In 1944 the US was the most powerful nation in the world; it’s military and economic might were second to none and, although the war was still being fought with Japan, Germany was defeated and the US was one of the few nations that was still left intact after WWII. The goal of the Bretton Woods Conference was to prevent a WWIII by rebuilding the world’s economic infrastructure. They wanted to replace the former model of economic growth, which was go to war and take over another nation and all their resources, by providing consultation and economic assistance. It was at these meetings that the NY based World Bank and International Monetary Fund (IMF) were created to aid nations in becoming a part of the global market place, by helping them develop their own unique resources and create transportation, communication and financial systems through which they could trade and prosper.
The British Pound was the World Reserve Currency (WRC) at the time, but after two world wars in 30 years, Britain was broke, so the USD became the WRC. The WRC is the currency which all nations use when they buy, sell and trade internationally. It’s supposed to be stable with little fluctuation, so the world can more easily trade between nations and simplify business transactions. The only way two nations could avoid using the WRC was to have a bi-lateral treaty allowing for direct exchange of each other’s currency. Being the WRC provides many advantages and the expectation was that the nation benefitting from these advantages would handle the privilege responsibly. The British did this for hundreds of years and, unlike the nations before them who acted irresponsibly, were simply the victim of two world wars fought on their soil, which had badly damaged their economy.
The US started out well for the first twenty five years, but in the latter 60s started acting in its own interest and began to handle this privilege poorly and have unfortunately abused it. In 1971, the US was just emerging from a recession, but economic problems continued to persist. French President DeGaulle then started buying gold from the US at the artificial rate of $35.00 per ounce, which was set at the Bretton Woods Accords back in 1944. In reality gold was worth more. President Nixon couldn’t break the treaty, so in August of 1971, he decoupled gold from the USD and completely monetized it. This enabled the US to print as much money as it needed to pay for the Vietnam War, since the USD was now a free floating fiat currency.
The decoupling and increased money printing also caused great concern about the stability of the USD. In 1973, the US was once again in recession and Nixon was worried about the durability of the USD. Recognizing the demand for oil was growing and would only increase, in 1974 Nixon sent Secretary of State Henry Kissinger to Saudi Arabia. A secret financial arrangement was signed with the Saudi Monetary Agency (SAMA) that enabled the high oil prices of 1973-1974 to directly benefit the U.S. Federal Reserve Bank. The deal was that Saudi Arabia would sell their crude oil only in USDs. In return, the US stopped exporting crude oil, making Saudi Arabia the undisputed King of oil and creating the petro dollar. This arrangement stayed in place until President Obama made the nuclear deal with Iran, causing Saudi Arabia to end the deal, and in January the US exported its first shipment of crude since 1974.
In 2009-2010, when the US printed $8 trillion to bailout its banks and financial institutions, it was able to spread the devaluation of the USD to the entire world. This is because, at that point in time, most nations without a treaty to exchange each other’s currencies had no other options but to continue to use the USD in international trade, no matter how much money the US printed or how irresponsible they acted. Since 2010, almost all the major nations have created treaties to directly exchange their currencies with one another, so they do not have to trade with the USD. The creation of a new world bank, the Asian Investment Infrastructure Bank (AIIB) was another step away from the US controlled World Bank. The US is the only major nation in the world who is not a member of the AIIB, and although they could become a member, only the original founding members have a vote. Regardless of whether the USD remains the WRC or not, with the combination of direct currency exchange treaties, the new AIIB world bank, the IMF adding China to the SDR basket which is the IMFs currency comprised of USD, GBP, Yen, Euro and now the Yuan. the NY based World Bank adding China as the eighth world reserve currency and the emergence of China, Asia, India and other international economies, the “privilege” and advantage of being the WRC is becoming irrelevant.
The Federal Reserve and Congress have failed to make the difficult and painful choices they should have made following the 2008 financial crisis, instead they’ve tried to fuel growth and recovery through printing money, increasing their debt and other forms of governmental and central bank intervention. Every nation throughout history that has tried to do this has failed, because no one is too big to fail. Nations rise and nations fall, usually because of the weight of their own debt and fiscal mismanagement, all the while trying to cling to power and refusing to deal with present realities. It happened to Greece, Rome, Portugal, France, and Britain, all of whom were the world reserve currency for a time, and except for Britain, all devalued their currency until it was basically worthless. The USSR was the second most powerful super power for 40 years, but they defaulted and disappeared for a decade, before Russia began to get back on their economic feet.
Instead of making the difficult choices necessary to rectify the underlying causes of the 2008 financial crisis, the US has passed massive regulatory acts like Dodd/Frank, which both sides of the political aisle, as well as the judiciary branch, have concluded doesn’t work. The US has, in fact, made things worse by taking on massive debt that is beyond its ability to pay off. Excessive central bank intervention and debt fueled stimulus have created artificial growth environments and market sector bubbles.
The US is already insolvent by most methods of analysis. The rest of the world is preparing for the fall of the USD and an end to the American domination of the world market place. Currently, neither Congress nor the two presumptive presidential candidates are talking about making the difficult choices and taking the necessary action to put America’s financial house in order. Thus, the US is continuing to drive toward the cliff of insolvency and outright and/or technical default. The only real question is, will they drive straight off the cliff or will they manage their default as they descend.
The US is not alone in its central bank’s failed stimulus, intervention and devaluation of their currency. The EU, Japan and China have also failed miserably and are in debt beyond their ability to repay what they owe, and they are avoiding making the difficult choices as well. Many nations today are depegging their currency from the both the Euro and USD, because they can no longer trust their stability. Politically, it’s all about how it looks, so instead of managing reality, they manage perception, thus how things look are not necessarily how things are. How the US, EU, Japan and other world economies, markets and political leaders and governments look, are not necessarily how they are, as there is so much that is artificial, that it’s difficult to discern what is real and unreal. One thing is for sure, is between now and Jan 1, 2017 the world’s political leaders, the financial markets and the currency values will look very different than they do now.
Nixon, Gold and Oil – by Richard Mills AheadoftheHerd.com | http://aheadoftheherd.com/Newsletter/2012/Nixon-Gold-and-Oil.htm
List of Recessions in the United States – Wikipedia | https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States
Currency Pegs (1-28-16) Bloomberg | http://www.bloombergview.com/quicktake/currency-pegs
500 Euro Notes will no Longer be Produced (5-5-16) SMC
Global Corporate Debt Now Far Exceeds Pre-Lehman Bubble (5-8-16) by Internationational BusinessTimes http://www.ibtimes.co.uk/world-corporate-debt-far-exceeds-pre-lehman-financial-bubble-warns-iif-1558766
Stocks Rise as Dollar’s Plunge to 10-Month Low Lifts Commodities (4-27-16)
The Fed’s Credibility Dilemma (3-22-16) http://www.bloombergview.com/articles/2016-03-22/the-fed-s-credibility-dilemma
U.S. Dollar on Track for Worst Quarterly Performance Since 2010 (3-28-16) WSJ
Four Signs the Dollar Hit its Peak in January (3-14-16) SMC https://www.sovereignman.com/trends/four-signs-the-dollar-hit-its-peak-in-january-18846/?inf_contact_key=8782d8004601f100553a45682bf6d9ed08ae2b56f12a0361b944d11d011210a0
Signs Are Flashing That Dollar Plunge Has Gone Too Far, Too Fast (3-19-16)
Cash is the Currency of Freedom (3-1-16) USA Today
Foreign Governments Dump U.S. Debt at Record Rate (3-16-16) CNN