Home » Money » Death of the Mighty Dollar

Death of the Mighty Dollar

The gamesmanship of Congress is still reverberating through the world’s financial system with a big drop in stock markets today.  But that may be only the start of the problems caused by the self-inflicted calamity.  At risk is the source of the USofA’s real power around the globe – not the military, but the US Dollar itself.

The high standard of living enjoyed in the US is based on the fact that our currency is the standard “reserve currency” across the globe.  All commodities and many long-term contracts are priced in US Dollars.  If, or more likely when, that comes to a screeching halt the implications are vast for our economy and just about everything we do.  Where it gets interesting is that, done well, it could be a liberating experience.

Imagine for a moment that you buy aluminum from Brasil for your factory in Malaysia.  Your contract is written around the world price for your product, determined not in Ringgit or Real, the local currencies – it’s in US Dollars.  Because you know that this might go up and down in the world markets, you have to hedge a bit – keep some accounts denoted in US Dollars.  The checks you wire off to São Paulo are all in US Dollars and come from these accounts.

It’s been that way around the world since the Bretton Woods Conference in 1944.  That’s when the (soon to be) victorious western powers sat down and devised a new global currency system based on the US Dollar.  Every local currency around the world was measured against the Buck.  That broke down a bit in 1968 when we had a spell of economic trouble, but the meat of it kept moving along.  The Dollar now floats alongside other currencies but prices remain denoted in it.  Every bank around the world keeps some dollar denoted accounts handy – and buys a lot of US debt in the form of Treasury Bills as interest-bearing equivalents of US Dollars.

Back with our example, we see our Malaysian and Brazilian factories starting to get very nervous.  The US Dollar is up one day, down the next, and looking like it might be extremely unreliable over the long haul.  They are getting nervous because a Congress far away is acting irresponsibly.  There’s a good chance that they will want their leaders to do something about it, too.

That’s where things get interesting because the International Monetary Fund has been looking at a new system to replace the Dollar for some time. It’s called the SDR for “Special Drawing Rights”, a mouthful of a name that describes how it’s maintained.  In essence, it’s a based on the US Dollar, British Pound, Japanese Yen, and the Euro.  It can be used in international transactions in place of the US Dollar solo.

That’s not the only threat that the Supreme Dollar faces, however.  Some Arab nations have proposed the “Gold Dinar” as a standard for oil prices – and it has been recognized as legal tender in Malaysia.  It’s a 4.25 gram gold coin worth about $120 and based on traditional Islamic standards.  There is also the Bitcoin movement to change the world over to a completely virtual standard of value.  These are what we might call “Distributed Standards”, meaning that no sovereign nation controls them in any way.  Such currencies are historically the norm in international trade, meaning they have appeal far beyond the current crisis.

But let’s say that our trading partners and their nations have had it with the dangerously unpredictable US Dollar and write their contracts in something else.  As this catches on around the world, the reserves of US Dollars are suddenly not needed.  That means a big excess of Dollars around the world, and by the laws of supply and demand the value of the Buck drops.  If this happens overnight, it drops dramatically – and potential hyperinflation ensues.

The results could be catastrophic if it gets to the point where no one wants to be the last nation holding the bag full of worthless Dollars.

No one wants this to happen, of course.  Destroying the US economy is not in any nation’s interest, so the transition will likely be as smooth as possible.  But it will take careful management of the kind that we aren’t exactly known for right now.  And it will surely mean that the value of the Dollar will drop – which is to say that imported oil, foods, and fancy toys will all become more expensive than they are now.

The upside?  US manufacturing will become cheaper, and thus much more desirable.  This would be what gets us out of the doldrums once and for all if done properly.  And it will be much easier to manage our currency to fit the needs of our own economy rather than the needs of the entire global system, something which has caused a lot of strain since global trade started taking off 40-some years ago.

But, like nearly every change, it means that our ability to manage it is the key to whether it’s a net benefit or a problem.  And the more we screw up, the more likely it is that we will have to face this new reality before we are ready for it.  Fasten your seatbelts.

19 thoughts on “Death of the Mighty Dollar

  1. In other words these idiots may have screwed up everything we have enjoyed since the end of WWII. Great.

  2. Yes, that is exactly what is happening here. It may have been bound to happen eventually, but just 5 years ago it was hard to imagine anything replacing the Dollar – and now it’s starting to look like a necessity for a lot of nations.

    If this goes down as I think we can reasonably expect over the next few years it’ll be all those idiots’ fault. And they will probably try to find a way to blame Obama for it. I can only hope that we do get the boost in manufacturing as part of the package because the rest of it looks pretty nasty.

  3. EriK:
    “…. find a way to blame Obama for it?” To imply that this is hard calls for a lot of closed-minded partisanship! Over and over again you blame the Congress as if this was a one-party deal. It’s not, starting, or ending, with the fact that if Obama wasn’t a political incompetent we wouldn’t now have this wingnut Congress. One of the best pieces I’ve seen on the overworked “what’s really wrong with Obama” theme: “What Happened to Obama?,” http://readersupportednews.org/opinion2/277-75/6943-what-happened-to-obama. (By Drew Westen, The New York Times)

    You are right on, of course, in mentioning that t he real source of US power is economic, not military. I’m sure Obama understands this, and most US residents are surely *capable* of understanding it. Do the wingnuts in the House and Senate understand it? Or care? Seemingly not.

    Alan

  4. I don’t think anyone understands what is at stake here. People generally act like we have nothing to lose and we just have to wait for a recovery to happen and it will all be better. There is so much at stake but no one is capable of thinking it through. Thanks for this blog & I hope it gets the message across even though it may be too late.

  5. Jack: They are dangerously stupid. I can’t think of any other way to describe them.

    Alan: Fair enough – I do blame Obama and despair that he is now their captive. He has little room to squeeze out of this jam. I don’t know what to say about him anymore. I hope he isn’t completely irrelevant yet.

    Anna: No, I don’t think anyone understands just how we got where we are. I think Alan is right that when you describe our real power as economic people “get it”, but the source of that power is less obvious, I think.

  6. So MPR says the effect on japan will be strengthening of their currency, resulting in higher prices for their vehicles and electronics and their firms are taking a beating today.

  7. Dan: Yes, we can expect that even in the short term the USD will drop in value and gizmos from overseas will cost more. All we can hope is that the main effects occur gradually enough for us to scale up our own production, but I seriously doubt that will happen.

    It’s when oil goes up for the same effect that we are in trouble, IMHO.

  8. Laurie: Sorry your post got stuck in the spam-trap for a bit (links do that!) but these are good links – thank you for them. They argue what I’ve been saying all along – that this is more like a Depression than anything else. Well, they don’t use that term, but … I’ll give them slack for calling the problem just what it is and outlining why it needs more a active response. :-)

    This is a serious situation, whether you want to call it a Managed Depression (as I do!), the Lesser Depression (Krugman) or a “Great Contraction” (Rogoff). The analysis is the same, and the way out requires tremendous leadership – and brutal honesty about the pain. So far, we’re getting nonsense and that set up the manufactured crisis that is certainly going to make it worse.

    (Want me to go further in blaming Obama, Alan? :-) )

  9. Erik:

    Sorry, I didn’t mean to jump on you so hard. The spectacle of the USA being run by people who don’t understand or believe in fact-based decision making at all is a little unbalancing. I check the paper mail and the only political stuff is “donate to re-elect Obama.” The arrogance, the disrespect of it is, the timing of it is [I don't have words]. These are truly scary times: I don’t see a way out without better leadership and the political system seems pretty well set up to filter that out….

    This is something I posted on Friday:

    During the “shutdown” our household didn’t get a single call or doorknock asking us to support either side. I don’t know of a significant email campaign either. Nobody who knows Carol or I would ask us to support the Republicans, but I am surprised that the DFL didn’t try to activate its base to support the Governor’s (ostensible) positions in re restoring more progressive taxation and so on. Since the thing played out predictably, there was surely plenty of time to organize. Why are there resources for election campaigns but not for issues and political education? I’ve asked a couple of genuinely-progressive DFL legislators about this and gotten no real answers. I do believe there is a significant segment of the DLF is committed to justice and democracy, but I am more and more wondering how much energy and influence it really has left. Since being in Minnesota for several years I’ve never MET a DFL organizer! The most basic, most obvious, most elementary political work is apparently not being done. No wonder the Republicans are successfully selling nonsense to ignorant people.

    People had to watch Dayton bidding against himself over and over, until he’d caved. Obama: the same.

    Something is really, really wrong and new approaches are needed. But what approaches? [...]

  10. Alan: I was just teasing you! I agree, the disconnect within the DFL is alarming. It’s as if no one, anywhere, believes in organizing any more … except the Tea Party folks, that is. Does anyone wonder why they have hugely outsized influence? And I certainly don’t blame them for doing it, either – I blame “our side” for having apparently given up. I guess that is what is really frightening in all this.

    I also agree that the shutdown was our chance to shine, but we didn’t . I’m running a campaign now and we’re trying some new things to connect to people in new ways. I’d like to report back, but I can’t reveal secrets yet. We also have to see how well it works.

  11. So Bernanke and the Fed save Wall Street again without really saying anything. At there is some adult supervision.

    What is driving things these days? Can you make any sense of it? The talking heads on CNN are doing their best but they seem to be more cheerleaders than anything.

  12. Dale: That was a funny rally. I think the best that we can say about that is they wanted to rally, so they did.

    I heard some talk about bringing US Dollars back home – repatriating would be the short way of saying it. If that’s what is being discussed, we are preparing for what I wrote about here – US Dollars for the US, not for the rest of the world. I think it’s code for pros to prepare for the end of the Dollar Standard.

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