Greetings from Sedona…
The recent resumption of the droopy dollar syndrome has rekindled speculation about establishing a new international currency system using a basket of currencies as the lynchpin instead of the dollar. This kind of thing evokes images in my mind of rats fleeing the Titanic desperately searching for anything that floats.
Understanding why there are insistent and persistent proposals for replacing the dollar as the world’s reserve currency, and why it is all useless, we must take a brief sojourn through the last century that led us to our present sorry state or monetary madness. On the eve of WWI only the United States, of the world’s major powers, was on a true gold standard. Everyone else had been cheating for a long time. With the creation of the Federal Reserve, we joined the rest of the world on what I call the BS Bullion Standard.
After the war Europe tried to maintain the fiction of a gold standard but was unwilling to take the necessary monetary medication to cure its serious economic ills. The US emerged from the war so strong, and its economy so robust, that it was able to smoothly resume its cheating gold standard with apparent ease. Despite the fed, America might have gone many decades before a major crackup. Unfortunately, and for reasons I do not believe I will ever fully understand, the power elites sold us out in a desperate and vain attempt to bail out the British pound. Instead of decades of robust, relatively stable expansion everything began unraveling in 1929 with Britain officially giving up the golden ghost in 1931 and America defaulting when it devalued the dollar by seventy per cent in 1934.
After years of depression and war, the Keynesian inflationists cobbled together a new monetary regime based on the dollar. America would maintain the fiction of a gold standard and the rest of the world would accept dollars as if they were gold. This could have worked for many decades if America behaved responsibly. Such fanciful notions never play out in the real world. Putting it mildly, America did not meet expectations of the architects at Bretton Woods. We used our privileged status to go on the greatest spending binge the world had ever seen. The result was that confidence eroded and the new system collapsed with America defaulting in 1971 when Nixon closed the gold window and refused to honor obligations to foreign central banks. At this point, there wasn’t even a BS Bullion Standard. The entire world’s money was officially worthless fiat garbage.
With all its problems the dollar was still the world’s reserve currency, which meant it carried a substantial premium to what it would otherwise fetch in foreign exchange markets. This allowed America to continue binging away as suckers like Japan shipped us actual boatloads of really great stuff like cars, cameras and consumer electronics while we shipped them boatloads of trashy treasury bills and notes in return. In past posts on this site the point has been illustrated by the following chart:
Over the last forty years the Japanese have been skinned by over seventy-five percent! In 1971 it took nearly 360 yen to buy one dollar. Today it takes only 84 yen to buy that same dollar. Other countries have not been clipped quite so badly, but have been conned and defrauded as well. For example, the Swiss are just as unhappy with the dollar as anyone as we can see from the next chart:
With the world’s reserve currency in such sorry shape, it is no wonder that the economic eggheads are thrashing about for an alternative. At the moment the odds on favorite is a system based on a basket of fiat currencies instead of the dollar. In other words, instead of one brand of junk, the idea is to diversify into many brands of junk. While Germany’s junk and Japan’s junk are less junky than our junky currency, we are still left with fiat junk.
Besides, what difference will it make anyway since the foreign exchange markets trade $trillions of all kinds of junk fiat currencies every day? It’s not like people are stuck with the dollars they get in exchange for their expensive oil or cheap apparel. A couple of keystrokes and the dollars are gone! In fact the main reason that the gargantuan foreign exchange trading volume occurs is anyone with significant exposure to currency risk is crazy not to hedge against that risk in such an unstable fiat currency world. A new basket of fiat currency reserve system changes nothing.
To illustrate the point of the universal junkiness of all currencies, we can look at a chart of gold prices in both dollars and Euros and see there is only a quantitative (not qualitative) difference:
Therefore, a new Special Drawing Right reserve currency backed by a basket of fiat currencies will not be much better than what we now have, just more complicated. A SDR backed by a basket of commodities would be a modest improvement, but unlikely because the objective of the ruling monetary mavens is to have a system that does little or nothing to constrain political proclivities to print, borrow and spend on behalf of connected cronies.
That’s all there is folks. If our rulers do change things up it will have no lasting positive effect. We are privileged to bear witness to the unfolding of the greatest cataclysmic world fiat currency collapse in history. Enjoy the theater so bizarre that nobody would believe it possible if sold as fiction.
All the best to you all,
steve (at) SedonaCyberLink.com