Post by Emperor AAdmin on May 23, 2014 12:07:29 GMT -5
How to Destroy the U.S. Dollar
Putin's Revenge
By Geoffrey Pike
Friday, May 23rd, 2014
There was reportedly a meeting last month with Russia’s Finance Ministry in which discussions took place about increasing the role of the Russian ruble in exporting goods, while reducing or cutting out U.S. dollars from the process.
This is not a surprising development given the sanctions against Russian officials in the wake of the Ukraine situation and the harsh words from U.S. politicians.
If Russia does make a move against the U.S. dollar, it might be seen as an act of revenge. And in terms of Putin’s reputation, perhaps it would be.
But it would also be a rational step for the Russian government, particularly when some of the government officials are specifically being targeted.
If the U.S. government is going to place sanctions on particular Russian officials, then of course Russia is going to want to deal less in dollars. In many ways, they have little choice at this point. The only way to avoid possible harm from the sanctions is to start doing business with currencies the U.S. is less able to control.
It's also being reported that Iran and China are backing Russia’s plan to reduce the use of dollars in its export operations.
Even though Iran has oil, I think the country's backing is almost irrelevant in terms of its capability of economically harming the U.S.
China is a different story. China has well over a billion people and a highly significant, even if vulnerable, economy. If China joins Russia in moving away from the dollar, even just a little bit to start, it could have a significant impact down the line.
Of course, China’s biggest threat to the U.S. dollar and economy is its holdings of over $1 trillion in U.S. Treasuries. While I see no immediate indication that China will reduce its reserves of U.S. government debt, the Chinese government takes a step away from the dollar when it supports Russia's plan.
The World’s Reserve Currency
The U.S. dollar has been considered the world’s reserve currency since the end of World War II. Much international trade and settlements are completed in dollars, and oil has generally been sold in dollars.
But I think this is slowly going to change over the next decade or two.
To be clear, there is almost no chance that the Russian ruble is going to become the next reserve currency of the world. Russia has its own set of problems. But there is also no reason Russians can’t use their own currency in trading with others.
In fact, I really don’t see any fiat currency taking over the dollar’s role as the reserve currency. There are economic problems all over the world. The only countries or regions with fewer economic problems than the U.S. are ones that aren’t big enough to take over. For example, the Singapore dollar is not going to be used worldwide as the U.S. dollar is today.
But one thing I have pointed out in the past is that there really doesn’t need to be a reserve currency of the world. We live in a digital age where you can convert currencies, along with many other financial instruments, with the push of a few buttons. Why does Russia — or any other country, for that matter — have to use U.S. dollars to trade with countries other than the U.S.?
So the question here isn’t whether the Russian ruble or the Japanese yen or the euro or any other currency is going to replace the dollar as a reserve currency. The question is whether there needs to be a reserve currency at all — and I think that answer is no.
The follow-up question is whether the U.S. dollar is going to remain the reserve currency. I don’t think it will lose this role overnight, but I see a long-term trend in the direction of it becoming less and less relevant to the rest of the world.
Impacts on U.S. Residents
The U.S. consumer has been heavily subsidized for a long time now. The high demand for U.S. dollars outside of the U.S. keeps prices lower than they would be otherwise.
There are mercantilists all over the world. The Chinese central planners are the best example. They try to subsidize their export sector — at the expense of Chinese consumers, and to the benefit of U.S. consumers.
The Chinese export goods to the U.S., and they receive dollars in return. But instead of converting these dollars back into yuan or using them to buy goods and services elsewhere, the Chinese government uses them to buy U.S. government debt.
So the Chinese government subsidizes the U.S. government, U.S. consumers, and the Chinese export sector all at the expense of Chinese consumers.
Even in other parts of the world where they aren’t necessarily buying U.S. government debt, there is still high demand for U.S. dollars. Again, this is a subsidy to the U.S. consumer. Let’s walk through a simple example...
Let’s say you have a guy from Thailand living as a permanent resident in the U.S. He works and pays his taxes. Of the money he gets from working, he uses half to buy goods and services within the U.S. such as food, clothing, and shelter.
He takes the other half and sends it to his relatives in Thailand, who use it to buy goods and services there. As long as that money stays in Thailand, it is a benefit to U.S. consumers.
The guy from Thailand worked and helped produce a certain amount of goods and services, but he only consumed about half of what he helped produce. So it leaves more for everyone else in the U.S.
(Again, this is under the assumption that the money sent to the relatives in Thailand doesn’t flow back to the U.S.)
Sending dollars overseas basically has a deflationary effect on the prices of goods and services.
Now let’s say the U.S. dollar starts losing its status as the world’s reserve currency. The process discussed above starts to reverse. Not only do dollars not flow out, but they may even start coming back in. Maybe people in Thailand would rather buy some U.S. products and send them back than hold onto the dollars.
This would result in higher prices and would eventually mean an end to the major subsidies American consumers have had for many decades now.
In the case of China and Japan, it would mean much the same thing. But if the governments of China and Japan stopped buying U.S. Treasuries and reduced their holdings, this would also have the effect of ending the major subsidy to U.S. politicians. They would not have the ability to run huge deficits at low interest rates.
I think this would actually be a positive development in the long run. It would get the government to reduce its spending, essentially forcing it to get its budget in balance or close to it, with higher interest rates and higher inflation.
And the Federal Reserve would not be able to come to the rescue as easily with threats of higher interest rates and higher price inflation.
Timing
I see this as inevitable. The U.S. dollar’s elite status is going to end.
Russia may be taking the first significant step in the near future. It will be even more significant if China publicly endorses it, and even more than that if China starts doing the same thing.
I am not predicting that the U.S. dollar will become irrelevant anytime soon or that it will lose its reserve currency status in the near future. But I do see a slow shift in that direction.
We don’t know if it will take five years, 10 years, or 20 years. But once a certain trend gets started, sometimes it can build quickly.
Even Europe is beginning to be more defiant of U.S. commands. The Europeans need cheap energy to come from Russia through Ukraine. Some European politicians may finally have to stop obeying virtually every command of the U.S. politicians.
If you live in the U.S., you should really prepare for higher price inflation regardless of what happens to the dollar in the near term.
The good news is that when things get rough for the dollar, they are also going to get rough for the politicians in Washington D.C. A reduction in government spending would more than offset the pain of having fewer cheap goods and services coming from China.
Until next time,
Geoffrey Pike for Wealth Daily
link
Putin's Revenge
By Geoffrey Pike
Friday, May 23rd, 2014
There was reportedly a meeting last month with Russia’s Finance Ministry in which discussions took place about increasing the role of the Russian ruble in exporting goods, while reducing or cutting out U.S. dollars from the process.
This is not a surprising development given the sanctions against Russian officials in the wake of the Ukraine situation and the harsh words from U.S. politicians.
If Russia does make a move against the U.S. dollar, it might be seen as an act of revenge. And in terms of Putin’s reputation, perhaps it would be.
But it would also be a rational step for the Russian government, particularly when some of the government officials are specifically being targeted.
If the U.S. government is going to place sanctions on particular Russian officials, then of course Russia is going to want to deal less in dollars. In many ways, they have little choice at this point. The only way to avoid possible harm from the sanctions is to start doing business with currencies the U.S. is less able to control.
It's also being reported that Iran and China are backing Russia’s plan to reduce the use of dollars in its export operations.
Even though Iran has oil, I think the country's backing is almost irrelevant in terms of its capability of economically harming the U.S.
China is a different story. China has well over a billion people and a highly significant, even if vulnerable, economy. If China joins Russia in moving away from the dollar, even just a little bit to start, it could have a significant impact down the line.
Of course, China’s biggest threat to the U.S. dollar and economy is its holdings of over $1 trillion in U.S. Treasuries. While I see no immediate indication that China will reduce its reserves of U.S. government debt, the Chinese government takes a step away from the dollar when it supports Russia's plan.
The World’s Reserve Currency
The U.S. dollar has been considered the world’s reserve currency since the end of World War II. Much international trade and settlements are completed in dollars, and oil has generally been sold in dollars.
But I think this is slowly going to change over the next decade or two.
To be clear, there is almost no chance that the Russian ruble is going to become the next reserve currency of the world. Russia has its own set of problems. But there is also no reason Russians can’t use their own currency in trading with others.
In fact, I really don’t see any fiat currency taking over the dollar’s role as the reserve currency. There are economic problems all over the world. The only countries or regions with fewer economic problems than the U.S. are ones that aren’t big enough to take over. For example, the Singapore dollar is not going to be used worldwide as the U.S. dollar is today.
But one thing I have pointed out in the past is that there really doesn’t need to be a reserve currency of the world. We live in a digital age where you can convert currencies, along with many other financial instruments, with the push of a few buttons. Why does Russia — or any other country, for that matter — have to use U.S. dollars to trade with countries other than the U.S.?
So the question here isn’t whether the Russian ruble or the Japanese yen or the euro or any other currency is going to replace the dollar as a reserve currency. The question is whether there needs to be a reserve currency at all — and I think that answer is no.
The follow-up question is whether the U.S. dollar is going to remain the reserve currency. I don’t think it will lose this role overnight, but I see a long-term trend in the direction of it becoming less and less relevant to the rest of the world.
Impacts on U.S. Residents
The U.S. consumer has been heavily subsidized for a long time now. The high demand for U.S. dollars outside of the U.S. keeps prices lower than they would be otherwise.
There are mercantilists all over the world. The Chinese central planners are the best example. They try to subsidize their export sector — at the expense of Chinese consumers, and to the benefit of U.S. consumers.
The Chinese export goods to the U.S., and they receive dollars in return. But instead of converting these dollars back into yuan or using them to buy goods and services elsewhere, the Chinese government uses them to buy U.S. government debt.
So the Chinese government subsidizes the U.S. government, U.S. consumers, and the Chinese export sector all at the expense of Chinese consumers.
Even in other parts of the world where they aren’t necessarily buying U.S. government debt, there is still high demand for U.S. dollars. Again, this is a subsidy to the U.S. consumer. Let’s walk through a simple example...
Let’s say you have a guy from Thailand living as a permanent resident in the U.S. He works and pays his taxes. Of the money he gets from working, he uses half to buy goods and services within the U.S. such as food, clothing, and shelter.
He takes the other half and sends it to his relatives in Thailand, who use it to buy goods and services there. As long as that money stays in Thailand, it is a benefit to U.S. consumers.
The guy from Thailand worked and helped produce a certain amount of goods and services, but he only consumed about half of what he helped produce. So it leaves more for everyone else in the U.S.
(Again, this is under the assumption that the money sent to the relatives in Thailand doesn’t flow back to the U.S.)
Sending dollars overseas basically has a deflationary effect on the prices of goods and services.
Now let’s say the U.S. dollar starts losing its status as the world’s reserve currency. The process discussed above starts to reverse. Not only do dollars not flow out, but they may even start coming back in. Maybe people in Thailand would rather buy some U.S. products and send them back than hold onto the dollars.
This would result in higher prices and would eventually mean an end to the major subsidies American consumers have had for many decades now.
In the case of China and Japan, it would mean much the same thing. But if the governments of China and Japan stopped buying U.S. Treasuries and reduced their holdings, this would also have the effect of ending the major subsidy to U.S. politicians. They would not have the ability to run huge deficits at low interest rates.
I think this would actually be a positive development in the long run. It would get the government to reduce its spending, essentially forcing it to get its budget in balance or close to it, with higher interest rates and higher inflation.
And the Federal Reserve would not be able to come to the rescue as easily with threats of higher interest rates and higher price inflation.
Timing
I see this as inevitable. The U.S. dollar’s elite status is going to end.
Russia may be taking the first significant step in the near future. It will be even more significant if China publicly endorses it, and even more than that if China starts doing the same thing.
I am not predicting that the U.S. dollar will become irrelevant anytime soon or that it will lose its reserve currency status in the near future. But I do see a slow shift in that direction.
We don’t know if it will take five years, 10 years, or 20 years. But once a certain trend gets started, sometimes it can build quickly.
Even Europe is beginning to be more defiant of U.S. commands. The Europeans need cheap energy to come from Russia through Ukraine. Some European politicians may finally have to stop obeying virtually every command of the U.S. politicians.
If you live in the U.S., you should really prepare for higher price inflation regardless of what happens to the dollar in the near term.
The good news is that when things get rough for the dollar, they are also going to get rough for the politicians in Washington D.C. A reduction in government spending would more than offset the pain of having fewer cheap goods and services coming from China.
Until next time,
Geoffrey Pike for Wealth Daily
link