Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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