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The Clock Is Ticking On The U.S. Dollar As World's Reserve Currency
Submitted by Henry Hewitt via OilPrice.com,
The View From Hubbert’s Peak
In 1971, the American President put an end to a 2,500 year trend; the Wall Street Journal called it “Nixon’s Worst Weekend.” Considering the old boy had some really bad ones, this must have been something special. In August of that year (on Friday the 13th) it was decided that the U.S. would no longer pay out gold for its paper dollars. OPEC Ministers took note, and in September they met, deciding it would be necessary to collect more paper dollars, if possible, since gold was no longer on offer and oil was the only asset they had to sell.
It would take another two years for those decisions to matter (during the October 1973 embargo in the wake of another Arab-Israeli war). The Oil Embargo marked the end of ‘free’ energy, and kicked off a massive rise in the price of oil because the U.S., the world’s swing producer since Colonel Drake’s Pennsylvania strike in 1859, had finally reached peak production at around 10 million barrels per day in 1970. This moment is the original Hubbert’s Peak, the beginning of decline for the U.S. oil industry, at least until recently. The surge in U.S. production since 2010 has stalled out around 9.5 mb/d and, due to the Saudi decision to give the American tight oil producers ‘a good sweating,’ that rate has begun to fall in the last few months.
It is certainly possible that U.S. production will surpass the 1970 peak, but with low prices it is hard to say when that will be; it is also hard to say how long that will last as tight oil wells have a devilishly high rate of decline. It is worth noting, as Arthur Berman has recently done in his fine article, that even the best producers are losing money now, and lots more are being lost by those who are not the best. Making it up on volume is a dog that does not hunt for $45.
The Wizard of Oz
The ultimate irony for this generation of investors is that, despite the occasional obligatory chant about ‘free markets’ and the wonders of capitalism, most of the day is spent obsessing about what the world’s most important central planner will do next. By Supreme Central Planner, I mean, the Fed.
“Pay no attention to that man behind the curtain”
The ‘Man’ behind the curtain is now a woman, but the power of the Fed is not in doubt; it still illuminates the Emerald City and all who look to it for guidance and more free money, which can be printed instantaneously and in any amount. At some point, the value of ‘free money’ will fall out of the sky, like Dorothy’s house onto the ruby slippers. Are we anywhere near that point?
On September 17, the mighty Fed decided to do nothing, continuing a 9-year inning without a rate increase. (Did the markets breathe a sigh of relief? On the first full day of trading after the announcement the S&P fell by 1.6 percent and the Dow Industrials fell nearly 300 points; so, no, they didn’t.) This Bloomberg article suggests the Fed kept its powder dry because of China. “China affects the world more than ever before, and its influence over global markets will only increase as it approaches the U.S. economy in size.”
Gold isn’t doing much to suggest that paper money is on the ropes but you may still be forgiven for thinking gold is a crouching tiger and it is only a matter of time. Oz is the abbreviation for an ounce of gold – “Follow the yellow brick road”; that is the path of hard money. Nobody is on that path anymore, so currency wars, i.e. who can devalue the right amount at the right time to gain a competitive advantage for their nation’s trade, are to be expected.
The Fed failed its first test in the 1930s, and the question must be asked, now that China is well on its way to becoming the world’s most important financial player, will they make the same mistake? Will they tighten the money supply to the point that disaster follows? Deutsche Bank thinks the tightening has begun, though they do not predict disaster. At this moment in the great game, turbulence in markets is not particularly reassuring. Liquidity is evaporating, in pockets, and that generally ends badly.
It is important for non-mathematicians to understand a dilemma which is not much discussed, if realized at all. When rates are low, even small increases make a significant difference. Raising rates from 1 to 2 percent, a ‘mere’ one point rise, has the same effect on the cost of the money you borrowed as raising rates from 5 to 10 percent – it is a doubling of the cost. It took a long time to crawl out from under extremely low rates in the 1930s (as it did after the 1893 crash before the Fed came along), which included a world at war. The liquidation process did not end until the rubble bounced in Germany and buildings were vaporized in Japan.
Central Planners have not yet figured out a way to end the problem without a liquidation event; the problems of 2008 were not allowed to run their course. In other words, there is no precedent for a rate recovery from such an enduring trend without first undergoing a massive deflation. What is different this time is that gold is no longer seen as an official backstop, though central banks still own plenty of it (for some reason). As terrifying as deflation is, hyper-inflation is worse. Consider what happened in France after 1790 and Germany after 1923.
The Next Suez Moment
1971 was symbolically pivotal in another way. The Royal Navy, symbol of British power from the time of Trafalgar on, pulled up its anchors and sailed away from Singapore (Churchill’s ‘Gibraltar of the East’), having left Aden (in Yemen) a few years before, where it kept watch over the Indian Ocean and its most prized possession, i.e. India itself, for 128 years. The liquidation of the British Empire did not happen overnight. The 30-year running gun battle with Germany leading up to the Bretton Wood’s coronation of the U.S. dollar as the world’s supreme currency was not quite the bitter end. It took another 12 years before the British ruling class learned that the sun had already set upon their power.
On July 26, 1956, Egyptian President Gamal Abdul Nasser nationalized the Suez Canal. The British and the French, who had financed and built it along with the Egyptians, were outraged. On October 29, Israel invaded the Sinai. On November 5, British and French paratroopers landed and defeated Egyptian troops along the Suez Canal. On the following day, Ike won an overwhelming electoral victory over Adlai Stevenson and, at the height of his (and America’s) powers, he told the British and French leaders to back down. America held their notes. The world held its breath. Prime Minister Anthony Eden resigned during the crisis and events effectively marked the end of heavily indebted Britain’s time as one of the world’s great powers.
The $64 trillion question now facing the current world’s economic superpowers, by which I mean the U.S. and China, is not whether the Fed will raise rates any time soon, but when will the Yuan replace the Greenback as the world’s reserve currency? Whether or not paper money turns to dust generally is a separate question. The U.S. is now the world’s leading debtor nation, owing something on the order of $18 trillion. This is by far the most money that has ever been owed at any time in history. Does anyone really believe that it will ever be paid back?
Inflation (printing money) and default are the usual suspects, but the unwinding of American debt will not necessarily happen in an orderly fashion. China’s Yuan becoming the world’s reserve currency would not be a Black Swan event; it may be a Gray Swan, but we have seen this sort of thing play out many times before, and not just to Britain.
It has been a constant throughout history that both the Operations & Maintenance (O&M) and capital costs of running an empire at some point exceed the benefits or gains obtained from having that empire. Prestige does not pay the bills. Hadrian’s Wall, a high-water mark of Roman expansion, is in a pretty bad state (like a lot of American bridges that are crumbling on the home front).
If it were otherwise, this article would be written in Latin; Facilis descensus Averno. (Loosely translated: The descent to hell is easy. Coming back up is the hard part: Hoc opus hic labor est.) The oft-quoted phrase: “Rome wasn’t built in a day,” misses a more important point, i.e. that it took centuries for the place to fall apart. About 150 years before so-called barbarians put the Eternal City out of its misery, Constantine moved the capital to what is now Istanbul. The Bezant, a gold coin, was the western world’s supreme currency for about 800 years after that, until the Venetians ruined the city during one of the Crusades.
The Venetians (the Ducat), Florence (the Florin), Spain (thanks to American gold and silver), and the Dutch (whose Guilder was garnished with an occasional tulip), all had their turn in the catbird seat – the supreme privilege of minting the reserve currency (and running up debts without anyone calling them in). Britannia ruled the waves and the financial system after finally beating Napoleon in 1815 and their turn did not end until 1944, after decades of war first ignited in 1914 by Victoria’s grandchildren.
The New Face of Money
Nobody plans to give way as keeper of the supreme currency, so there is no schedule to follow and no way to know when the torch will be passed from the dollar to the Yuan. Central planners and economists, who all drink from the same cup, may acknowledge that such a thing could happen decades from now (after all, Rome didn’t fall apart in a day), but will vigorously dispute the conclusions in this article. However, history has shown that the shift comes suddenly, usually in the heat or aftermath of war.
American troops have now been involved in the Middle East for 25 years (nearly as long as the face-off between British and German troops and navies in the 20th century) and the U.S. Navy’s Fifth Fleet is stationed in Bahrain, having filled the void left when the Royal Navy departed. The U.S. Navy is the world’s single largest consumer of oil and aircraft carriers don't come cheap. Clearly, the ‘price’ of oil is greater than we think it is, and someday this will probably be recognized as the principal cause of the dollar’s fall from grace. The temporary rise in the dollar against most other currencies is partly the result of being the best looking leper in the colony. Furthermore, an expected rise in dollar rates makes the currency seem relatively more attractive, though this is a double-edged sword.
It should be clear now that the reserve currency status is neither a birthright nor a privilege that stays forever in one place, which means it isn’t a question of if China will replace the U.S. as title holder but when. Imagine that a Republican president in January 2017 decides to act upon a campaign pledge to tear up any agreement between the U.S. and Iran. Imagine further that an air strike is aimed at Tehran. Regardless of Iran, or who is president, what if something happened in Pakistan that brought about a large scale American military response? What would China do?
That country has an insatiable and rising need for Btus from the Middle East and its development of a port at Gwadar is highly significant. “Beijing says it wants to use Gwadar as the hub of an energy corridor to its western province of Xinjiang. But at the same time, Beijing has secured a string of port facilities in the Indian Ocean that increasingly allow it to project its own naval power westward.”
With a population four times that of the U.S., and a per capita car ownership rate roughly one-tenth that of the U.S., even an elementary school math student can figure that over the next decade or so, there will be a lot more cars drinking a lot more oil filling Chinese streets (even if most vehicles eventually run on electricity – a switch that will take a long time).
A military misadventure in that part of the world would be considered a direct threat to Chinese strategic interests. As Ike said ‘no’ in 1956, Xi Jinping may well say ‘no’ this time around. What would happen if China decided, or even threatened, to sell a substantial fraction of its trillion dollar U.S. Treasury horde? This may seem unthinkable, but even if they did not, after 35 years of falling and now zero rates, the direction is only up for the cost of money, as is the cost to service debt, along with the burden to those who are most indebted (i.e. the U.S.).
What should no longer be unthinkable is that the clock is ticking on America’s status as the holder of the reserve currency. If you still doubt this proposition, consider that China is in the process of setting up a third benchmark for oil, along with Brent and West Texas Intermediate, for trading oil futures contracts. And unlike the existing contracts, these will be traded in Renminbi. Who needs the dollar?
Alexander Hamilton’s face is on the ten dollar bill for a reason; he devised the system that made the U.S. the world’s supreme financial power. (Pretty good work for a penniless orphan from the Caribbean. He was also one of the few founders who did not ever own slaves.) If he goes off the $10 bill it would be a very bad omen. Susan B. Anthony would be a good choice for the $20 bill; she is already on the roster. Andrew Jackson does not deserve to be there anyway, as he was no champion of liberty even before he betrayed the native allies who helped him defeat the British. ( In 1814 we took a little trip, along with Colonel Jackson down the mighty Mississipi . . . )
https://en.wikipedia.org/wiki/Susan_B._Anthony_dollar
Speaking of Liberty, she graced U.S. silver dollars and gold coins for a long time. In hoc signo vinces.
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No shit?
Oh my Goat! This just in!!!
Victoria Nuland is rumored to be taken to the St. Francis Hospital (N.Y) with slurred speech and her right side paralyzed.
I ain’t no doctor, but it sure sounds like a… Polonium-laced tea allergy. ;-)
Karma is a bitch…
Looney
P.S. Nobody has officially denied it yet, so I blame it on my medicinal glue-sniffin’ ;-)
Stroke?
"Pull it"... - Larry Silverstein
Dorothy's slippers were silver.
Whoda F#&k is Victoria Nuland?
https://www.google.com/?q=victoria+nuland
"Fuck the EU"
... and let them fund the refugees, and the Ukraine, and Greece.
Tonight is Kol Nidre, the most sacred time of the year in the Jewish religion. Kol Nidre was also the name of a yearly Radio City Music Hall rockette show occurring around now. In any case, Long Island's St. Francis, "The Heart Hospital," has their work cut out, finding a heart in satanist Nuland. Hopefully, she went in though the Emergency Room.
just in where? if can't link it, please refrain from posting
Like Hillary, hitting the moonshine.
Maybe Billy boy recieved boxes of it from his home state.
For the drug addled central planners at the Fed, the problem is the following: If you ride the tiger, it is hard to get off. Plus the tiger has sharp teeth.
Don't worry, the pain will end soon. At about 61.8% from the recent all time highs.
MegaDoom, Market Destruction and Death Crosses EverywhereThis is the first of heard of this concept.. I better still be able to buy pistachios
US debt has increased from $60 trillion in 2003 to $210 trilion in 2014 per Kotlikoff. US interest rates cannot be increased without sinking the US budget and economy. After ZIRP comes NIRP.
QE forever. And the dollar loses its reserve currency status
and after it loses reserve status it unofficially starts world war III in the middle east with all the starving, disenfranchised, overeducated and structurally unemployed youts too stoopid to know better.
just sayin
any reserve currency is a double-edged sword. it can hurt itself.
Say what you will about Andrew Jackson, he will have my eternal respect for
1) Paying off the national debt
2) Abolishing the Bank.
Yeah! And for
3) The Indian Removal Act of 1830
4) the Trail of Tears
...oh, wait
Boo Hoo
Jackson did nothing that every other person who would have been president at the time would have done. Congress passed the indian removal act, so he wasn't just signing an executive order. For this author to complain about the Fed and criticize Jackson shows a dangerously high level of cognitive dissonance.
China as the new reserve currency??? You don't get to the major leagues and be the reserve currency by devaluing it. They are still playing coach pitch. Tell me when they raise rates to bring on a recession to control their inflation, instead of arresting short sellers and merchants who raise prices. Don't look behind that curtain of phony government numbers and ghost cities. They have pulled a whole shit ton of aggregate demand forward and inflated asset prices to boot. If china sells treasuries in mass it will be to hand out government cheese to the masses or prop up the yuan. Hardly the sign of strength. And, oh yeah, send its largest trade partner into a recession by raising their treasury rates, but that is only if the Fed doesn't just buy up those treasuries and expand their balance sheet further. This has the makings of a deflationary death spiral. Can't have the largest credit bubble in human history without a deflationary collapse or a currency crash. But whose currency. China is sitting on a $3 trillion hedge.
Nothing last forever. Not even the USD, not even the U.S.A.
Nothing!
With BRICS and AIIB, if I were the USA, I'd be nervous as hell, too.
But USSA has inventors and a strong manufacturing base. Woops, Where'd it go? Reminds me of 1960's China where the people were encouraged "if you see something anti-communist, say something".
Music, dance, and ball throwing is USSA's strongest industries. Obama.
Does this mean that oil is going to $20/barrel and gold to $600/oz because that seems to be the trend line since all of this dollar losing reserve currency status talk started. Is that what losing the world reserve currency means? My thoughts were our currency was supposed to get devalued but the opposite is happening.
And let me be clear on one thing, the yuan will never be the world currency, China is a fucked up mess too. It depends on dirt cheap labor and just copies other people's shit. Hong Kong excluded.
It also produces other people's shit, so hug your iPhone and thank a Chinese peasant.
Bring those "jobs" building bauables "back" to the US and you'll have to be a banker to own iTreasures.
Oh, and China is totally fucked up for the future, but then again, I guess we all are.
I disagree with the premise that the Chinese Yuan will become a significant reserve currency. It has to first rise over the UK Pound Stirling, Japanese Yen, EU Euro and then the US dollar. Given the probability that we have hit the limits of growth due to flat-to-declining crude oil and crude condensates production, not to mention ever increasing costs of production, I don't think that there will be much need for a reserve currency in future decades. That's because high-cost petroleum is strangling GDP growth and non-elite jobs and incomes putting ever increasing pressure on the world's climbing mountain of unplayable debt. When that realization reaches a tipping point total economic collapse will ensue due to loss of its financial lifeblood and the world's globally networked economy will cease operating. Then China, the USA, the EU states, etc., will also all have a very difficult time maintaining domestic stability and internal cohesion.
andrew jackson ushered in the best multi decade run in american history.
his resurrection is sorely needed; y
ou seem a viper and theif obamapologist
I'm sure the few remaining native americans would disagree.
If you had any brains, you would realize that the indian removal, no matter how terrible it was, saved the Cherokee from extinction.
During the war between the states, several tribes joined the Confederate army. There was even a Creek general. You think the southern states were punished by the union during reconstruction? The indian tribes fared even worse.
The Cherokee could not have remained nuetral in the war and probably would have sided with the confederates. How well do you think they would have fared?
Never forget, that after Grant ordered Sherman to rape and pillage against southern civilians, Grant became president and ordered Sherman to commit genocide against the plains indians. Blame the people who are responsibe, why don't you?
Andrew Jackson moved some people to Okalahoma. Sure, it was a terrible business. However, it probably saved the tribe and in any case, Jackson's crimes against the indians are nothing compared to the crimes of Grant.
well, Manifest Destiny has many presidential faces but one direction; and those who preach it HATE it to be subsequently practiced on their own progeny.
Now DAT is where the logic is faulty : what you preach has to work both ways.
'Thou shalt not kill' made that rule #1 in the Abrahamic faith; unless it be in self defense.
So Geronimo was right to kill the guys Grant & Consorts sent after him.
When Caesar played "manifest destiny" he started an imperial tradition that finally got practiced on his progeny; just like Alexander of Macedon.
History has as awesome return bite on those who bite first. Ask Agamemnon.
So the Apple is what its all about. First bites and boogey nights in Heaven end up in lost paradise !
Maybe the Guy from Apple has not understood that's his future destiny, as he dreams of algo driven watches and self driven cars. Paradise lost is next stop !
Well an apple a day...so it works both ways at least on planet earth !
now that is some poetic justice.
+1
I'm sure the few remaining native americans would disagree.
Before the white man arrived the Indians spent their time at war, slaughtering and torturing and enslaving one another. There's abundant evidence for this. The image of kindly nature-loving philosophers that Hollywood and the media foist on us is comically inaccurate but serves its purpose....to further by demonise Whites and sap our self-belief.
Could you give some examples of this "abundant" evidence?
And could you go and defend your women you faggot. Raped and murdered by savage invaders while you paint your nails.
What is this stupid turn at the end? Okay article, then goes full retard with taking pot shots at Jackson and promoting Hamilton? WTF. Is this a plant article or what?
Hamilton, a banker, who never owned slaves? Now who is being naive? One other thing, yeah Jackson was a SOB and probably worse than that but he KNEW bankers and sussed out their whole con and control game. The fact that he is on a Federal Reserve Note is a hilarious farce seeing how bankers tried to have him assassinated. Honest money is the cure to what ails us but it's true we are to far gone. One other thing, if this were a real empire we would just invade Saudi Arabia and take all the effin' oil we want and kill those evil bastards in the bargain! What kind of Empire is this?
Paul, We can't have Salman barefoot on the back of an album now can we?
Fair article until the last paragraph.... simply oozes PC.
Hamilton was a sell out banker as was Washington. Neither could wait for the ink to dry on the constitution to bring in a central bank.
Jackson wouldn't want his face on a POS FRN,,, the only president who understood the destructive power of a feral central bank with the balls to defeat it.
And Susan's free voting women of today murder their children by the millions isn't much to be proud of. Couldn't think of a better place for her than a worthless piece of fiat.
Remember, we're not talking the u.s dollar here.
In todays news, water is wet....
To counter debt places like Chicago are instituting record property tax increases.
It's becoming to get like the communist party where when they get desperate they just take.
Emanuel paints dire future without record property tax hike
http://www.chicagotribune.com/news/local/politics/ct-rahm-emanuel-proper...
Rinse and repeat until they just seize stuff like the communist party.
The difference in America is that you - for now anyway - can up stakes and move to a more suitable location. This is rapidly changing of course as the productive middle class (read White), the source of the nation's wealth, gets proportionally smaller and discriminated against in every aspect of life.
I don't know how many times I've seen an article with the alarmist bent that we'll lose our "reserve currency" status.
Keep in mind that there is only ONE COUNTRY in the world to retain world currency status. So how the fuck do all the rest of the countries stay afloat without having RESERVE currnecy status.
See, these articles over the course of time have equated reserve currency to VIRGINITY status. If we lose our "reserve" currency status then we have nothing left to bargain with. And yet, there is only one country in the world that gets to have that virtue.
Countries that lose GRC staus generally fare poorly in the transition. During the last shift, the UK was the most powerful country in the world and is now second rate, and overrun by muslims and pedophiles.
And the USA is in the process of being overrun by Muslims and Latinos.
And Greenland is in the process of being overrun by climate change.
All the ice is now floating into the sea.
Maybe we should put American Oil lobby neo-cons tied to chains on Greenland's melting icebergs to float away like debris into that island of plastic like the last remnants on a Medusa raft.
If you put some good Salafists with them they will have good company all the way to the gates of Hades!
"Its hot but the company is awesome! We have some hairy tales to tell each other!"
The way to go, NWO of Oil barons.
what about the nuclear barons?
Fuck her the Cunt. Yes, Cunt.
Bla.. bla... bla... whatever. Don't worry keep on dreaming. Oh look! Kardhasian ass on TV again. Go watch it kids..
Not gonna happen. USA will blow the world first before it allows other currency to become the reserve currency. WWIII is coming, the question is NOT when but how soon
Not necessarily. The loss of RCS and the accompanying drop in living standards can happen gradually. America is already suffering such a decline, exacerbated by a tsunami of illegal immigrants. Yet there's no sign of a violent reaction.
Susan B Anthony graced gold-plated coins. Fixed it for ya.
At least now we don't have to use the dollar for currency in the US thanks to Utah's gold debit cards, bitGold and bitcoin.
In the event, the USD looses its reserve currency status, no nation would want to conduct trade in another currency which is open to abuse and subject to manipulation by the issuer nation.
I believe the Yuan can only become a reserve currency if it backed by gold or a very significant internationally recognized currency reserves, perhaps a monetized SDR.
This is an either/or situation? What if there can be two reserve currencies?
The defence of the USD in Iraq was extremely costly, still is. You could go bankrupt defending the indefensible. (Saddam had made a new contract with the French starting 1st April 2003, selling for Euros which the March invasion prevented coming into force. We are all paying that defence off for the rest of our lives.)
"Fifteen men on the dead man's chest--
...Yo-ho-ho, and a bottle of rum!
Drink and the devil had done for the rest--
...Yo-ho-ho, and a bottle of rum!"
-------------------
After the chest is opend ,
it is found to be only empty
--------------
Pirate captain America & its band of thieves (euroPeons etc) need to constantly loot small & developing nations , thats the regime (remember East India Company) . However, time is now running out. You have an incompetent, impudent, unholy president of America and his Satanist Chummy DavidCameron (oral sex with pig). Such are our great leaders with great chastity & values who can spill blood for any number of people - for oil.
Whats the world coming to when countries will accept as the "world reserve currency" the currency of a country that cannot be trusted for honest and transparent money supply and debt data and has a central bank controlled by the "party bosses" and takes part in manipulation of the markets.
Did you think I was talking about China ? --- or the US ?
Where is this clock, I'd like to synchroze my watch
Lost me when he said the man behind the curtain (Mr. Yellen) is now a woman.
What many, including this author, fail to realize is the the viability and attractiveness of a currency does not issue from the barrel of a gun, for the simple reason that you can force people to labor but not to productivity.
Reserve. Currency is an expression of trust, supported by moral behavior with respect to property.
The Yuan's rise is not inevitable.
If there are no issuers of currency who project moral behavior with respect for other's property, then trade will collapse, and currencies will become local and ad hoc.
Patience with official misbehavior is not endless. And the lesson of the Soviets is that the strongest government does not guarantee the strongest currency.
GC I disagree with "Reserve currency is an expression of trust," It only means that the country with the large trade deficit can continue to create more money than it needs to run its own economy.
I think the scowling face of the Susan B. "Agony" coin was a turn off. She didn't deserve that profile. Also, it would have been better if the perimeter of the coin actually had the angular cuts you see stamped on the circumference, because you would have been able to determine the coin just by feeling it with your hand. A lot of people claimed it was confused with the quarter. Well, the mint keeps trying, but sooner or later it will all be scrap metal. I also feel that minting a slew of new pictures on the quarters actually "diminishes" the value, at least psychologically. They are no longer perceived as unique. What's next on the back? A tribute to Maytag washing machines? The game time is running out. And the national debt is still trending UP:
http://usdebtclock.org/
So WHAT. Reserve currency is a *bad* thing. It means that the country who's currency is the reserve currency has a huge trade DEFICIT, and their currency piles up in central banks all over the world.