As America’s dollar continues to lose its value in the global markets, it seems to me the pursuance of a new international currency is inevitable, and already underway. The American dollar was once a zero inflation currency that was backed by precious metals, but overtime we have distanced ourselves from tangible assets backing the USD, and instead embraced a “Faith” value system known as a Fiat money or currency that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith and has caused a declination in value of the U.S. Greenback.
Another well known contributor to the devaluation of the greenback is inflation, which is found everywhere in our economy, except in the government’s statistics. Take for instance corn; the most important food crop in America, is up 75% since 2008. Gasoline is up from $2.25 a gallon to more than $4 a gallon – an increase of more than 40%. The nationwide minimum wage is up by 19%- based on the increase from $5.15 and hour to $7.25. Lastly, the cost of monthly rent is up by 25% nationwide and up 40% in most urban markets, as more Americans seek renting over homeownership due to the 2008 real estate crisis which caused many to lose their home and others to have their homes drop in value.
One last example is, the base price of a Ford F-150, the best-selling passenger vehicle in America, has gone from $18,225 to $36,590 – a 33% increase. This is an arguably domestically sourced and manufactured product. Its price is completely dominated by the value of the U.S. dollar. I know many would say that these examples are not of inflation but instead the rise of Corporate creed and cost of innovative new technology – I would say you have some ground there, but the largest attributor is that our dollar is so far stretched that it no longer holds the value it once did and I will explain why in this article I hope you enjoy the read.
When did we lose control of the US Dollar?
Well it started in 1913.What changed in 1913? That was the year America adopted the Federal Reserve Banking (FRB) system and the nation took its first steps toward abolishing the gold standard and replacing it with a banking system that allowed for unlimited paper money to be created.
In 1966 Alan Greenspan described the new system as a regional Federal Reserve Bank that is nominally owned by private bankers, but more so owned in fact by the government.
Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. … But now, in addition to gold, credit extended by the Federal Reserve banks (‘paper reserves’) could serve as legal tender to pay depositors.”
In other words, the dollar would only be partially backed by gold, and banks could create money by lending out money secured by credit from the Federal Reserve banks (even though the reserve banks did not necessarily have gold on deposit themselves). Thus the seeds of America’s first fiat (currency not backed by gold) dollar system were sown.
At that time, however, there were still restraints upon money-supply growth because the dollar was still convertible to gold upon demand. Anyone cashing in paper dollars was still legally entitled to its value in gold, so the money supply did not balloon completely out of control.
Yet by 1934, the paper money supply had expanded faster than the nation’s gold supply, so in order to prevent the nation’s gold supply from being drained, the U.S. decided to devalue the dollar—by 41 percent. Prior to 1934, an ounce of gold could be redeemed for just US$20.67, however after the revision; the U.S. government would only part with an ounce of gold in exchange for $35. In gold terms, anyone who had a U.S. savings account lost 41 percent of its value—overnight.
Even though the 1934 U.S. currency devaluation rocked people’s confidence in the dollar, World War II thrust the U.S. dollar into a new status: the world’s reserve currency. Toward the end of the war, representatives of most of the world’s leading nations met to create a new international monetary system, later known as the Bretton Woods agreement. At this meeting, the war-torn and virtually bankrupt nations of the world decided that since the U.S. economy had come to dominate the globe, and because it held 80 percent of the world’s gold due to the war, they would tie their currencies to the dollar, which, in turn, could be converted into gold at $35 per ounce.
Yet under the Bretton Woods system there were still limits on how much paper money a country could create. Each country had to police its own currency or be forced into embarrassing devaluations. The U.S. itself was constrained from overprinting money because the dollar remained fully convertible into gold.
However, by 1971, America had again printed vastly more paper money than was backed by precious metal. According to some estimates, so many paper dollars had been created that the nation’s gold supply only backed 22 percent of them. At the same time, French President Charles de Gaulle, recognizing that the dollar was losing value, had been exchanging his nation’s collection of U.S. dollars for American gold reserves. Seeing other nations following suit, U.S. President Richard Nixon closed the gold window in August 1971, no longer allowing foreigners to exchange their U.S. dollars for gold and thus ending the Bretton Woods agreement.
From that point on, America’s dollar became fiat, not backed by tangible assets. As the Federal Reserve bank of Minneapolis says, the U.S. dollar is fiat and is valuable only as long as “people are willing to accept fiat money in exchange for the goods and services they sell”—and only as long as “they are confident it will be honored when they buy goods and services.”
Since people were already in the habit of accepting paper backed by gold, Americans hardly noticed when the U.S. greenback became backed by nothing more than faith—until it started affecting their pocketbooks. Loss of the dollar’s gold backing resulted in a U.S. dollar sell-off in which foreign nations dumped dollars on the open market. This in turn caused roaring inflation and gold to spike up into the $800-per-ounce range. After the FRB jacked interest rates into the high teens, both Americans and foreigners decided they would trust the government and continued using the U.S. dollar.
The U.S. now operates on what many refer to as the Bretton Woods 2 system. Although there is no formal central bank agreement (as was the case with Bretton Woods 1), many countries, especially those in Asia, have more or less informally pegged their currencies to the dollar.
This system is inherently more unstable than the previous precious-metal-based non-fiat system. Since the U.S. dollar is no longer convertible to gold, there is no theoretical limit to how much the U.S. money base can expand—and the U.S. has been taking full advantage of this situation to increase its money supply.
The Dollar’s Decline
During Alan Greenspan’s term at the FRB alone, America’s monetary base tripled and more new money came into being than under all previous Fed chairmen combined. As the government has massively increased the money supply—doubling it in the last seven years alone—those dollars have become less valuable.
So many dollars have been created that only the dollar’s status as a reserve currency, along with the kindness of America’s trade partners, has prevented a complete dollar meltdown. Unfortunately, these dollar supporters seem to be crumbling.
At one point, 86 percent of the globe’s transactions were denominated in dollars. Whether it was Russians and Saudis selling oil to the world, or Chinese purchasing wheat from Canada, the dollar was the primary means of payment. Thus, foreign nations needed to keep huge dollar reserves on hand. This was a gigantic plus for the dollar. Had foreign nations not needed to increase their holdings of dollars as world trade grew, there would have been a massive wave of homeless dollars roaming the world looking to be spent, and as the supply of dollars increased, the dollar’s value would have plummeted. Instead, over the years, America has been able to get away with creating the money needed to pay its bills and finance an otherwise unaffordable standard of living.
However, the dollar’s status as a reserve currency is now being challenged. In 2005, the percentage of dollar-denominated reserves held by foreign nations was 76 percent, not two years later; it is down to 65 percent. “There is a gentle and osmotic process underway,” says economics analyst Julian D.W. Phillips: “a lessening of the role of the U.S. dollar in the global reserves” (Financial Sense Online, Nov. 6, 2006).
Although an all-out revolt against the dollar hasn’t yet occurred, clear signals are emerging that the dollar’s role as the world’s reserve currency of choice could be ending. Several international banks have announced intentions to diversify their reserves away from the greenback: Russia’s central bank, Sweden’s Riksbank, the Central Bank of the United Arab Emirates, Qatar Central Bank and the Central Bank of Syria. Stop and think about this- we no longer have tangible assets backing our dollar.
America’s massive monetary expansion could be about to boomerang on itself, as it did in 1934 and 1971—only this time, the number of dollars involved absolutely dwarfs all previous currency crises. As the U.S. persistently destroys the value of the dollar by overprinting (or, more correctly, over-creating, since most money created is now digital), foreign nations are losing confidence in the dollar and its role as a reserve currency. Foreign central bank sales are the first waves of a coming dollar storm. The more those central banks dump dollars, the greater the loss of investor confidence.
The rise of crypto-currency!
Many may be thinking by this point- WHAT IS GOING TO HAPPEN!? As I write this article hearings are being held on Capitol Hill to discuss the validity of a digital currency that has been on the rise for sometime but has not poised a threat until recent increases in crypto-currency worth. This crypto-currency has many forms but it seems that there is one that is making enough waves to get congressional attention this week and it is known as Bitcoin, and as I write this article its current value is 1 bitcoin= $544.57, and is recognized almost globally as a relevant currency. I strongly believe that this form of currency has a phenomenal foundation and will not seize to exist, but instead grow in popularity as the virtues of this fiat system values anonymity and translates well in worth globally.
What is Bitcoin?
Bitcoin is a consensus network that enables a new payment system and completely digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for the Internet. Bitcoin can also be seen as the most prominent triple entry bookkeeping system in existence.
From a user perspective, Bitcoin is nothing more than a mobile app or computer program that provides a personal Bitcoin wallet and allows a user to send and receive bitcoins with them. This is how Bitcoin works for most users.
Behind the scenes, the Bitcoin network is sharing a public ledger called the “block chain”. This ledger contains every transaction ever processed, allowing a user’s computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bitcoins from their own Bitcoin addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in bitcoins for this service. This is often called “mining”. To learn more about Bitcoin, you can consult the dedicated page and the original paper.
Won’t loss of wallets and the finite amount of Bitcoins create excessive deflation, destroying Bitcoin?
Worries about Bitcoin being destroyed by deflation are not entirely unfounded. Unlike most currencies, which experience inflation as their founding institutions create more and more units, Bitcoin will likely experience gradual deflation with the passage of time. Bitcoin is unique in that only a small amount of units will ever be produced (twenty-one million to be exact), this number has been known since the project’s inception, and the units are created at a predictable rate.
Also, Bitcoin users are faced with a danger that doesn’t threaten users of any other currency: if a Bitcoin user loses his wallet, his money is gone forever, unless he finds it again. And not just to him; it’s gone completely out of circulation, rendered utterly inaccessible to anyone. As people will lose their wallets, the total number of Bitcoins will slowly decrease.
Therefore, Bitcoin seems to be faced with a unique problem. Whereas most currencies inflate over time, Bitcoin will mostly likely do just the opposite. Time will see the irretrievable loss of an ever-increasing number of Bitcoins. An already small number will be permanently whittled down further and further. And as there become fewer and fewer Bitcoins, the laws of supply and demand suggest that their value will probably continually rise.
Thus, Bitcoin is bound to once again stray into mysterious territory, because no one exactly knows what happens to a currency that grows continually more valuable. Many economists claim that a low level of inflation is a good thing for a currency, but nobody is quite sure about what might happens to one that continually deflates. Although deflation could hardly be called a rare phenomenon, steady, constant deflation is unheard of. There may be a lot of speculation, no one has any hard data to back up their claims.
That being said, there is a mechanism in place to combat the obvious consequences. Extreme deflation would render most currencies highly impractical: if a single Canadian dollar could suddenly buy the holder a car, how would one go about buying bread or candy? Even pennies would fetch more than a person could carry. Bitcoin, however, offers a simple and stylish solution: infinite divisibility. Bitcoins can be divided up and trade into as small of pieces as one wants, so no matter how valuable Bitcoins become, one can trade them in practical quantities.
In fact, infinite divisibility should allow Bitcoins to function in cases of extreme wallet loss. Even if, in the far future, so many people have lost their wallets that only a single Bitcoin, or a fraction of one, remains, Bitcoin should continue to function just fine. No one can claim to be sure what is going to happen, but deflation may prove to present a smaller threat than many expect.
Can Crypto-Currency be a danger to world economies?
Electronic payments aren’t new. Bitcoin’s only innovations are its status as an independent currency and its decentralized network design. But those differences might make Bitcoin — or rather, crypto-currency in general — an existential threat to the modern liberal state. If widely adopted, crypto-currencies would cripple government in three central functions: taxation, police and macroeconomic stabilization. That is exactly what Bitcoin’s biggest fans are hoping.
1. Taxation: How do governments collect taxes on transactions in Bitcoin? The answer is they don’t, and they can’t. Crypto-currency’s strong protections on anonymity make it impossible for any state to know who is buying what, who is paying whom, who earns what, and who has what in savings. That poses a direct challenge to the power of states to levy taxes.
The problem is that Bitcoin makes tax evasion easier. States could enforce reporting of Bitcoin income for individuals and businesses, as they try to do for cash, which is also hard to track. But encryption and the peer-to-peer network structure make Bitcoin even harder to follow than physical cash, and digital cash is much better than the physical kind for storage and transactions, so the scale of the challenge could end up being much bigger.
2. Police: It would be almost impossible for states to detect certain crimes. One of the major alleged uses of Bitcoin — though, of course, one can never truly know — is buying illicit drugs. Bitcoin’s cryptography makes it uniquely able to facilitate money laundering, insider trading, fraud, and bribery. The transactions would be untraceable, and the money doesn’t ever have to return to the bank, where the financial crime might have been detected.
3. Macroeconomic policy: A Bitcoin economy would undermine the power of real-world central banks to make monetary policy. Yes, governments can influence the demand for national currencies by requiring taxes to be paid in them. But the monetary lever on private transactions and lending would be gone if such commerce was denominated in Bitcoin. And by displacing governments as currency issuers, Bitcoin also threatens their ability to finance public debt. In a world where many transactions are anonymous, it’s unclear how governments could even compile accurate economic data, without which macroeconomic policy is impossible. Economic depression in a Bitcoin regime could be an insoluble problem.
Only time will tell if what I discussed in this article is relevant to future practices in the global marketplace, but it is evident that the USD will not play a part in global commerce as it has for decades in the future. We no longer hold the industrial prowess to maintain the standards that made America great we have sold those rights away so that a chosen few can make a big payday. What America does now to combat these rising issues will set the precedent on whether we can one day reclaim our title as a civil industrial nation.
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http://abcnews.go.com/Business/MarketTalk/story?id=3630951
Shift From U.S. Dollar As World Reserve Currency Underway (+93K Views)
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