For a number of decades, the U.S. dollar has acted as the world’s reserve currency. A reserve currency is essentially a currency,
. . . which is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. It also tends to be the international pricing currency for products traded on a global market, such as oil, gold, etc. This permits the issuing country to purchase the commodities at a marginally lower rate than other nations, which must exchange their currency with each purchase and pay a transaction cost. . . It also permits the government issuing the currency to borrow money at a better rate, as there will always be a larger market for that currency than others.1
Over the course of the last year, the dollar’s role as the world’s reserve currency has come under attack. The other day it was noted,
In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar. Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars. . . .
This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region’s conflicts into a battle for great power supremacy.2
While the U.S. continues its fight against Al-Qaeda in oil-rich Iraq, some have questioned if the U.S. is misleading citizens and preparing for military action in Iran3, which holds the world’s third-largest proven oil reserves and the second largest natural gas reserves. The world’s resources appear to be up for battle.4
According to the Washington Post,
The dollar fell to nearly its lowest point of the year against the yen and euro on Tuesday, which sent the price of gold surging to a record intraday high above $1,045 per ounce, as investors sought a hedge against inflation and foreign nations continued to stockpile the precious metal. . . China was the first major power to attack the greenback, calling in March for the dollar to be replaced as the world’s reserve currency. China holds more U.S. debt than any other country — about $800 billion — and the further the dollar drops, the less the value of the U.S. debt owed to China.5
Last fall, Congressman Brad Sherman (D-California) reported that China and other foreign creditors put pressure on the Bush administration to bail out foreign investors.6 Meanwhile, as the Pentagon preps for economic warfare, the economic consequences of replacing the dollar as the world’s reserve currency remain to be seen.
Sources:
- “Reserve Currency”. Wikipedia. 7 Oct 2009.↩
- Fisk, Robert. “The Demise of the Dollar“. 7 Oct 2009. The Independent. 7 Oct 2009.↩
- Pilger, John. “The Lying Game: How We Are Prepared for Another War of Aggression”. 30 Sep 2009. JohnPilger.com. 7 Oct 2009.↩
- For an ancient corollary, see W. T. Sanders’ comments in Polarization in the Book of Mormon.↩
- Ahrens, Frank. “Dollar’s Slide Gives Rise to Calls for New Reserve”. 7 Oct 2009.↩
- China and the Bailout.↩
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Tags: China, Economic Warfare, Russia
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Mark D.
on October 8, 2009 at 11:57 pm
Whether oil is priced in dollars or Euros or dinar doesn’t make that much of a difference. What makes a difference is what level of confidence foreign investors have in our fiscal and monetary policy. If they lose confidence in the stability of the dollar, due to our excessive deficits, for example, they won’t buy bonds denominated in dollars any more, which will have major implications both for them (China particularly) and for us.
On the other hand, minus all the inflation, perhaps it would be best if foreigners quit lending us money…
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Greg
on October 10, 2009 at 12:05 am
Mark D. – If or when the U.S. dollar is replaced as the world’s reserve currency, it makes the possibility of a financial collapse much more likely, since its status as the “anchor currency” is propping up its value. Also, given the fact that the U.S. is the world’s largest debtor nation, prices of important commodities imported to the U.S. will be significantly higher. This will likely mean that the government will find it increasingly difficult to expand and/or control the American overseas “empire” since it will be unable to finance the war machine.
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Mark D.
I would say that the stability of the dollar’s value is what gives the dollar de facto status as the world’s reserve currency. If the dollar’s value keeps on dropping (raising the cost of everything traded on the world market), it will be our own fault.
Our fault for pretending we can print, lend, subsidize, and borrow our way out of our problems, instead of addressing economic fundamentals. With a squishy GOP at the helm, we were in slow decline. Now we are on the highway to economic ruin.
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Greg
Mark D. – By promising more than they could deliver, U.S. politicians and others have put the country in a precarious financial position.
However, I don’t agree with the assessment that it’s “our own fault.” That’s a phrase much too close to Collectivism to be bandied about in a free society. Rather, it would appear that those who were elected and/or nominated to positions of responsibility had a different agenda.
Since the U.S dollar was inaugurated as the world’s reserve currency shortly after WWII, former New York Times reporter Henry Hazlitt’s collection of articles and essays in From Bretton Woods to World Inflation: A Study of Causes & Consequences is an important book on this subject.
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