Today's Reserve Currency Is Tomorrow's Wallpaper

Tyler Durden's picture

Submitted by Bill Bonner via Acting-Man blog,

Somehow, like it or not, the world turns. Today's hegemon becomes tomorrow's also-ran. Today's reserve currency becomes tomorrow's wallpaper. Today's cock o' the walk becomes tomorrow's dinner.

Hey, we didn't create this system. We don't even especially like it. But that's just the way it is.

Whether you already have made a fortune, or are trying to build one, you need to be very careful about what currency... or currencies...  your wealth in denominated in.


The End of History?

Governments were set up to take control. Ruling elites – by force of arms – established laws, protocols and armies to try to prevent anyone from taking their place.  Their wealth, power and status were to be preserved – at all cost. But in the 18th and 19th centuries, firearms started to become ubiquitous. It was harder for elites to maintain their authority over the masses.

Every farmer on the American frontier had a rifle. A rag-tag band of insurgents in the American colonies (with the help of the French Navy) could defeat the best army in the world. An out-of-work actor could buy a handgun and pop off a president.

Unable to stay in control by force alone, governments had to resort to fraud. Ordinary citizens were allowed to vote on who would rule over them. They were also promised the fruits of others' labors, if they voted the right way. For a time, it looked as though this new model – social democracies run by flaming politicians and professional functionaries – had defeated all rivals.

The Soviet Union – which had relied on more old-fashioned blunt force to run its slave-driven economy – capitulated in 1989. Maoist China had thrown in the towel, more or less, 10 years earlier when the country's "paramount leader," Deng Xiaoping, announced, "To get rich is glorious." (Historians now claim he never uttered those words. But the phrase accurately captured his vision for China.) And Francis Fukuyama – hallucinating – wondered if the "end of history" was at hand.

If the end of history were at hand, the dollar, the Fed and federal finances would have nothing to worry about. But between history and the greenback, if we were taking bets, we'd put our money on history. Most likely, history will trundle forward. And the renminbi will join (or replace) the dollar as the world's leading currency sometime before the 21st century comes to a close.

But how, exactly, will that happen? No one knows … but few imperial elites give up the No. 1 position without a fight. As they see their power, their status and their wealth challenged, they typically find a casus belli, hoping to stomp the newcomer before it is too late.

Thucydides' Trap

The phenomenon is known to historians as the "Thucydides' Trap." Political scientist Graham Allison explains:

“When a rapidly rising power rivals an established ruling power, trouble ensues. In 11 of 15 cases in which this has occurred in the past 500 years, the result was war. The great Greek historian Thucydides identified these structural stresses as the primary cause of the war between Athens and Sparta in ancient Greece. In his oft-quoted insight, "It was the rise of Athens and the fear that this inspired in Sparta that made war inevitable."

Note that Thucydides identified two factors: a rising rival and fear of that rise. China is rising. The US power elite fears its rise. And for good reason. Having the world's reserve currency is an "exorbitant privilege," as Charles de Gaulle described it. It allows Americans to buy things from overseas without ever really paying for them. Instead, we send over pieces of paper. That paper is then held in foreign vaults as reserves. Or it is lent back to us.

From an economic point of view, the system (established by Richard Nixon in 1971) is loopy. The Chinese pretend they have good customers. Americans pretend they have good credit. And everyone pretends to get richer … based on promises to settle up sometime in the future.

In practice, nobody wants the day of reckoning to come. Because they all know that there are vastly more claims on tomorrow's output than tomorrow can satisfy. Between 1971 and today, roughly $10 trillion more has been received by Americans in goods from overseas than has been shipped to foreigners. That money is an outstanding claim on US existing wealth and future output.

There is also (with some overlap) about $17 trillion worth of US government debt … also a claim on future American output. And this is just part of the total credit market debt of $55 trillion. (Not to mention the feds' unfunded liabilities.)

To pay off these claims, the US would have to run a surplus. (When? How?) But instead of running a surplus, we run deficits. The federal government's deficit, for example, is expected to be $744 billion this year. And the current account deficit is running at about $500 billion. Neither is near a surplus.

Edging Toward a Reckoning

Instead of edging toward a reckoning, all major governments seem to want to make the situation worse. The US stimulates its people to buy more Chinese-made goods. And China stimulates its manufacturers to make more stuff for people who can't really afford it. Both are heading for trouble.

Americans are hooked on spending. They consume their wealth … and more. China is hooked on producing. As it adds productive know-how and capacity, it becomes more and more competitive. Not only can it produce more consumer output at lower prices, but also it can produce the latest in military hardware. It's a matter of time before that fighting gear comes out. At least, that's what history suggests.

If there is a military conflict, how will it turn out?

The US spends three times more than China on "defense." Advantage: Pentagon. But as the Persians discovered in their wars with the Greeks, having the biggest, best-funded army does not necessarily give you an edge. Instead, it invites sluggishness, complacency and overreaching.

The US military is arguably the fattest, most zombie-infested bureaucracy in the world. It suffers from an overabundance of resources. It supports troops (at a cost of $1 million per soldier per year) all over the globe. It builds weapons systems that are often obsolete before they are put into service. It coddles armies of lobbyists, contractors, consultants, retirees, hangers-on and malingerers. Like all bureaucracies, it looks out first and foremost for itself. Looking out for the security of the nation is a distant second.

Its 11 huge aircraft carriers, for example, may be marvelous ways to generate contracts, fees and expenses. They may also be great ways to throw US military muscle into two-bit conflicts around the world. But put them up against a modern, electronically-sophisticated enemy … Then what?

We will probably find out...

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wisehiney's picture

China will turn on a giant fan and blow fuku at us.

The Juggernaut's picture

Can someone chart the price of Gold in those former reserve currencies when they were actually the reserve currency??  There is probably a price pattern... Wheres the intern??

wintermute's picture

Bitcoin or another cryptocurrency is the next world reserve currency. China has missed the boat.

It occurs to me that this event will save huge debtor nations like the US. As the trickle of fiat moving into crypto becomes a waterfall then existing government and private debts will become chicken-feed. Eventually, even the US government debt pile (except TIPS, which they should stop issuing) will be paid off with a couple of years taxation in a crypto-based economy.


fonestar's picture

Nothing can compete with Bitcoin.  It's just embarassing watching these paper currencies go up against the mighty Bitcoin.

silvermail's picture

Nothing can compete with Bitcoin - because human stupidity, has no boundaries and limits!

fonestar's picture

If you're too stupid to understand the implications of P2P that's your problem and not everyone else's.  Myself, I saw this coming as far back as the late 90's.

silvermail's picture

If you're too stupid to understand that P2P it is not currency and it is only technology, that's your problem and not everyone else's.  Myself, I saw this coming as far back as the late 90's.

Skype and Torrent is also based on the P2P technology.
But none of them is truly safe, truly anonymous and truly decentralized authentication.

fonestar's picture

Skpe and .torrent clients did not have any built in methods for obscuring the user.  It is up to the Bitcoin user to go the extra mile to be truly anonymous and as for authentication, it is built into the protocol itself.

silvermail's picture

Yes, yes - I'm aware of:
Titanic (shit-coins) - a brand-new ship, it is not like the other ships, it's big, it has a lot of new technologies, and of course Titanic (shit-coins) will not sink! LOL

MontgomeryScott's picture


I resemble that remark (literally)...

gold-is-not-dead's picture

still can't belive there's so many unbelieveres in math... hit $1k again, 10k next stop...

TheHound73's picture

Extremely large and still in charge.  amirite?

saveandsound's picture

Bitcoin is fiat money.

Altough limited in number due to design, new cryptocurrencies can be started out of thin air every day. And, of course, one can start with the first bit coin block all over, you just have to find enough peers. That is not trivial but also not impossible. There already has been at least one split of the bitcoin logfile so far.

Bitcoin is slow. It is absolutly not suitable for international trade. If you want to implement bitcoin for international trade you need banks which store bitcoin and issue "banknotes" referring to bitcoin. At least that reminds of gold.

However gold will be there in a thousend years - unchanged. You won't find any bitcoins around in, hmmm, 50 years, probably even less.

TheHound73's picture

Holes, holes everywhere.

Define fiat.  Bitcoin is not government issued nor government backed and it is limited in supply.  Bitcoin's value is set by the market.

Just because authors can create novels ad naseum doesn't mean Tom Clancy is a worthless author.  Investors want the crypto-currency that has the best chance to retain value, meaning the best security (mining power) and merchant/user base.  This could change but doesn't appear to be the case currently.  For testing I create new blockchains and new testing Bitcoins all the time -- These are not "real" bitcoins and nobody will be fooled in this manner.

So, bitcoin is too slow for international trade but is just fine for instantaneous purchases?  For the paranoid, complete bitcoin settlement takes about 1 hour.  This is, oh, 3 days faster than a SWIFT wire transfer.

saveandsound's picture

A currency which is not backed by a resource like gold, oil or land is called "fiat money". Bitcoin isn't backed by a resource. Not issued by a government can be an advantage as well as it can be a disadvantage.

Bitcoin's price is set by the market and much more volatile than overvalued new economy stock shares back in 2001. The value in use is extremely limited so far.

Investors want the crypto-currency that has the best chance to retain value, meaning the best security (mining power) and merchant/user base.  This could change but doesn't appear to be the case currently.  For testing I create new blockchains and new testing Bitcoins all the time -- These are not "real" bitcoins and nobody will be fooled in this manner.

There are others (like the NSA) who have a lot more computing power than you have. As well as better and faster access to the relevant nodes and backbones of the internet. I don't think the US-government is going to interfere, because there will be no need for doing so.

There have always been men who wanted to become rich without having to work. It is up to everybody's own how to achieve that goal.

But again hey, no risk, no gain. Good luck.

silvermail's picture

The Chinese are smart people. They will not allow to cheat themselves via any crap-coins, instead of real money - gold and silver.

TheHound73's picture

Bitcoin is legal for Chinese citizens to buy and sell.  The Chinese exchange, Huobi, has the largest Bitcoin trading volume.

buzzsaw99's picture

Why bother when they will sail right into the worst of it on their own?

lordbyroniv's picture



I have sooooooo had it !!!

VD's picture

asymetric warfare against a superpower is exceedingly effective.

SilverRhino's picture

Nuclear bombardment is pretty effective as well.  

Oh look ... they have ABM sites .... Project Thor UP! 

LawsofPhysics's picture

Hhmm, in that case, the pound is pretty damn expensive wallpaper.

0b1knob's picture

Exactly.  I know the point they are making has SOME validity, but the British Pound (in spit of its may troubles) has never been hyperinflated to wallpaper worthlessness.   And the change over from Pound to dollar occured without war between the US and England.   China is a house of cards.  See who is left standing at the end.  The Great Game isn't over till its over.

wisehiney's picture

One drop of poison in every can of china beans.

ebworthen's picture

The moral and ethical ROT in Washington and New York have already killed the U.S.

wisehiney's picture

Cesspools of corruption and worse.

silvermail's picture

Some idiots say: Bitcoin is a threat to the U.S. dollar.
At that time, they forget that Bitcoin is supported by the U.S. Senate and the U.S. Army.
If someone thinks, that the system which represents a real threat to the hegemony of the dollar will have the support of the Senate and the U.S. Army, he is definitely a full idiot.

LawsofPhysics's picture

if bitcoin is support by the U.S. government, then that should tell you everything you need to know about bitcoin...

silvermail's picture

Bitcoin – a product of the Federal Reserve.
Dollar discredited itself in the eyes of the public. The Fed also discredited itself in the eyes of the public.
Of course for Fed was needed make a legend about some Satoshi, which supposedly created Bitcoin, and then he is evaporated.

Thus, the Fed shows for fools (which the majority) that Bitcoin - a system that "does not belong to anyone," and "no one is controlled".

But this is absurd. In the world there are no financial assets and payment systems that have no legal owners,
with a specific name, surname and ID number.

All that is in front of the prefix "The global World or International" - it is the property of the United States. Or controlled by the United States.
Everything else - the local and minor.

Federal Reserve no longer need gold. Now they have a Bitcoin. As soon ends era the first fiat money - the U.S. dollar, immediately begin the era of other fiat money under the control of the Fed - it will Bitcoin.

Bitcoin system has a limit of coins. But Bitcoin system has no limit fragmentation of these coins.
Crushing coins Bitcoin to infinity - it's the same exact Monetary Emission, like printing FRN.

silvermail's picture

One of the main objectives of bitcoin - it distract investors from exit in the real money - Gold and Silver.
Bitcoin today is the main enemy of the PMs and the main instrument of the Fed for to suppress the price of PMs.

wintermute's picture

Bitcoin a tool of the Fed? FFS, you conspiracy nuts live in dreamland!


silvermail's picture

For the Blind about Bitcoin again:

U.S. Senate supports Bitcoin.
U.S. Army supports Bitcoin.
U.S. banking system supports Bitcoin.

I very hope, that you are able at least a bit of thinking.

Future Jim's picture

"There is also (with some overlap) about $17 trillion worth of US government debt … also a claim on future American output."



US Federal Debt – Problem Solved

The American government has been spending trillions of dollars on programs it had no Constitutional authority to create, and such unconstitutional expenditures exceed the amount of the federal debt. Therefore,

The federal debt is unconstitutional.

Not only are most government programs themselves unconstitutional, but the debt used to pay for these unconstitutional programs, which were created by previous taxpayers, is paid for by future taxpayers. Therefore,

The federal debt is Taxation without Representation.

Taxation without representation is also unconstitutional. In fact, it is the reason America seceded from the British empire.

Given that the US Constitution is pretty simple, then anyone who loaned money to the US government should have known that they were loaning money to a fraudulent and illegitimate enterprise and thus should not expect repayment.

Of course, there would be a huge consequence – no one would be willing to loan money to the US government again until it started obeying the Constitution, which would be ...


silvermail's picture

I think the problem U.S. is not in debt. I think the problem is the loss of the U.S. ability, to live at their own expense. I mean to live without taking a loan.

Yes, the U.S. could loudly declare that they refuse to pay any debts.
But then, how the U.S. will live after, without the real economy, only with visibility of the economy?

Future Jim's picture

I'm not sure if you're conflating personal debt with government debt, but in either case you are correct that the underlying problem is What is Wrong With the People.

silvermail's picture

I'm not American, so my opinion may be incorrect. I think the strength and greatness of America is not in the FRN or the Fed, but above all it is in humans. I mean U.S. citizens. I am convinced that if you give U.S. citizens the opportunity, they quickly revive America's greatness. But today, U.S. citizens - captured into slavery Fed. However, like all other people around the world.

LawsofPhysics's picture

"U.S. citizens - captured into slavery Fed." - indeed, but still some of the best armed slaves.  here's to hoping americans get that motivational spark soon.

silvermail's picture

" What is Wrong With the People "

Oh yes, today the system encourages unprincipled.
What is the main principle of Bitcoin?
It is very simple: In order to live better than other people, you do not need to work. You do not need to benefit society via your useful productive job.
You only need to have a more powerful computer.

And so will you generate yourself more benefits, than your stupid neighbor, what works in the two jobs, at 12 hours every day.

But it is a vicious principle. This is the principle of unscrupulousness. This is contrary to the fundamentals of morality and ethics. And it defies common sense, because it is a utopia.

The system encourages unprincipled parasitism on the body of society.


LawsofPhysics's picture

People would actually have to go back to work, real work, not paper-pushing bullshit "jobs" that add nothing of real value.  America still has numerous resources and significant capital to do so, for now...

disabledvet's picture

The Spanish never had a "reserve currency" so you need to cross them off your list. That had as money...but obviously there wasn't a lot of that circulating around. You really don't get "modern money" until you get the Fed actually so the idea of a "reserve currency" (which the Americans...who funded their revolution with (ultimately worthless) paper...started working on from Day One) was really the place where this whole experiment of "paper as reserve" first got started. Anyone from Europe would have found it quixotic at best...hilariously stupid at worse...but we had no gold standard during the Civil War and we still use that same paper today! So in that sense "we've had a reserve currency since 1865" as far as Americans are concerned. Seriously though Harry Dexter White knew exactly what the "terms of surrender" would be in 1945. This is another oddity in "American-ness"...namely we believe in "unconditional surrender." at a certain level that's REALLY ludicrous...however...on two occasions the USA got its way. The first was really bad (the Civil War)..and the second was obviously WWII which involved money creation on a scale certainly the American people could never have imagined...but once it was "unleashed" not on either Europe of Great Britain at the time either (for the record Great Britain did default in the 1960's and required an IMF bailout...and the British Pound also got crushed during the exchange rate mechanism days in the early 90's.) somehow, someway "America slaves on with its bucky." the last time that piece of paper meant anything in foreign places was least until now. simply put there is no way spending can be this high and interest rates this low unless production is coming "on line" (so to speak) ala Industrial Revolution 3.0. the Banks look totally wrecked...but the securities business AND...i think more importantly...COMMERCIAL INSURANCE...have simply recovered beyond anything i would have thought as humanly possible given the magnitude of the devastation of 2008. Again we still have a serious DEFAULT crisis looming at the State and local level...but hey, beware the company you keep.

NaiLib's picture

BTFC Buy That F-ing Coin

olle's picture

This means JPM Dimon and Goldman Sucks Blankenfield will loose more than I ever owned.... don´t care I´m going out sailing.... and the world will still exist....


cyberseer's picture

well, that's clearly nonsense. The pound is quite strong today and is no longer reserve.

eddiebe's picture

I don't really see a problem here as long as the Chinese and others are happy to send us the toys we want and are happy to receive the paper promises we are paying them with. Everyone is happy. Why bitch about that?

eddiebe's picture

It's a bit more than ridiculous to expect the same results when you posit Athens and Sparta against each other with spear and shield, when now enemies face each other with inconceivable weapons. 

If there ever is an actual WWIII, I don't think we need to concern ourselves with investments or stacking or beans and rice, rather we should hope to be at ground zero when the first button gets pushed.

NoWayJose's picture

"I am not a crook" -- Tricky Dick

Yes you are, when you took the US off the gold standard...

NoWayJose's picture

Amazing how every one of these had the largest stockpile of gold during the time they were the global currency, and how each one the status as global currency when they overspent and lost much of their gold.

whidbey-2's picture

Rather poetic, ...but wrong.  The efficiency of the adversay is always the key to the fall of the dominate power.  While the USA has serious public management problems, the Would-be successors to the USA have even more serious problems, more ambition than insight.  China lacks both a government and a military that is cohesive and responsive to the threats to China and unable to support the ambition of the Central Government. Internally it is not a government but rather many governments who are organized around their banking system.  The Urban zones are almost independent and unarmed but still not likely to support the central government. The urban areas know that they must succeed by virtue of their own efforts, not Beijings.  China has carefully destroyed much of its geographic support in the pacific. True RMB are likely to be attractive if China holds its export dominance, but only in its trade zones.  No, there is some time yet, but this is a fair warning to get rid of the politicans and become a democracy again.  Try term limits, Debt limits, and put Congress on just 120 days a year sessions.  We have met the enemy and he is us. Wake up and take a hand.  

Kina's picture

China is too big for US to make war with it. The US might be superior but China has a enough firepower to make a mess of the US even in being itself thrashed.


China doesn't need enough firepower to beat the US, just enough to make a mess.

Yenbot's picture

(Don't) try this at home. Put a Gold Sovereign in a Walmart wrist-rocket slingshot. Aim it at something breakable. Let fly. Now reload and repeat with a Bitcoin. Hear that sound? It's the sound of one hand clapping (crapping?). By the way, I've got a trunk full of Confederate States Banknotes and they make great slingshot ammo too if you wad 'em up, soak 'em in beeswax and light 'em on fire before using. Chinese gonna get a hot reception if they open a can o' whoop-ass anywhere near Yankeeland...