Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

What to Expect When U.S. Dollar Reign Comes to an End

Currencies / US Dollar Oct 09, 2012 - 08:08 AM GMT

By: Money_Morning

Currencies

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Lloyd Blankfein has got it all wrong again.

Speaking last week, the Chief Executive of Goldman Sachs (NYSE: GS) claimed that if the "fiscal cliff" of tax increases and spending cuts go into effect on January 1, the U.S. dollar would lose its reserve currency status.

As the Vampire Squid's representatives often do, Blankfein actually has it backwards.


Contrary to what Blankfein thinks, a legitimate movement to deal with the fiscal cliff would cut the federal deficit in half, make the country more or less solvent and strengthen the dollar.

However, the problem is that the fiscal cliff involves pain. And since politicians like to delay pain as long as possible, the chances are good the fiscal cliff will be postponed again.

Instead, the country will likely continue to run trillion-dollar deficits in the hopes that Ben Bernanke can finance them through even more quantitative easing. It's the only play in the Keynesian playbook.

Unfortunately, that is the policy most likely to crash the dollar -- and it's headed our way.

So what will the world look like when the dollar has crashed, and international investors and traders have lost all of their confidence in the greenback?

The truth is if that happens it won't be like anything we've seen within living memory.

To understand why, you need to understand how the world managed to get by before the U.S. dollar became the world's reserve currency.

Before the Rise of the Dollar
Ever since the Bretton Woods agreement in 1945, the U.S. dollar has been the world's reserve currency. So far, that role has been relatively unquestioned.

But prior to that, beginning in 1914, the world had relied on two reserve currencies. One was a declining British sterling. The other was a rising U.S. dollar.

Oddly enough, the sterling was the stronger of the two in the 1930s, after Britain went off the gold standard in the 1920s. That's largely because while the U.S. suffered through the Great Depression, Britain managed to enjoy something of an economic renaissance.

Before 1914 though, the British gold pound was the world's main reserve currency for over 100 years--ever since the Napoleonic Wars.

Just as with the dollar today, when it came to true international transactions and investments, there was no real alternative to sterling at the time.

However, that wasn't always the case, either. History is full of examples where there was no one true reserve currency like the dollar or the gold pound.

Before 1800, the pound was important, but scarce - the main British gold coin of the time was the guinea, worth 1.05 pounds.

In the American colonies, however, British gold coinage hardly circulated at all, because gold was scarce. Instead Spanish silver coins -- "pieces of eight," or 8 Spanish reals -- were the main coinage for trade, investment and, of course, piracy.

When Long John Silver's parrot squawked "Pieces of eight," the intelligent bird was simply expressing a preference for the medium in which it wanted its pirate treasure to be paid!

Around the same time, after a 1751 re-coinage, the thaler issued by the Austrian empress Maria Theresa become the common currency for the German-speaking world.

Strangely, this common currency continued after Maria Theresa's death in 1780, spreading to Africa and the Middle East. The British government, in particular went on coining Maria Theresa thalers, basically counterfeit (though made of real silver) until as late as 1962, continuing to date them 1780.

In fact, when my father made his first trip to Saudi Arabia in 1963 he brought one back. He said they were still using them in a big way there. Of course, since the Saudis still used the Moslem calendar, many of them were probably unaware that it was, alas, no longer 1780 for the rest of us!

The point is that if the dollar becomes no longer credible, other currencies will have to do the job-like they have throughout history.

The problem is that there is no obvious single alternative to the U.S. dollar today.

The euro is a mess, the sterling has the same problems as the dollar, Japan has a humongous debt problem, and China's currency isn't freely traded and is endangered by a huge black hole in its banking system.

Living in a World Without a Strong U.S. Dollar
In a world without the dollar, it's likely that smaller currencies would have to be used.

Doubtless some of these would be "specialist currencies," tailored to the needs of different users.

For instance, asset-only savers would want a currency that is a truly reliable store of value, with rock-solid monetary policies like the U.S. in the days of Fed chairman Paul Volcker.

Meanwhile, traders would be partial to a currency that is as close as possible to a median between the various economic blocs, so that neither buyers nor sellers are disadvantaged.

Debtors undoubtedly would want a currency with sloppy Bernanke-ite monetary policies and very low interest rates. When they find it, they will combine with the hard-sell operators on Wall Street to stuff it into unsuspecting investors' portfolios, especially investors like insurance companies and pension funds, which try to match assets and liabilities.

Of course, like clockwork every now and then confidence in a particular currency would collapse.

You see, none of these currencies would be backed by a hard asset, like pieces of eight or the Maria Theresa thaler. They are paper money.

That's why we are likely to re-learn some painful eighteenth century lessons...

Eventually, over the wailing protests of the world's economists and central bankers, we may move to an eighteenth century solution - a gold standard.

That's the only thing that could truly be used to replace the greenback as the world's reserve currency.

It's why the soaring price of gold is not an anomaly.

Source :http://moneymorning.com/2012/10/09/what-to-expect-when-the-reign-of-the-u-s-dollar-comes-to-an-end/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules