be vast, and because the holders will be seeking to divest themselves of these dollars, that is to sell them, one must question to whom will they be sold and at what value? If everyone is selling their dollars and no one wants to buy them, then their value will necessarily plummet until such time as another party buys them or they become worthless. The dollar has been separated from the gold standard since 1971, and so not being tied to anything of tangible value, its value becomes wholly arbitrary. That is to say that it is worth whatever market movers think it is worth, and if they deem it someday to be worthless, then it will be so. And in the age of electronic transfer of monies, where trillions of dollars of transactions are completed each day, such an action of nations literally dumping their dollars into the open market could happen instantaneously. The effects would be instant and devastating.

Thirdly, we must briefly address the preposterous notion of a “jobless recovery” in an economy driven by consumer spending. This is thoroughly nonsensical. If the unemployment rate is constantly increasing, and therefore more and more people are unable to find jobs, then one must conclude that they are not earning money, and any amount that they might be earning will be either saved or spend on life’s essentials. If people aren’t earning then they are not spending. If people are not spending then businesses are not supplying goods and services, because demand is too low. As each month passes and the number unemployed increases, then necessarily the amount of consumer spending decreases, and likewise demand for various goods and services decreases. As demand decreases then there is the obvious relationship supply: less demand mandates less supply, and less supply mandates less production, which itself mandates a decrease in cost which is ultimately achieved by the loss of jobs through workers being laid off or entire businesses closing their doors. The only spending is coming from the government, and what is being spent is pure fiction. The Treasury has no money to spend; hence the Fed creates money for the government to spend on various ineffective programs and monetizing the debt. “Jobless recovery” is a jingo or buzz-phrase conceived in the minds of economists and government bureaucrats so out of touch with the reality of the current situation that they cannot see that the Keynesian policy of active government interventionism is an abject failure and that continued intervention, especially by the Fed, would be catastrophic.

Fourth, to the argument that the various nations abandoning the dollar for a new world reserve currency being something altogether unattainable due to nationalistic tendencies and protectionism, this seem s to longer relevant as it appears that, at least for the time being, this new currency is being referred to as a “basket” of various currencies: the Yen, the Yuan, the Canadian Dollar, the Euro and gold. Note that the U.S, dollar is absent from this list. This is very telling, and policy makers in Washington had better wake up to the message that is being sent.

This is most significant because we are initially talking about dealings with oil. Up until the time of this announcement, barrels of oil could only be purchased in U.S. dollars. Now U.S. dollars will be specifically and deliberately excluded from any transactions of barrels of oil. The deadline for transition to a new world currency to replace the dollar will be 2018, but it is certain that this “basket” of currencies will be substituted for the increasingly weak dollar in the interim.

The reckless abandon with which the Federal Reserve created the conditions for and is now compounding the danger of this global financial crisis has given other wealthy nations pause to consider what would be the benefit to continued U.S. economic dominance, and indeed some have already proclaimed that the transition ha already taken place. The fact that China and Brazil have been quietly converting some of their dollar reserves into gold would seem to confirm this. The fact that the Fed is debasing the currency at breathtaking speed would seem to give them good reason to do so.

The fact of the matter, all else aside, is that the rest of the world blames the U.S. for the global financial crisis. Right or wrong, it is what it is, and the rest of the world that was demanding and bought up toxic assets of its own will is looking for a scapegoat; and we are it. The question then becomes, now that it is accepted by every nation on earth that the U.S. is at fault, what is to be done? Disturbingly, the IMF in its latest communication has called for a global tax of sorts, primarily directed at the U.S. One could easily surmise the logic at work here: the Americans created the crisis, and therefore the Americans should pay for it in total. This logic is eerily similar to the logic, or lack thereof, applied to the crafting of the Versailles Treaty at the end of the Great War that required Germany to pay reparations covering the total cost of the war to the victor nations. The result was not good: Germany could not meet its fiscal obligations and so it’s central bank resorted to printing money and creating credit which caused hyper-inflation, and by 1923 the Mark was all but worthless, and Germany was plunged into an all consuming economic, social and political chaos that stopped just short of civil war, and entered into one of the darkest phases of human history.

One hopes that the world learned something from what happened to the Weimar Republic. One hopes that enough people are beginning to see the historical parallels. One hopes that the policy makers, politicians and central bankers in Washington will be honest with the people regard the most dire situation we are currently facing, so that we can realistically and soberly assess what can be done to salvage the system before it collapses. Transparency is key, and until the Fed’s secrets are revealed, and we all know openly the damage they have caused, we will have a very difficult time in undoing that damage and regaining the confidence of the world.

AP Photo:  Evan Vucci

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