SPECIAL REPORT : Zero Hour: The Dollar's Days Are Numbered - financialanalysis


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Tuesday, December 24, 2019

SPECIAL REPORT : Zero Hour: The Dollar's Days Are Numbered

The Bretton Woods Agreement did provide a measure of stability to the world’s banking system, at least for a while. During the period of the Bretton Woods Agreement, from 1944 until 1971, the countries involved in the agreement experienced relatively few banking crises:

This state of affairs came to a screeching halt when, on August 15, 1971, the United States Government ended the U.S. dollar’s convertibility to gold (i.e., the dollar was taken off of the gold standard), thus ending the Bretton Woods system and rendering the dollar a fiat currency.

This action by the U.S. Government, sometimes

referred to as the “Nixon shock,” created a situation dollar became the reserve currency for

many nations. The “gold window” had been closed, and countries were free to choose any exchange agreement, except for the price of gold. One by one, these nations chose the U.S. dollar as the standard by which their own currency would be measured.

While the Nixon shock and the closing of the gold window would pummel the U.S. dollar throughout the 1970s, that was merely a hint of what lie ahead for the greenback. Fast-forwarding to 20082009 and the financial crisis, the U.S. Federal Reserve and other world central banks entered into an unprecedented program of “quantitative easing” (QE), in which governments would purchase long-term securities such as Treasuries and mortgage-backed securities, thereby pumping massive amounts of money into the system.

Intended to stimulate the sluggish economy, QE added more than $3.5 trillion to the Fed’s balance sheet by October of 2014. Pumping so many dollars into the banking system had the effect of putting downward pressure on the U.S. dollar:

President Nixon stated emphatically at the time that “The effect of this action... will be to stabilize the dollar.” The Dow Jones Industrial Average shot up 33 points the next day (its largest daily gain ever at the time), and a New York Times editorial read: “We unhesitatingly applaud the boldness with which the President has moved.”

If they could have seen into the future, they most likely wouldn’t have made such bold statements. The immediate effect of the Nixon shock was that the price of gold quickly shot up from the low $40s to $120 per ounce because there were no longer price controls on the yellow metal. The U.S. dollar, meanwhile, entered into a bear market in the 1970s that mirrored the woes of the economy and the stock market at that time:

The world’s reserve currency; that’s what the talking heads in the traditional media have been calling the U.S. dollar for decades. While certain events may have artificially held the dollar in a dominant position in the past, the dollar’s future hangs in the balance, and current conditions won’t allow it to retain its prominent position for much longer.

For some perspective on how the modern-era dollar rose to prominence in the first place, we have to go back to the World War II years and the Bretton Woods Agreement of July 1944. Under this agreement, major world currencies were pegged to the price of gold. Furthermore, the U.S. dollar was to be considered a reserve currency, and it was linked to the price of gold.
Taking place in New Hampshire and attended by all of the World War II Allied nations, Bretton Woods ultimately had the effect of superseding the gold standard, with the U.S. dollar as the global reserve currency. Thus, in effect, it established the United States as the dominant power in the world’s economy, as King Dollar was put on the throne and America was the only country with the ability to print dollars.

The inflationary impact of large-scale central bank money printing continues to deteriorate the U.S. dollar to this day, with the dollar losing 10% of its value against other major world currencies in 2017 and the dollar’s inflation rate showing no signs of slowing down:

As a legacy of the Nixon shock, the U.S. dollar remains the world’s reserve currency and, as expected, the Federal Government and central bank have consistently upheld the notion that the dollar is on solid ground. And while the dollar would indeed be hard to replace today, the facts clearly indicate that the dollar’s days are numbered.

The U.S. dollar’s ability to remain the world’s reserve currency is based on trust in the American financial system; after all, any fiat currency’s existence is a trust-based monetary entity. But with so many unfunded liabilities, trust in the American financial system, and therefore trust in the dollar, is breaking down.

This point is inarguable. We have a national debt that is approaching $22 trillion, and the Federal Government’s deficit in 2018 is 21% higher than what it was in 2017. The U.S. carries a debt to China of $1.17 trillion and counting – and that’s just 19% of the $6.3 trillion in U.S. Treasury bills, notes, and bonds held by foreign countries. In fact, the U.S. has a number of debtors in multiple continents:

Tax revenues won’t even come close to funding the massive debt load carried by the U.S. today. Other factors detracting from trust in the stability and solvency of the American financial system include the nation’s inability to continue funding Social Security, Medicare, and other entitlement programs for a steadily growing senior population:

The eyes of the world are watching the deteriorating foundations of the American financial regime, and plenty of nations would be glad to witness the end of King Dollar’s reign. China has introduced stiff competition from the petro-yuan, and in a disruptive turn of events, the emergence of blockchain technology has made Bitcoin a popular currency of choice among millennials.

Meanwhile, an aggressively hawkish Fed is pushing Treasury yields up to the point where parking your money in U.S. dollars is a less attractive option than it once was. Nonetheless, this same Fed is printing money like there’s no tomorrow, depleting whatever value might still remain from the once-almighty dollar.

Perhaps it’s because the Fed feels they have no alternative to printing money. Having lost all trust in the American financial system – and the nation’s willingness and/or ability to repay its debts – world nations simply don’t want to fund America’s ballooning federal budget any longer.

Due to its addiction to printing and spending money, the U.S. Government has forced itself to pay for its bad habits through those same bad habits. And as for the dollar, don’t count on a bright future for the world’s reigning currency, for the reign will, soon enough, come to an end

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