Demise of the US dollar: World no longer trusts the American policy makers
After the end of World War II the US dollar replaced the British pound as the main reserve currency of the world. The currency reserves of the world's central banks are mostly kept in dollars and most of the commodities essential to the functioning of the world economy are priced in dollars.
The unbalanced federal budget and the growing debt of the United States greatly in-crease the risk of US dollar devaluation, there-fore threatening its status as a world reserve currency. The currency which serves as the store of wealth for the governments and cen-tral banks of the world should not be exposed to devaluation risks. The quantitative easing stimulus used by the Obama administration to kick-start the ailing American economy is often viewed as an exercise in unbridled mon-ey printing which allows the US government to export inflation around the world and buy votes at home at the expense of the foreign holders of dollar-denominated currency re-serves.
A sign of global distrust in the way the US government manages the world's most impor-tant currency is the resurgence of gold as an investment and as a currency. Central banks of China, Russia, Brazil, South Korea, Kazakh-stan, Philippines, Mexico, South Africa, Paki-stan and Turkey have been buying gold from local mines and international markets. Last year was a record breaking year for central bank gold demand as the world's monetary authorities bought 534.6 tons of the yellow metal. The recent drop in gold prices left the central banks unfazed. Dominic Schnider, head of commodities research at UBS AG's wealth-management unit in Singapore told Bloomberg that "central banks are here to stay as net buyers; they are probably the ultra long-term investors". Gold is often regarded as an ultimate reserve currency because it cannot be "printed" at will. The mainstream media and the political cheerleaders of quantitative easing try to downplay the importance of gold as an alternative to the US dollar. Such attempts are easily explained by Peter Schiff, an American investment broker, author and conservative financial commentator who be-lieves that "politicians don't like the gold standard, because it keeps them honest".
Gold is not the only competi-tor for the role of the currency that will replace the weakening US dollar. China is trying to break free from its dollar de-pendency and is creating a web of bilateral "swap lines" and trade agreements that will help the internationalization of the Yuan. Before the beginning of the American economic crisis, almost all of the Chinese exports were priced in US dollars, re-gardless of the geographical lo-cation of the buyers. Now, China is trying to switch its trade to Yuan. If the European, African, South American and Asia buy-ers of the Chinese goods require the Yuan to pay for their pur-chases, China will achieve its goal of creating a Yuan-based economic ecosystem. This eco-system is likely to gradually re-duce the global influence of the US dollar, confining its use to the North American continent. According to a report by the Organization for Economic Co-operation and Development, China will become the world's largest economy, overtaking America, around 2016 so it is only natural for its currency to become the main currency of the world economy.
China is not the only coun-try trying to reduce the world's dependency on the US dollar. BRlCS control more than half of the world's trade, 40% of the la-bor force and 25% of the world's GDP. A big part of the influence of the dollar is due to the fact that institutions like the IMF and World Bank give dollar- based credits to countries around the world. For the worlds' corpo-rations, dollar-based financing is the cheapest and most accessible. The BRICS aim to change this situation and are actively financ-ing African, European and South American countries which are taking loans in Yuans or Rus-sian Rubbles. Moreover, BRICS countries are becoming the creditors of choice for the Euro-pean companies. Replacing the current dollar-based financial system has become a top priority for the BRICS leadership. One of the points of the official Russian "Strategy for BRICS participa-tion" signed by the President Vladimir Putin states that one of the goals of BRICS is the "reform of the global financial system for the creation of a more represen-tative, stable and predictable sys-tem of world reserve currencies".
The reputation of the dollar is getting clob-bered by each fiscal mistake made in Washington and each rise of the debt ceiling. Even the geeks and the hackers of the digital age are jumping on the bandwagon of alternative currency creation. A digital, encrypted, peer-to-peer currency called Bitcoin has emerged from the cypherpunk subculture and has taken the internet by storm. Bitcoins can now be used for buying web servic-es, guns, gold, pizzas and even cars. So far, Bitcoin looks like a grassroots attempt to use technology where American politicians have failed.
The American mainstream media has made a habit out of demonizing anyone who tries to circumvent or reform the dollar system. The Chinese are being accused of "stabbing the dol-lar"; gold investors are labeled "gold bugs" while the users of Bitcoins are being accused of money laundering without any proof whatsoever. The world can't be forced to use the dollar at gunpoint. Why would anyone want to price goods or store wealth in a currency which is being continuously debased? What happens if the President of the US decides to naturalize 15 millions of illegal aliens and grant them the right to use Medicare, Medicaid and provide them with foodstamps? Such expenses can only be financed through ob-scene amounts of freshly printed money. In such a scenario, the dollar could lose half of its value overnight. Why would anyone trust a currency exposed to such risks? The main enemies of the dollar based currency system do not come from Beijing or Moscow or a secretive hacking com-munity. The main enemies of a strong and reli-able dollar are located in Washington DC. Until the American budgetary mess is sorted out, the rest of the world, along with free-spirited Ameri-can citizens, will have to look for alternatives to the once mighty US dollar. Deprived of the privileges given by the dollar's role as the world's reserve currency, the US will not be able to pay for imports, finance its army and provide social security to its citizens. The fall of the dollar sys-tem will force the US government to default on its debts and cut its budget. If Washington's reck-less policy doesn't change, America will become a second-rate country engulfed in poverty, price inflation and social unrest.
This article was originally published in Washington Times newspaper on May 9th, 2013 and is part of Russia Debate in Washington Special Project co-sponsored by The Voice of Russia and Russia House Associates.
