Update August 13, 2015: Since I originally wrote this column, my sources tell me it is all but certain that the International Monetary Fund (IMF) will allow the Chinese renminbi to become a world reserve currency during its upcoming meeting in October. Also known as the yuan, which is the basic unit of measurement of the renminbi, the proposal to add the Chinese currency to the basket of highly favored currencies was rejected previously by the IMF. However, according to my sources, because Chinese exports are now the largest in the world, and there are many nations trading in the yuan, there is little justification for not granting this status to the Chinese currency.
Another new development related to the first is that it appears the U.S. is now embroiled in another Cold War. This one is not an arms race between the US and Russia, although there is good reason to suggest that it has resumed —or will soon. Instead, this latest version is a Currency War between the US and China. According to a report from Reuters, “China’s currency fell to a four-year low on Wednesday, slumping for a second day, after a central bank devaluation on Tuesday, and government sources believe the yuan may be allowed to slide even further to help the country’s exporters.”
This Chinese version of “quantitative easing” may be intended to ensure that China and other nations no longer have to trade in U.S. dollars as much as they do today. Naturally, if the dollar is no longer the dominant world currency, it will almost certainly make it harder for the U.S. to refinance its estimated $18 trillion in public debts, at least at favorable rates. This in turn would exacerbate efforts to achieve a balance budget and reduce those debts.
Of course, many nations have devalued their currency of late in part to increase their exports. But of particular concern to us should be when the likes of China decides to do it on a grand scale. We should keep foremost in mind that despite our status as trading partners we are not allies and it is clearly in their regime’s strategic best interests to supplant us as the world’s most important economy.
Have you discussed with your financial advisor the likely impact on your investments if the U.S. dollar loses its dominant position as a world reserve currency. If he or she is not prepared to offer you recommended measures to take as safety precautions, I suggest you get other advice. Secondly, in reviewing the list of presidential candidates, I hope you are vetting them to ensure that you do not vote for another amateur-in-chief or a spendthrift, no matter how well intended or sweet sounding the rhetoric.
The following was originally published on June 19, 2014
If you don’t yet know that the U.S. dollar is the world’s currency, a.k.a reserve currency, then you’re not alone. Many Americans don’t —and most of them have about as much interest in the subject as a child hearing a parent tell them it’s bedtime. Sadly, most Americans don’t have a good working knowledge of basic economics, and how important it is for the U.S. dollar to remain dominant.
In short, before WWII, the British pound sterling was the world’s dominant currency. Countries and companies traded in the pound sterling as a matter of course. Since then, however, the U.S. dollar replaced it as the go-to currency. This has provided us with significant advantages and leverage.
Since the dollar has long since been untethered to anything real, such as gold, instead of simply the “full faith and credit of the United States,” and more recently our federal government’s spending and dollar-printing habits, to be charitable, have become excessive, there is clearly a movement afoot to counter this abroad. Some nations want to make the dollar less dominant, and therefore themselves less reliant upon it —and us. A “supranational currency” and a “global currency” have been proposed to supplant the U.S. dollar. Some nations are putting their thoughts into action. Some, of these “progressive” nations, while very large and currently enjoying trading status with us, are technically not our “allies.” Think China and Russia. Imaging that!
Why is this important?
Your federal government, for a number of reasons including lessening the short-term impact of the Great Recession on our economy, has been messing with the U.S. dollar. Regardless of the motive, the amount of dollars in circulation has increased exponentially along with our federal debts . In the eyes of the clear-minded, this lessens the credit-worthiness of the government backing them.
Not to worry, says the newest money czar, that would be Janet Yellen, recently installed chair of the U.S. Federal Reserve. Under her watch, and by extension with at least the tacit approval of President Obama and Congress, the dollar printing is to continue, albeit at a slower pace. (This is referred to as “tapering” of the purchase by the Fed of the bonds issued by the Feds which provides the “cash” needed for the Feds to pay its bills and debts. Got that?) In the meantime, not so casual observers such as Brazil, Russia, India, and China, known as the BRIC countries, are thinking and doing. They are thinking that the dollar dominance is not in their best interests, and they are taking significant strides to lessen their dependence on it.
Among other things, this is expected to result in competition for the dollar which in turn is expected to decrease the amount held by other nations and institutions. This is also expected to rate of interest paid by our federal government on our federal debts. Raising that interest rate by only one-percentage point could impair our federal government’s ability to pay the interest on its debts. Our latest FedGov Report™ shows that the each U.S. taxpayer is on the hook for more than $150,000 in just the funded federal liabilities. Rising interest rates could result in a budget crisis that would make the most recent partisan bickering over the “debt crisis” look like a love fest. Naturally, we the taxpayers will likely be the ones called upon to make things right with heftier tax bills.
And don’t be mislead in thinking the “rich” alone can fix this problem if only they started paying their fair share. Confiscating a substantial portion of the combined wealth of the so-called 1% wouldn’t make much of a difference. Besides, return to the even higher confiscatory tax rates and the wealthy, with the help of their CPA’s and lawyers, will figure out ways to minimize taxes. They always have, and always will. Just ask Warren Buffet, political ally and friend of President Obama’s.
According to some financial analysts, the possible fallout from the dollar losing its reserve currency status could be huge. The average American’s standard of living could be reduced by as much as 25%, said one analyst. Add 25% to your current cost of living and tell me this issue should not be a top priority of our civic and business leaders.
Perhaps you think, “O’Malley, certainly you jest.” I wish. On the contrary, in fact, Tea Party members of Congress have been trying to nudge both major parties toward exercising greater fiscal discipline for years. From the reaction, you would think it was a four-letter word. Furthermore, even President Obama, no friend of the Tea Party, demonstrated that he knew the problem existed. During a late-night TV interview he remarked about how important it is that the currency situation remain stable:
“We don’t have to worry about it short-term. Right now interest rates are low… But it is a problem long-term, and even medium-term.”
President Barack Obama
Late Show with David Letterman, September 18, 2012
Regrettably, the president’s budget proposals have not reflected an acute awareness of the “problem.” Perhaps he’s hoping that the consequences for our federal fiscal follies will not be felt until he leaves office in 2016. If that’s so, it may be that he calculated correctly. His successor will be thrilled, I’m sure. Just imagine Occupy Wall Street on steroids coming to your neighborhood.
This is not to say that the president and Congress don’t have other pressing matters. The resurgent Islamic extremists in Iraq, the war in Afghanistan against them, Iran and Korea’s nuclear ambitions, Russia’s imperialism toward its neighbors, the U.S. unemployment lines, our strategic energy needs, and various social issues all scream for attention. These are trying times requiring cool heads, stout hearts, collegial wisdom, and great political courage.
Unfortunately, it appears that most Americans have lost faith in the president’s ability to lead. The recent Real Clear Politics poll average for his job approval rating is once again heading to record lows. The recent WSJ/NBC poll shows dissatisfaction with him at levels below that of President Bush’s. My, my, what a difference a few years, and a plethora of scandals and self-inflicted wounds can make.
Meanwhile, the rest of the world is not standing still on the currency front. Here’s an entry under “world currency” courtesy of Wikipedia. If you don’t trust the source, follow the citations and you’ll see why those of us that are really concerned about this developing situation advise every individual, business, and civic leader to get current on this development, and then plan and vote accordingly.
You might also read what Aljazeera America reported earlier this year regarding the cozy deal Russia and China made. (see accompanying screenshot.) Or, if you like irony, read what the assistant editor of a British newspaper wrote on the subject back in 2013.
Regardless, don’t ask me why President Obama, the leaders in Congress, and the Fed chair haven’t been treating this as a looming crisis. After all, from what I’ve seen, they enjoy playtime as much as other children.
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