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No currency remains in use much longer than a single lifetime. In recorded history, since the first century Roman currency, it and every currency to follow has gone the way of the dinosaur. Traditionally only one currency at a time is prominent in global trade as a standard medium of exchange. Spain, the Netherlands, France, Britain and the United States have all had the dominant currency at different times in the last 500 years. If you believe the U.S. Dollar will be an exception to the fact that all past currencies have failed, time will most likely prove you wrong, and it will cost you dearly.
The U.S. dollar rose significantly in global reserve status after World War One and it was later made official near the end of World War Two. This was when the Bretton Woods Agreement, out of all the world’s currencies, made the dollar King. At this time international dollar reserves were convertible to gold at a stable rate of Thirty Five dollars per ounce.
This changed in 1971 when the U.S. under President Nixon announced a temporary pause to gold convertibility; though this did not turn out to be temporary at all. The U.S. Dollar from then on was a fiat currency. This means the world’s medium of exchange ever since has had no intrinsic value. It was not a representation of any commodity and new units were created at the discretion of the American government. Such a system alone would likely lead to lower United States economic strength, which is why Nixon convinced Saudi Arabia and later OPEC, the oil producing nations, to only sell oil for dollars. This created a much different world currency paradigm that would be known as the “Petrodollar.” An increasing supply of dollars needed to be created to fund America’s ongoing wars and social programs. Without a global demand for these dollars, without the Petrodollar, Americans would have seen high inflation in their economy.
Now, 43 years later, headlines everywhere are proclaiming that the dollar as a world reserve currency is likely nearing its end. Japanese yen, the Swiss franc and even Chinese yuan have been increasing as a percent of foreign reserves held in banks.
The King Dollar is shrinking as a percentage of the world’s currency supply. U.S. Dollars in 1952 made up 90% of the money on the globe in. Now they only make up 15%.
In 2008, during the economic crisis, the President of France Nicolas Sarkozy said “we must rethink the financial system from scratch.” In 2009 the Governor of the People’s Bank of China, their central bank, argued that a gradual move away from the U.S. dollar as a reserve currency would prevent economic disorders like the 2008 crisis. He also recommended a global currency, following the same argument as John Maynard Keynes that there’s an inherent dilemma when using a national currency as a world currency because of the conflict between balancing foreign and domestic needs.
Brazil, Russia, India and China are frequently coming out with new agreements for direct trade in their own national currencies. Together with South Africa they form what’s known as the BRICS nations. The BRICS are severing financial ties with the old superpowers of the world and creating their own institutions to replace those of the West’s.
By having the world reserve currency, the U.S. is allowed to print money to service its debts. Shockily there’s twice as much debt in the world as there is money. If the dollar loses its reserve currency status, the U.S. will have to pay its debt with real value instead of just increasing it’s money supply. It could not sell bonds to foreign countries, as it does now, at such low rates of return. Interest rates could easily rise high enough that the U.S. Government would have to spend half of its income just to pay for the interest on previous borrowing.
This is why the FED will say and do anything to keep interest rates low. Former Federal Reserve Chairman Benjamin Bernanke recently said that he doesn’t see interest rates reaching normal levels again, around 6%, in his whole lifetime! This would mean interest rates will remain low up to the 2030’s or early 2040s; and this is under a scenario where everything works out as the FED and U.S. government are hoping.
Many large countries have been making major moves in the last five years to stop transacting in U.S. Dollars. In July of this year at the sixth annual BRICS summit, the five nations signed an agreement to create the ‘New Development Bank,’ a bank to rival the International Monetary Fund or, IMF for short, that was created 68 years ago at the Bretton Woods Conference of 1944; where the dollar began its reign as the world’s reserve currency. Both the IMF and World Bank are based in Washington D.C.
BRICS nations comprise 40% of the world’s population and more than 25% of world GDP. Their New Development Bank will be headquartered in Shanghai, China. This bank will be given a $100 Billion reserve currency pool to counter the influence of Western-based lending institutions and the dollar. The President of Brazil literally said the fund is a “safety net to prevent volatility faced by various economies when the United States exits its expansionary monetary policy.”
Vladimir Putin, the President of Russia stated “The international monetary system depends a lot on the financial policy of the U.S. authorities. The BRICS countries want to change this.” The largest BRICS country by far is China whose Gross Domestic Product will officially overtake the U.S.’ in two to seven years.
Goldman Sachs chief economist in 2009 predicted the BRIC nations economies could overtake the top seven Western powers by 2027. Yet another nail in the coffin to the dollar is the unforeseen disadvantage of the U.S. shale oil boom. With the U.S. importing less oil; oil producing countries will have less need to hold U.S. dollars. U.S. net oil imports from OPEC countries has declined 50% since 2008 from 6,000 barrels per day to only 3,000 in May 2014.
Estimates now calculate that Saudi Arabia exports more oil to China then it does to the United States. Furthermore, Russia & China have a new deal to sell energy in their local currencies instead of the Dollar. Iran sells oil directly to China in Chinese yuan. Iran has also traded its oil for gold to neighboring countries to bypass U.S. and United Nations sanctions.
The U.S. Energy Information Administration reported that within the last year China had overtaken the U.S. in net oil imports. China’s third and fourth largest sources of oil, Russia and Iran, are both bypassing the dollar. Finally, a partnership between China and Saudi Arabia has created a giant oil refinery off the Red Sea that’s expected to be online this year. King Dollar is truly dying…
In addition to this, less U.S. oil imports mean less dollars going abroad, which means more dollars are coming back inside the United States. This will inevitably cause additional inflation that’s been overdue as America’s money supply has more than doubled in the last 10 years. Estimates put more than half of all U.S. dollars as being held abroad. It will be devastating to the value and stability of U.S. currency and domestic economy when these dollars return.
The reality is, sometime in the next 30 years the U.S. will surely lose its reserve currency status, and it will likely be after a major reset of the global monetary system. Some economic analysts are even saying this could happen as soon as 2018.
There are an infinite number of unexpected shakeups that could happen around a dollar collapse as well. From the U.S. backing its currency with oil to a major war breaking out. However, there are no circumstances that are absolutely certain. The timing of a dollar collapse is also impossible to predict. This is why you should be prepared for it now so it does not catch you, your finances and your family by surprise.
CrushTheStreet.com has compliled some steps you can take to prepare for the inevitable collapse of the U.S. dollar. Visit CrushTheStreet.com/dollar to get our free report and checkout our free newsletter of personal financial advice for the new economy.