Gargantuan ships at sea do not turn on a dime (read: Titanic), nor do national economies. Instead, small course corrections, planned and executed intelligently, are required to navigate successfully to the destination. Experienced ship captains and global heads of state are charged with providing direction and orchestrating course corrections. Our currency (the U.S. Dollar) is being threatened, and we need to respond appropriately.
International trade developed rapidly in the global post-WWII economy. When financial stability was needed to facilitate burgeoning international trade, designating a widely trusted currency became necessary. The American economy and currency were leading the world, and in 1944 the Dollar was designated as Reserve Currency for international trade.
Trading in oil was increasingly important, and the Dollar was used for funding transactions. Importers converted their own currency into U.S. Dollars to finance transactions. Exporters then banked the Dollars received, or exchanged them into other currencies, including their own. This system proved tenable for decades, but along the way the USA was tripping over its own prosperity, with plenty of “help” from elected leaders.
Originally pegged to gold (the timeless international form of money), the U.S. Dollar was de-linked from gold by President Richard Nixon in 1971. At the same time, government spending ramped up astronautically. As a result, purchasing power of the Dollar declined steadily. Print money, spend money, print more money to cover spending. Lather, rinse, repeat. The predictable result was inflation, which has eroded more than 96% of our original purchasing power.
America’s spending cycle (and corresponding money printing) accelerated with advances in computer power. Eventually, FED Chairman Ben Bernanke said the quiet part out loud, when he explained that the Federal Reserve didn’t really print money, because electronics “allow it to produce as many U.S. dollars as it wishes at no cost.”
Over time, trading partners began to perform transactions in currencies other than Dollars. Twenty years ago, the amount of International Trade using Dollars was about 70%. It has fallen now to 59%, and the decline continues. Recently, China, Russia, Brazil, and other European and Asian have agreed to trade oil in various currencies.
Important for us to understand is that most countries of the World right now do not have confidence in Russia or China, and will not move away from the Dollar in a panic. Erosion will take time, but the economic Titanic is slowly changing course. Outlook uncertain.
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