A Falling Empire

In Criticism, Financial, Fresh on January 24, 2010 at 10:00 PM
There is nothing more symbolic of America’s economic reign than the US Dollar. You can trace the power of the Dollar back to World War II, where America not only emerged as political and military leaders, but the Dollar supplanted the British Pound as the world’s most reliable currency. Although there were ups and downs before, there is something very significant about the current US Dollar decline we are witnessing.

What followed the War was sheer economic domination by America. Sure, they had some ups and downs, but in the end you could always count on Maverick to come through in a dog fight against 18 Russian Migs. That’s right, America’s economic reign was exactly like Top Gun. They broke all the rules, relied on talent and guts, beat all the bad guys, got the girl, and finished everything off with an epic 80s guitar solo anthem.

Being the World’s measuring stick has a tremendous advantage. When asset prices collapse, like they did in late 2008 during the Financial Meltdown, the safe place to put your money was a reserve currency. When the housing bubble burst triggering the meltdown, trillions of dollars went into US Treasury notes, increasing the demand for the American Dollar. Warren Buffet said that we had all just witnessed a new bubble form, and he was right.

But Empires don’t fall overnight. I always look back to what America did in 2003 as their fiscal point of no return. They committed to the Iraq War (the War that gained them nothing in terms of National security) and the combination of expenditure without the means of raising funds internally relegated the nation to decades of deficits.

The White House Accountant, David Walker, tried to warn the administration that this was not only unsustainable, but dangerous. He was forced to resign soon after that. What followed was a completely reckless monetary and fiscal plan, justified by the idea that the US Dollar wouldn’t face any consequences simply because everyone needed the Dollar. Their currency wasn’t like gold – it was gold, and they had the ability to print as much gold as they wanted.

Fast forward to today, and at this point their situation is laughable. They just spent a ridiculous amount on stimulus, and it wasn’t nearly enough because they are still entertaining double digit unemployment figures. Walker has gone on the record, stating that the United States is “underwater to the tune of $50 trillion” in long term obligations.

Let me be clear. If this was any other nation, the entire World would have been on the phone asking for their money back. All US T-Bills/Bonds would have been severely devalued because the nation has no reasonable plan or prospect to pay its debt back. Their credit rating would have been diminished, and American hedge funds and investment banks would have been shorting the currency itself (engaging in a variety of contracts to sell the currency both now and later), which would serve to exacerbate the problem even further.

And so, I give you the signs of a falling financial landmark:

When India moved a large sum of money into gold, that was not only a wise economic move, but it was interpreted as a signal that no longer are they going to blindly keep using the US Dollar as their reserve.

Think about this. They moved their money into a commodity that hasn’t lost value in over thousands of years, and this is somehow considered a speculative move as compared with purchasing US Dollar notes, pieces of paper backed by a promise to pay by a nation with an exponentially growing debt and no real plan to repay it.

Before the recent financial crisis, there were only whispers among the other World leaders about establishing a new measuring stick. Now there is an open and frank dialogue, because basically nobody wants to rely on the greenback anymore. They are working on new global currency. It wouldn’t be a national currency, it would be something synthetic, representing all the nations collectively (think of the Euro, but more widespread).

I’ve read several articles giving the recent drop in the US Dollar a positive spin. They will point out how we’ve seen declines like this before (70s oil crisis and late 90s as well we saw CAD/USD at par). When you study the charts, they will show you that the US Dollar will always climb back up.

But that’s irrelevant. I’m not saying the US Dollar won’t make some sort of recovery in value. I’m saying our entire concept of how we define that value is about to change, and all America can do is watch.

  1. Umar, you're talking about a synthetic and multinational currency to act as reserve for national currencies? What is the Euro backed by?

  2. The Euro is backed by Gold, albeit some fractional reserve amount, but still…

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