The Rise and Fall of the US Dollar as the The World Reserve

The advent of a new millennium has brought about new challenges to the uncontested supremacy of the almighty US dollar. London's Financial Times noted in an article on December 27, 2006, "The US dollar bill's standing as the world's favourite form of cash is being usurped by the five-year-old euro. The value of euro notes in circulation is this month likely to exceed the value of circulating dollar notes, according to calculations by the Financial Times. Converted at Wednesday's exchange rates, the euro took the lead in October.

"Although the ECB does not deliberately promote the international use of the euro, it has become popular in official foreign exchange reserves – even if it is far from challenging the dollar's lead as the most popular reserve currency.

"By the end of October the $759bn-worth of US dollar notes in circulation was only a fraction ahead of the value of euro notes, converted at exchange rates at that time. But since October the euro has risen strongly against the dollar and this month the value of euro notes has risen to more than €610bn, or in excess of $800bn at the latest exchange rates. That level is unlikely to have been beaten by the greenback."

On the other side of the world, a China Daily article dated August 11, 2005, states, "Governor of China's central bank Zhou Xiaochuan yesterday revealed details of the basket of currencies used to determine the value of the yuan. Dominant amongst a raft of currencies are the US dollar, the euro, the yen and South Korea's won. The Singapore dollar, pound sterling, the Malaysian ringgit, the Russian rouble, the Australian dollar, the Thai baht and the Canadian dollar are also considered in the calculation, Zhou said.

Speaking at the opening of the second headquarters of the People's Bank of China in Shanghai, Zhou explained that the currencies were chosen for their share of China's foreign trade, foreign debt and foreign direct investment. At the moment the United States, the euro zone, Japan and South Korea are China's biggest trading partners. "Their currencies are naturally the main ones in the basket," Zhou said. Any economy that has an annual bilateral trade volume of more than US$10 billion cannot be neglected in the basket, he said. Those with an annual trade volume of more than US$5 billion should also be considered, he added. A recent assessment of China's basket shows that the USD would represent 33% of the basket, the JPY 30%, the KRW 16%, the EUR 11% and the other currencies around 10%. As China increases its exports to other nations around the world, the composition of its basket will obviously change accordingly.

Other cracks in the US dominance are starting to appear elsewhere as well. Under Saddam Hussein, Iraq started selling its oil strictly in euros. This practice continued until the summer of 2003. More recently, Iran has started selling its oil in several different currencies, chief among them the euro, the yuan and the yen along with the dollar. Venezuela's President Hugo Chavez has severed ties with both the IMF and the World Bank and with the help of other South American countries, chiefly Bolivia, Argentina and Brazil, is in the beginning stages of created a Bank of the South which will compete with these offspring of the Bretton Woods Agreements.

But is this enough to reign in the US dollar and cause its collapse as the de facto world reserve? One major factor to look at is the so-called US debt ceiling, a limit set by Congress beyond which the national debt cannot rise. Way back in March 1971, four months before Nixon closed the Gold window, the "permanent" U.S. debt ceiling had been frozen at $400 Billion. By late 1982, U.S. funded debt had tripled to about $1.25 TRILLION. But the "permanent" debt ceiling still stood at $400 Billion. All the debt ceiling rises since 1971 had been officially designated as "temporary(!?)". In late 1982, realizing that this charade could not be continued; The U.S. Treasury eliminated the "difference" between the "temporary" and the "permanent" debt ceiling. Since taking office in 2001, Bush has asked Congress to raise the debt ceiling five different times. It now stands at nearly $9 trillion.

The other piece of the puzzle is what this outrageous debt was able to purchase. Overwhelmingly, the US has invested in nonreturnable goods such as military weaponry, healthcare, and servicing the debt. Nearly half of the US government spending, therefore, is on guns and weapons of mass destruction, pills and more pills, and paying interest on monies borrowed long ago. While key infrastructural repairs go unheeded, a healthcare system grows more and more burdensome for fewer and fewer people, and interest-only payments skyrocket, the US government contents itself with hegemonic growth overseas in regions that are increasingly hostile to a US presence. At the same time, the US dollar has steadily decreased in value against all major currencies worldwide. When I moved to Switzerland in 1975, the US dollar was pegged at SFR2.75. When I left only four years later, it was down to SFR1.60. The US dollar has continued to weaken as a result, and the Bush regime has been rushing headlong towards the day that the rest of the world will eventually call in their dollar chips. Though they can no longer request gold as an exchange, they can effect the same result by simply buying another currency rather than the dollar.

In an article on the World Prout Assembly website from June 21, 2007, Julian Delasantellis explains both the scenario that the Bush administration and the rest of the US hopes will occur along with a more pragmatic and probable outcome. "a new international financial architecture seems to have developed, one that economists Nouriel Roubini and Brad Setser, on their weblog RGE Monitor, call Bretton Woods 2.

Here's how Bretton Woods 2 works. China (or the other, lesser players in this game, Japan, Taiwan and South Korea) does not sell its export-earned dollars. Rather, it banks them. Without this excess selling pressure, the dollar does not fall in value against the yuan; it remains stable, which allows American consumers to continue their monthly billion-dollar overseas spending spree. Chinese factories keep humming, employment is strong, the Chinese people are far too content buying new stuff to come out to protest again at Tiananmen Square, and China's Communist Party rulers are very happy about that.

This is much like what happened with the billions of petrodollars that were raised by oil-exporting countries after the oil-price rises of the 1970s. The billions of dollars of China's current export earnings get sent back to the US, mostly to be invested in Treasury securities. This keeps dollar interest rates, including mortgage rates, lower than they would have been, and this keeps the US economy humming and the consumer, still fat, dumb and happy, flush with cash and plastic to keep the cycle going for at least one more round.

But no human agency or endeavor lasts forever. The internal contradictions of Bretton Woods 1 caused it to fall, and the same seems to be happening with Bretton Woods 2. Specifically, what if China doesn't want 1.2 trillion in US dollar reserves?

Bretton Woods 2 greatly benefited Bush administration officials, by both pressuring wage rates to help out their business buddies and spurring the economic growth that got them re-elected in 2004. Still, it is somewhat embarrassing to be the president of the nation with the most massive trade deficits in history. Like spoiled rich kids since time immemorial, the Bush administration is blaming somebody else.

The administration, along with its mouthpieces in the corporate conservative media machine, is arguing that, even with a huge budget deficit and virtually non-existent national savings, the trade deficit is not America's fault. It's not that the US is spending too much and saving too little, it's that the surplus countries, especially China, are saving too much and spending too little.

This interpretation of savings as bad is certainly new in the working theory of capitalist economies; in classical economics, savings are a very good thing, since the market can direct them to future investments that will maintain economic growth. A rough parallel would be an inebriate claiming that he doesn't have a problem, it's the rest of the world that suffers from inadequate alcohol consumption syndrome.

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