Poor Man Survival
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A Digest of Urban
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The U.S.
dollar: The world’s worst reserve currency, except for all the others—for now.
Dark clouds
loom for the world’s dominant currency. Despite some positive financial news in
the United States, nations are reducing their reliance on the U.S. dollar. In
its stead, they are filling their vaults with gold, euros, yuan and other
currencies.
The Central Bank of Russia accelerated its dedollarization
efforts last year and dumped 98 percent of its dollar reserves. It then moved
$44 billion into euros, $44 billion into yuan, and almost $13 billion into 274
tons of gold bullion.
And Russia is far from the only nation turning away from the
greenback. Kazakhstan and Turkey cut their dollar reserves in half last year
and loaded up on 51 tons of gold bullion apiece. China sold 5 percent of its
dollar reserves, and bought 10 tons of gold. Ireland dumped 14 percent of its
dollar reserves, Switzerland dumped 6 percent of its dollar reserves, and Japan
dumped 2 percent of its dollar reserves. Altogether, around 60 nations reduced
their central bank’s dollar holdings last year, while over two dozen nations boosted
their gold reserves.
Demand for gold has soared to its highest level since U.S.
President Richard Nixon killed what was left of the gold standard in 1971. This
is a sign that nations are losing faith in the American currency.
The world economy is propped up by the U.S. economy, but the
U.S. economy is a house built on a bad foundation. The U.S. government
collected $3.3 trillion in taxes last year, but spent $4.1 trillion. It had to
borrow $779 billion just to meet expenses. The national debt rose more than
$1.2 trillion to an unbelievable $21.5 trillion. And net interest on
this debt rose to $371 billion. The Congressional
Budget Office estimates that America will be spending more on interest than
national defense within a decade.
These statistics are hard to fathom. For perspective, compare
the government to a household. Slash seven zeros from the official figures, and
it is like a well-to-do family that earns $330,000 a year—yet spends $410,000 a
year. This family put a staggering $78,000 on its credit card last year, even
though it already had $2,150,000 in credit card debt. It pays $37,000 a
year in interest, and it no longer pretends to
have a plan to pay off its debts. No well-managed bank would lend this family
more money.
The U.S. government has spent like this for decades, and nations
keep lending it all the money it wants at historically low interest rates. Why?
Banks keep lending America money because the dollar is the
world’s dominant reserve currency. Nearly 45 percent of the world’s debt is
denominated in dollars, and about 52 percent of international trade is
conducted in dollars. Since banks around the world need a lot of dollars to
conduct business, almost 62 percent of foreign exchange reserves are held in
dollars.
The high demand for dollars keeps the interest rate on America’s
debt low. Because many people want to own dollars, they want to buy dollars.
Purchasing U.S. debt in the form of U.S. Treasury bonds is an easy way to do
that. And since so many people want to buy these bonds, America’s government
can sell them at incredibly low interest rates.
But as nations lose faith in the U.S. financial system and sell
off their dollar reserves, the situation is changing. The dollar is losing its
reserve currency status. Its value is decreasing, and the interest rate that
banks charge America for loans is rising. The only reason the dollar has not
collapsed is that the world’s other major currencies are in even worse shape
than the dollar. Since there is currently no viable alternative reserve
currency, banks grudgingly continue to use the dollar—despite its flaws.
Almighty
Dollar
The U.S. dollar was not always a reserve currency. Before World
War i, the
British pound sterling was the dominant currency, and the dollar was barely
used outside the borders of America. But the Federal Reserve Act of 1913
centralized the U.S. banking system as nations around the world began
abandoning the gold standard so they could pay for their military expenses with
borrowed paper currency. America then became a lender of choice as nations
bought U.S. bonds denominated in Federal Reserve Notes.
When Britain finally abandoned the gold standard in 1919, banks
started reducing their dependency on the British pound and turned to the U.S.
dollar.
The dollar’s position as the world’s dominant reserve currency
grew stronger during World War ii. America sold weapons, supplies and other goods to the Allied
powers in return for gold. By the war’s end, the U.S. owned the majority of the
world’s gold reserves. Since no other nation could establish a gold-backed
currency, the world’s biggest economies fixed the exchange rate of their
currencies to the dollar. In 1944, at a conference in Bretton Woods, New
Hampshire, America promised that any dollar could be redeemed for its value in
gold. So the dollar became the new gold standard.
During the 1950s, over 90 percent of the world’s debt was
denominated in dollars. An economic downturn in the early 1970s, however,
caused nations to lose faith in the dollar’s stability. So they started
demanding gold for the dollars they held in reserve. Rather than watch American
gold reserves deplete, President Richard Nixon abandoned what was left of the
gold standard. To ensure that the dollar remained the world’s dominant reserve
currency, he negotiated a deal with the Saudis. He promised to arm and protect
Saudi Arabia if the Saudi royals would denominate all future oil sales in
dollars. The Saudis agreed, and the dollar became an oil-backed currency.
The fact that the Organization of the Petroleum Exporting
Countries uses dollars in all its oil transactions creates a massive demand for
U.S. currency. It is partially due to this demand that the average interest
rate on a 10-year loan to the U.S. government fell from 7.56 percent in 1974 to
2.69 percent today.
Since nations need dollars to buy oil and other goods, they buy
dollars in the form of U.S. Treasury Bonds (which are like an iou from the U.S.
government). Since demand for Treasury Bonds is high, interest rates are low.
This means the U.S. can continue racking up debt by selling ious around the world without
having to worry too much about the costs of servicing its expanding debt.
Former French Finance Minister Valéry Giscard d’Estaing called
America’s ability to borrow at low interest because of the dollar’s reserve
currency status an “exorbitant privilege.” This privilege is based on a high
demand for U.S. Treasury Bonds. When the dollar is no longer in international
demand, the U.S. will lose its ability to borrow cheap money, and interest
payments on the national debt will consume a burgeoning portion of America’s
gross domestic product.
Today, America has a far worse debt, and it continues to borrow.
Nations are losing faith in the dollar’s stability; they just have no other
option—yet.
Many European leaders want the euro to replace the dollar as the
world’s dominant reserve currency, but worries that the EU may fall apart have
prevented central banks from wholeheartedly embracing the euro. Likewise, many
Chinese government officials want the yuan to replace the dollar as the world’s
reserve currency, but China’s lack of currency transparency has been a
stumbling block.
“There is no alternative to the dollar,” British political
economist Mark Blyth told the New York Times. “We’re
stuck with the dollar, which gives the United States astonishing structural
power” (February 22).
Until a good alternative emerges, nations worried about
America’s debt must move slowly: They can only gradually decrease
their dollar holdings as they reluctantly buy euros and yuan.
But the status quo is ripe for change if the eurozone truly
unites into a German-run superstate, or if China relaxes the yuan’s peg to the
dollar. Many nations and individuals desperately want these changes. But if
history is any guide, it will take a shock to overturn the world’s financial
system.
The shock that catapulted the dollar to dominant reserve
currency status between 1913 and 1919 was a banking crisis in Europe that
prompted central banks to load up on American currency. Ironically, it may be a
banking crisis in America that prompts central banks to load up on European
currency.
When investors start dumping dollars and rushing to other
currencies, demand for U.S. Treasury Bonds will plummet and
interest rates will spike. The U.S. is already spending
11 percent of its total tax revenue just to pay the interest on its debt. But
if interest rates returned to the level they were at just four decades ago,
during the 1981–82 recession, America
would have to spend 44 percent of its tax revenue on
interest.
It would struggle to finance both an army and a massive welfare
state.
Under such conditions, it would be almost impossible for the
government to borrow money. The nation would be forced to either slash spending
or start printing money instead of borrowing. That would mean printing over $2
trillion every year just to pay interest on
the debt and keep the government running. Money printing on such a scale cannot
go on indefinitely without causing hyperinflation. The value of each individual
dollar would decline as the nation pumped out more and more dollars.
Once the dollar loses its reserve currency status, economic
collapse will follow hard!
For insight into what happens when a financially isolated nation
has to print massive amounts of money to remain financially solvent, look at
Venezuela. When this nation entered an economic crisis in 2013, its government
responded by printing 500 million bolívars. This expanded the nation’s broad
money supply by 70 percent—and caused the bolívar’s value to plummet 44
percent. In the five years since, the nation has printed another 80 trillion
bolívars, and their value has dropped to the point where you literally have to
be a millionaire to buy a cup of coffee.
Similar conditions are coming to America after the dollar is
dethroned and the nation is economically besieged.
…America’s gold reserves
are draining away: the euro has 10,778 metric tons of gold while the USA now
owns only 8,134
Yours for
better living,
Bruce, the
“Poor Man”
Additional News You Should Note…
The Results of Your
Genetic Testing could affect your ability to get
insurance…while federal law prohibits health insurers from denying coverage based
on genetic test results, the law DOES NOT apply to life, disability, and
long-term care insurance. In most
states, an insurance company can legally ask for the results of your DNA test!
If you are planning
to get long-term care or life insurance, buy it before you get tested and don’t forget as I have warned
previously, law enforcement are increasingly using family DNA databases to
solve crimes so beware-there is NO PRIVACY regardless of what they may tell
you!
STOP BUYING LEVI PRODUCTS
Levi’s is now paying employees to fight
against gun rights! CEO Chip Bergh has
sounded off frequently about his hatred for the right to bear arms and
apparently for American workers as he’s shifted most of his manufacturing to
Mexico but recently he’s bolstered his anti-gun furor by creating his Safer
Tomorrow Fund, a group which grants cash to activists that work with anti-gun
groups and has partnered with Michael Bloomberg’s ‘Everytown for Gun Safety’
group…he’ll also double match its employees donating to anti-gun organizations,
and to actually pay workers for up to five hours a month of volunteer work for
such groups in their support to stomp out Second Amendment rights.
Don’t Leave a Mess-Literally
Parents who insist on living in a home they can’t
maintain or clean provoke resentment in children who can’t get them to move or
clean up. Children often need to hire a
firm to come and clean out a home that a parent has neglected for 20-30 years
after they’ve passed on.
Low-Bill Wills
Free Will- This no-cost service shows you to
how to draw a new will gratis if your wishes or circumstances change. [Freewill.com]
A Final Note…
Contributors and subscribers enable the Poor Man Survivor to post 150+ free essays annually. It is for this reason they are Heroes and Heroines of New Media. Without your financial support, the free content would disappear for the simple reason that I cannot keep body and soul together on my meager book sales & ecommerce alone.
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You Can’t
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