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The Dollar has been dethroned

Sep 14, 2012

The US dollar was enthroned in 1944 at the Bretton Woods economic convention in New Hampshire when the leaders of many nations decided to make it the "World Currency." One of the main reasons for choosing the dollar was because Europe was broke and devastated by World War II and was in no position to take the lead. The USA had an abundance of gold and silver reserves, so they could back their currency with gold.

The idea was that world trade imbalances would be settled by gold. If America imported more than it exported, the difference could be settled in gold. In the 1960's  the US became entangled in Vietnam, a costly war that increased its trade imbalance and thus drained the gold supply. By 1970, gold's backing of the dollar had fallen from 55% down to 22%. That was the point where economists believed people would lose faith in a currency.

So on August 15, 1971 President Nixon "closed the gold window." No longer could countries obtain gold from America's stock. They were stuck with dollars unless they could use them to buy things. In other words, the dollar was cut loose from the gold standard, and essentially, the Bretton Woods system ceased to function.

Of course, this frightened many people and caused the value of the dollar to drop. So to prop up the dollar, the US made a deal with Saudi Arabia to sell oil only in US dollars. This meant that essentially the dollar was now an oil-based currency, because any nation buying oil had to pay for it in US dollars. So every country had to have US dollars as part of their reserves. This new demand for dollars propped up the value of the dollar, because it could be spent on oil, which virtually every country needed, either to buy or to sell.

This new oil-backed dollar worked fairly well, although inflation remained a problem. In other words, it kept requiring more and more dollars to buy a barrel of oil, which means that the value of the dollar has gradually decreased over the years. In recent years, oil prices spiked to $150/barrel, then backed off to $50 and now hovers around the $100/barrel mark.

Over the years the US government found that its oil-backed currency could also be used as an instrument of power to impose its will upon other countries. All oil payments, being denominated in dollars, had to pass through the Federal Reserve System, and so the Fed could be used to block oil sales and purchases if it wished. The problem was that the more the US government used their power to impose its own interests at the expense of other nations, the more dissatisfaction and resentment was created throughout the world.

The recent oil sanctions against Iraq and now Iran proved to be the proverbial straw that broke the camel's back. With the rise of China as an economic power that could challenge the US, and having high-tech military might to back up their challenge, the US dollar was no longer able to remain strong. In fact, as of September 6, 2012, the US dollar has begun its final decline in value.

For the first time since the 1970's, when Henry Kissinger forged a trade agreement with the Royal house of Saud to sell oil using only U.S. dollars, China announced its intention to bypass the dollar for global oil customers and began selling the commodity using their own currency....

The ramifications of this new action are vast, and could very well be the catalyst that brings down the dollar as the global reserve currency, and change the entire landscape of how the world purchases energy.

http://www.examiner.com/article/dollar-no-longer-primary-oil-currency-as-china-begins-to-sell-oil-using-yuan

The article continues, saying that next day, September 7, Russia announced that it would supply as much oil to China as they wanted, bypassing the US dollar in its transactions.

The effects of this new oil-world order is that all nations, such as Iran and Venezuela, who are threatened by Western sanctions, can now continue oil sales without interference from the US government. Most sanctions will no longer be effective. If oil sales themselves are cut off to Europe and America, those countries can and will find a market in China and an ever-increasing array of other nations.

In other words, the US has just been deprived of one of its biggest economic weapons. At the same time, the dollar has been dealt a near-death blow, and the bleeding will continue until the dollar is dead.

To make matters worse, on September 13 Fed chief Bernanke announced an open-ended QE3 (quantitative easing #3), in which the Fed will purchase $40 billion worth of mortgage-backed securities each month until the economy is back to normal. That means it will never end.

The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.

http://www.bloomberg.com/news/2012-09-13/fed-plans-to-buy-40-billion-in-mortgage-securities-each-month.html

This means the Fed is pumping more newly-created money into the system at the rate of $40 billion per month for an indefinite period of time. Naturally, the price of oil immediately jumped 1.3%, and both gold and silver prices spiked higher. Gold is now approaching $1800/oz while silver is nearing $35/oz. This just means that the value of the dollar is dropping, so that it takes more dollars to buy these things.

So between China's new economic policy, Russia's enthusiastic response, and Bernanke's QE3, the dollar is dropping in value.

Bernanke's QE3 plan is to buy those toxic mortgages that the banks have been unable to sell for the past few years. You see, the banks will not sell their good mortgages, but will use this opportunity to sell the toxic variety at full face value. The Fed is going to take these off their hands. It is also likely that many or most of the Fed's purchases will be from overseas, which will not really help America's unemployment rate. Recall that the big banks in America sold those toxic mortgages to investors around the world in past years. I suspect that behind the scenes the Fed is now being forced to buy them back, so it is doing so under the guise of QE3.

The Fed itself is a privately-owned central bank, so I think they should buy back all the toxic mortgages, then declare itself bankrupt, and give us a Jubilee. Then remove all Federal Reserve Notes from circulation and replace them with Treasury Notes that are interest-free money. In other words, replace today's currency with actual money.

The stated reason for the Fed's purchase of mortgages is to stimulate the housing market in order to solve the unemployment problem. QE3 is supposed to stimulate demand for housing, so that the home builders build more houses and put contractors to work. Companies that make building materials will also hire more people for their production lines. Those new houses will be stocked with new stoves and refrigerators, which will be built by more workers (from overseas).

The perceived result will be that we have more houses on the market, and hopefully, more employed people to buy them.

The problem is that there are millions of unsold homes on the market already, which the banks have kept off the market in order not to drive prices even lower. Building more houses will simply add to the problem, and so it is likely that housing prices will continue to drop, and it will cost more to build a house than the selling price. When the building contractors cannot make any money selling houses, they will stop building in spite of QE3.

You see, the unemployment problem is not that interest rates are too high for people to afford a house. The unemployment problem is caused by the Free Trade policies that were implemented in the Bill Clinton era and earlier, which sent manufacturing jobs overseas. The problem is that so many American workers have to compete with low-wage workers overseas and do not want to take pay cuts to remain competitive. Americans do not want to live the same subsistence life style as the overseas workers. We cannot have Free Trade without a painful process (for Americans) of equalizing the life styles of all workers in every nation. Their life styles are made better by the jobs, while Americans find themselves unemployed or are given massive pay cuts.

It may be that the Free Trade treaties are irreversible. If that is the case, then Americans will have to wait it out for a generation or two until workers from India, China, and every other country receive equal pay with Americans. Our wages must decrease, while theirs must increase until we meet somewhere in the middle. Hopefully, those countries will experience high inflation rates in order to shorten the time.

Meanwhile, the drop in the value of the dollar will hurt all those who have money in the bank, because their money will erode in value over time. Those who are smart will invest in something of value. In years past, a house was a good value, but not any more. Cars were never a good hedge against inflation, since they depreciated every year. Land can be a good value, along with metals such as gold, silver, or platinum. Others may be able to invest in foreign currencies which are going up in value.

The Iraqi dinar is an exceptional value, ever since the UN sanctions in 1990 caused its value to drop. Those sanctions are almost all gone now, and when the final sanctions are lifted, the dinar should be reinstated or be revalued far above what it is today. If you are thinking about purchasing dinar, give brother Vinnie a call at: 850-255-1000.

If the dinar revalues, and you find yourself missing out, you can call our Procrastinators Hotline and Complaint Department at: 1-800-WAA-WAAA.

 

 

 


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Dr. Stephen Jones


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