How The U.S. Dollar Reserve Currency Dies… Slowly At First, Then All At Once

Death of Dollar

(By Chris Hamilton)

By any objective measure Reserve Currencies — particularly the US dollar — are dying. The question most analysts get when discussing the reality of the US and world economic/financial situations is, if things are so dire, why doesn’t it feel like it? (***see dire links below ) If all the facts stated about $6 trillion annual (GAAP basis) US budget deficits or US government total debt and obligations in excess of $90 trillion are true, why does the system still “function”??? Social Security recipients receive checks, the military is still paid, the garbage gets picked up, and stores still have stocked shelves. Life seems hectic but generally “normal”. So, is there a problem at all and if so, when and how will it go from theoretical to reality?

***US is Bankrupt: $89.5 Trillion in US Liabilities vs. $82 Trillion in Household Net Worth & The Gap is Growing. We Now Await the Nature of the Cramdown
or
***America Has Adopted The Sclerotic European / Japanese Model
or
***The Story of America’s Economic Illiteracy – Truth hidden in Plain Sight…Yet We Choose to be Blind?

Commit to about 5 to 10 minutes of reading and maybe we can have a very plausible answer.

A LITTLE BACKGROUND

Following WWII, a new monetary system for international commerce and finance was implemented. This agreement known as Bretton Woods (the location in New Hampshire where the conference was held) gave the expected Allied victors the spoils and represented the World as of 1945.

CHIEF FEATURES OF THE BRETTON WOODS SYSTEM:

• An obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar

• The ability of the IMF (created by the Bretton Woods agreement along with many other current day acronyms) to bridge temporary imbalances of payments (IMF would loan money to nations in trouble with strings attached to ideally resolve these imbalances and keep the system functioning).

• Address the lack of cooperation among other countries and to prevent competitive devaluation of the currencies as well (avoid countries printing money to cheapen their exports and gain advantage in trading)

• To ensure the US did not abuse it’s privilege as the world’s de-facto currency, the US dollar would be freely convertible into gold (if the US printed an excess quantity of $’s, nations accumulating too many dollars from US trade/budget deficits could convert and retire these dollar’s into gold (gold representing a relatively fixed quantity and storage of value).

WHAT ACTUALLY TOOK PLACE:

• 1946-1959 – Growth surged while debt was flat.

• Total US government obligations grew minimally from $269 billion to $285 billion. As a result the Debt to GDP ratio fell from 113% to 54%. In other words, the US essentially ran a balanced budget adding approximately $1 billion per year to national debt over 13 years, (about a third of a % annually…all while conducting the Marshall plan, the Korean War, and huge US infrastructure projects). The US was the model of global economic stability and fiscal restraint.

• 1960-1975 – Debt Doubled While GDP Grew by More Than Three Times.

• US government debt almost doubled from $285 billion to $533 billion while GDP more then tripled, from $525 billion to $1.7 trillion. In 1975 the US hit a Debt/GDP post Great Depression low of 31%. But great forces were already set in motion that would lead us to today’s trouble…including the initiation of the Great Society in ‘65 and LBJ’s four years later theft of these surplus’ meant to cover future tax shortfalls for these programs…all to hide the true cost of the Vietnam war…all under the “Unified Budget”. The US had put in motion the betrayal of Bretton Woods for national political purposes and the unfunded liability monster was borne.

• 1975-2014 – Debt Spiked 168 times, 16 times GDP Growth, 11 times Household Net Worth.

• Total US government obligations grew from $533 billion to $89.5 trillion while GDP grew 10x’s $1.7 trillion to 17 trillion and Household net worth grew 15x’s $5.4 trillion to $82 trillion. Median household income grew 3x’s from an estimated $17k to $51k annually while Real median household income barely grew 1.13x’s, from $45k to $51k annually. Bad policy decisions of 4 decades earlier went parabolic.

Below is a chart of GDP, Household Net Worth, and Federal Treasury Debt all indexed to 1973 to visualize the growth and relationship in each over the last four decades.

Chris Hamilton PIC 1

RAMIFICATIONS

• The US had roughly 19,000 tons of gold as of the end of WWII and peaked in excess of 20,000 tons by 1958…but by 1971, the redemptions by nations concerned over US deficit spending and printing had reduced the US gold holdings to just over 8,000 tons and a run on the remaining gold (the convertibility of the dollar to gold being the dollars foundation of the dollar) looked likely.

• 1971 President Nixon closed the US dollars convertibility into gold…but to avoid the dollars demise, Nixon struck an agreement with Saudi Arabia (and soon after all of OPEC) that all future purchases of oil will need be conducted in US dollars (regardless the buyer or destination). In exchange, the US promised weapons and protection to these close “allies” of the US. Unfortunately, this policy rewarded some very un-democratic and very despotic leaders in the middle-East whom reaped the rewards with a tiny minority of their cohorts. These trade policies typically left the populace poor and seething with anger at the US for supporting kings and dictators who ruled in complete contradiction to US founding principles and the best interests of the citizens of these nations.

• Ultimately, this petro-dollar agreement allowed the US to run very large trade and budget deficits and export the excess dollars worldwide (through our trade/budget deficits) that would have otherwise created significant inflation within the United States.

• This Petro-dollar agreement compelled by force of necessity a gigantic supply of dollars to be accumulated by foreign nations worldwide.

• In fact, the estimate is that there are more than 4x’s the supply of all money in the US ($2.8 trillion, M1**) held abroad ($12+ trillion). This includes nearly $6 trillion in foreign held US Treasury’s, $6+ trillion in formal Reserves, and the Federal Reserve estimated that 55% to 70% (and potentially in excess of 100% of M1) of all US currency was held abroad and increasing as of 2012*. As an aside, 80% of all US currency is in $100 bills and the vast majority of these reside overseas, but foreigners also hold lesser amounts in $50’s and $20’s. These formal and informal dollar and US Treasury bond reserves held by foreign nations allow trade in oil and other de-facto dollar denominated commodities (legal and illicit).

Crisis and Calm: Demand for U.S. Currency at Home and Abroad from the Fall of the Berlin Wall to 2011

**M1 = the supply of money measured by all physical money, checking accounts, and liquid cash like money within the US economy

BRETTON WOODS, THE DOLLAR, & THE “BRICS”

But global power has shifted a bit since 1945 and the US has balked on its Bretton Woods pledges, the Middle-East teams with “radicals” and “revolutionaries”, and now the BRICS (Brazil, Russia, India, China, South Africa) are on a path to de-emphasize dollar usage in favor of localized, decentralized currencies in trade. The US leans on the privilege of the dollar (established @ Bretton Woods) to maintain its lifestyle via massive $6 trillion annual (GAAP basis) deficit spending…but the dollars global dominance wanes more every day while America increasingly leans on this rickety crutch.

Today, the BRICS account for about 25 per cent of global GDP, 35 per cent of total international reserves (with China at over $4 trillion), 25 per cent of total land area and around 42 per cent of the world’s population…and BRICS affiliated nations increase these numbers significantly more.

However, despite their economic weight, the BRICS’ representation, voting power, participation in management and staff in the Bretton Woods institutions (International Monetary Fund, World Bank, World Trade Organization, and International Finance Corporation) and others like the Bank of International Settlement, displays a major deficit of ‘voice’ and influence.

As of July, the BRICS nations formally agreed on a BRICS bank funded w/ $100 billion to rival the influence and power of the IMF. This money is to be lent to nations in need, as an alternative to the IMF (typically with US directed strings attached). China, Brazil, Russia, and so many more are moving away from clearing their trade in dollars and instead utilizing the Yuan, the Real, the Ruble, etc. Please note that Russia and Saudi Arabia are now the largest exporters of oil – and at least Russia is moving rapidly to settle in anything but the dollar…and the troubles in Saudi Arabia, Iran, Iraq, Libya, Syria, Ukraine, etc. are all symptomatic of this conflict for which currency(s) will be used to settle trade.

China is organizing itself and its trade partners in at least 24 separate agreements to transact in the Yuan rather than the dollar. As of 2009, less than 1% of China’s global trade was settled in Yuan but by mid-2013, 17% of Chinese trade was being cleared in Yuan…almost entirely at the expense of the dollar. And the trend and structure to allow far more has only accelerated throughout the BRICS.

ENOUGH – WHAT’S THE ANSWER ALREADY?

It should be very clear where this trend is going and the implications to the United States – the perennially optimistic Congressional Budget Office and like prognosticators have acknowledged the US will soon need to run even larger budget deficits in excess of $1 trillion (and that’s assuming all goes well) due to large debt loads, growing social programs, and large unfunded liabilities. Of course the situation will only get worse because:

• We consistently spend more cash than we take in as revenue but due to Cash-Based accounting the true nature of the deficit spending is concealed.

• We continue adding new participants to existing entitlement programs increasing present and future unfunded liabilities…while the tax payers per social program recipient is expected to fall from 4 to 2 per recipient within a decade.

• We add new entitlement programs (i.e. the Prescription Drug Act in 2003 and the Affordable Care Act in 2010) absent funding therefore increasing our future liabilities.

• We incur interest expense each year on our Federal Obligation; real interest on our debt held by the public (included in item (a) above), virtual interest on our intra-governmental borrowings, and virtual interest on the present value of our unfunded liabilities).

All this will necessitate the world accept and utilize ever more dollars. HOWEVER, the existing dollar-centric system is not in the favor of most of the new powers of the world…and they are rapidly moving to reduce their dependence on the dollar…just as the US will need foreigners to embrace it more than ever. Rock meet hard place.

If $12+ trillion (plus the continuing growth in available dollars) is no longer needed as reserves for international settlement – where does that money go? Well, a relatively small reduction in dollar trade replaced by Yuan, Ruble, Real, etc. (say 5%-10% over a period, say 2014) would free up $600 billion to $1.2 trillion to move where dollars are still readily accepted…the US of A. Typically, these dollars would be levered up (say conservatively 5x’s)…and voila, $3 trillion to $6 trillion of purchasing power is introduced to America in 2014.

Things like stocks, bonds, and Real Estate would be very positively pushed higher and higher (rents, insurance, etc. would also be unwelcomingly pushed higher as wages remain flat due to structural unemployment issues…in other words, asset owners are rewarded, wage earners are punished). The Federal Reserve’s Z1 Household Survey for 2014 would be similar to 2013’s 11+% increase in US assets by $9.5 trillion ($84.5 trillion (’12) to $94 trillion (’13))…all while household liabilities (mortgages, all loans, etc.) barely increased ($140 billion) and wages remained flat.

But let’s say in 2015 the pace of BRICS non-dollar trade continues expanding and international settlement in non-dollars grows by 10% to 20%…and 10% to 20% of dollars are no longer needed as reserves to buy oil, wheat, finance trade, etc. etc. This is about $1.2 trillion to $2.4 trillion formerly held reserves cleared to go looking for their home…the US. $1.2 trillion to $2.4 trillion levered again very conservatively @ 5x’s (or 20% cash down) is $6 trillion to $12 trillion in “hot” money looking for assets.

With just a fraction of all the inflation the US exported over the ’71-present period coming home…this creates what amounts to a hyper-monetary dollar overdose in America. Foreign holders of US money chasing assets in America where dollars are readily accepted. And of course, once these things start, they create a momentum of their own and eventually a likely counter by the administration to freeze out these dollars and the likely panic this ensues both domestically and internationally.

IMPLICATIONS

The minority of Americans with assets see their value rise but the majority will get much poorer…those dependent on wages and social programs (generally younger, with families, retirees living on SS, etc.) absent assets are made dramatically poorer (wages stagnant while costs rise…rent, food, insurance, school, fuel, etc.). The economy suffers as consumers lose ground and inequality runs rampant. How it plays out from there is impossible to know as supply and demand implications are met with 2nd derivative government reactions and on and on and on. Beyond that, it’s all just plain guesses with little historical precedence to guide us.

Of course there are many steps and actions that could be taken to acknowledge our challenges and collectively address them through shared sacrifice and a long term restructuring of our economy. But the 4+ decade trend of fraudulent accounting, financialization, and, well, like a hundred other trends that need be reversed seem unlikely to be voluntarily addressed. Prepare for the solution to be involuntarily applied in a time and manner not of our choosing.

Article written by Chris Hamilton posted at Charles Biderman’s TrimTabs

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22 Comments on "How The U.S. Dollar Reserve Currency Dies… Slowly At First, Then All At Once"

  1. This a masterful overview of a topic which most always gets obscured by political orientation and/or investor bias. The balanced coverage of both domestic and international events gives the reader insight into the peculiar situation in which not just the USA, but the entire western world finds itself – the proverbial Wily E. Coyote moment of suspended animation…

    and invites their inspection of this temporarily ‘gravity- free’ moment without resort to the usual tricks of imagination people use to belie the notion that gravity must and will take it’s course. Simply by staying clear of the usual prescriptions…. buy gold/silver, ammo, farmland, etc. etc., … and concentrating on presenting a plausible storyline by which to plot an end point to the momentum of events now in progress.

    After the sequence of events that will eliminate the utility of much-hyped ‘solutions’ to the impact of this paraphrase of Hemingway on the macro level, those few left in a position of solvency will have been well served by such a drama-free summation of Pompeii 2.0. All one needs do is take this –

    “Well, a relatively small reduction in dollar trade replaced by Yuan, Ruble, Real, etc. (say 5%-10% over a period, say 2014) would free up $600 billion to $1.2 trillion to move where dollars are still readily accepted…the US of A. Typically, these dollars would be levered up (say conservatively 5x’s)…and voila, $3 trillion to $6 trillion of purchasing power is introduced to America in 2014.”

    – and combine it with an understanding of the massive buy up of exported rubles that were re-imported and employed by the western bank-Mafiya cartel to asset strip Russia 20 years ago … to envisage the future of a west laid totally bare to the depredations of a criminal syndicate that has no difference in approach or effect than a plague of army ants on the move.

    It’s worth noting that to the question “Enough- What’s the Answer” the author poses none. Those bold enough to lay aside their picks and shovels for just a moment should be able to hear the rumble of what comes in stead… well beyond the trenches and other devices with which it was sought to ward off its coming.

  2. Bretton Woods was in New Jersey??? Please FACT CHECK…. I’ve always known of Bretton Woods in New Hampshire near Mount Washington.

    I lost interest in reading your article when something that simple hasn’t been fact-checked or read by someone else before being published.

    • DJB777,

      Okay, so maybe he got the location wrong.. could have been an oversight. From time to time, I make errors in my articles and from the GOOD GRACES of my readers… they surely let me know. So, I go back and make the edit. Hell, Jim Willie does this as well. No BIG DEAL.

      The substance of the article is excellent… as you can see by the amount of FACEBOOK LIKES.

      steve

      • Just shows me the amount of ignorant people actually.

        You should proofread your articles, it is very embarrassing (damning) not to get facts correctly and shows you don’t even read what you write or understand it yourself.

        You should know your area of expertise like the back of your hand, not as some offshoot sidekick hobby every now and then.

        • Beano,

          By the way BEANO, if you read the article it was a GUEST POST. It was not written by me. I send articles all the time to other websites that publish my work… sometimes with mistakes.

          While it’s impressive to be arrogantly intelligent.. as yourself, I find it humbling to be wrong at times. I actually suffer from the Archie Bunker syndrome. I say or write a word, and mean another. Has nothing to do with ignorance, but rather just a GLITCH in my thinking.

          Furthermore, we all make mistakes and it really gets me a bit frustrating to have to read your kind of reply when all we are trying to do uncover the GABRAGE, MANIPULATION and FRAUD of what is the Fiat Monetary System.

          Maybe you might consider getting off your ARROGANT THRONE from time to time and allow folks a bit more leeway.

          Fer Heavens sakes… your remark sounds just like something Jeff Christian would say…. BRAVO.

          steve

    • How petty can you get

    • This agreement known as Bretton Woods (the location in New Hampshire where the conference was held) gave the expected Allied victors the spoils and represented the World as of 1945. I don’t see where it says anything about New Jersey?????

  3. Expect De-dollarization to accelerate as people around the world start to recognize the writing on the wall. Most investors in China, South America, Russia, and some European countries have witnessed or lived through a currency devaluation. They can read the overt and subtle market signals and they understand the consequences. De-dollarization will grow faster and will take on a life of its own. The Weimar Mark slowly debased and then its value dropped very quickly, trapping everyone that owned assets denominated in Weimar Marks. Once the general investing public figures out how the story ends, hyperinflation will quickly follow. Confidence is everything. that’s why we see PM suppression, and a government controlled commodity, stock, and bond markets. The government is attempting to mask the warning signs. Unfortunately, the signals are still coming and the U.S. isn’t the first government that ever tried to suppress them nor will they be the last. The Dollar will collapse..first slowly and then like thunder. Did you ever try to time Thunder?

  4. “This agreement known as Bretton Woods (the location in New Jersey where the conference was held)”

    Bretton Woods is in New Hampshire not New Jersey

    • Right you are and apologies to those in NH who feared they may have lost a town to New Jersey…my bad and just was an oversight as I focused more on content than geography.

      • Chris, please ignore the “nit pickers”.

        They remind me of someone discussing kitchen paint color, as the house burns down!

        To them I say, Grow up! Pay attention to what matters. Criticizing the size and color of the envelope and totally ignoring the message inside, is just childish behavior.

        This message is critically important for all to understand. Unfortunately, the vast majority will only come to the realization once wage and price controls are instituted across the country, along with probably martial law. It will be too late then for them to act. The only course of action left open to them will be to react!

  5. Thanks Chris, While I have often tried to communicate the apparent impacts of the dollars demise as a reserve currency on dollars coming home and chasing goods I did not effectively understand the leverage factor and thushave greatly minimized the impact of all those dollars coming home…. Thanks for pointing that out…. I guess….just means more nasty implications to our economy and living standards when one affects the huge amount of dollars in circulation coming home x5….. Scary and gaining momentum.. Zim bucks meet the Greenback….

  6. Excellent and concise article. One small correction, though. The Bretton Woods meeting was held in New Hampshire, not New Jersey…Bretton Woods, NH.

  7. I’d like to apologize for the way I criticized the “location” of Bretton Woods earlier today. I’ve recently found myself on numerous occasions repeating certain facts of our present dire situation to others and because of one slightly skewed date or incorrect amount or wrong location from the source of what I read and repeated, I lost the ear from those with whom I was hoping to communicate. So, that being the reason for my quick over-reaction and not considering how to better say something or just simply ask a question, instead of immediately criticizing the person who runs this website.

    I have found myself believing some very “probable” but not accurate information about the “powers that be” and then upon further research or fact-checking, I realize I fell for one of the most often-used tactics of warfare…DISINFORMATION…

    We ( primarily “I”) need to remember who the real enemy is….next time I see an error on a non-essential, I’m going to give the benefit of the doubt to the guy that’s on my side and not tear him down and give the “enemy” the upper hand by getting everyone else on our side focusing on things that aren’t the most important element to the warfare at hand… Again, I’m sorry, but a very valuable lesson learned today.

    My apologies to all who read my above post.

    • DJB777,

      Okay… well done. I apologize for going ITALIAN on ya, however, it does get frustrating when we should focus on the nitwits causing the problems. Anyhow glad to have you checking out the site.

      I will be putting out some interesting material in the next weeks.. month.

      steve

  8. Give the man a break ! Who gives a shit where Bretton Woods is located, that was hardly the point ! Nor did this “monumental” error take anything away from a very well written article.

  9. Just an FYI, there is a place in Morris Plains, NJ called The Bretton Woods Inn.

  10. RICHARD RALPH ROEHL | August 18, 2014 at 10:41 pm | Reply

    Where there is no insight, the people perish. And the Amerikan corn-syrup sheeple are the dumbest of the dumb. And proud of it too!

    Alas! No population on Earth is more manipulated and ill informed than the Amerikan sheeple-people. Rome is burning!

  11. “But the 4+ decade trend of fraudulent accounting, financialization, and, well, like a hundred other trends that need be reversed seem unlikely to be voluntarily addressed.”

    of course they won’t be addressed. one aspect of this problem that few consider is demographic decline. the productive population had no children and the money that might have gone to raising those children has instead gone to swell the ranks of the FSA. there are insufficient citizens remaining to address these issues. the fraudulent accounting and financialization are not trends to be addressed, they are end-stage.

  12. This is the most comprehensive explanation I have ever read on the Internet. It all makes sense with clarity. Thank you!

    Now, what happens in America is anyone’s guess. I see civil unrest exploding while the elite try to replace Americans with foreigners crossing over the border. We have been sold out.

    King George III & parliament ignored Americans and got the American Revolution.
    Obama and congress are now ignoring Americans.

    We are financing our own enslavement on the USG plantation. ( booksbyoliver.com ) may well show what is coming soon as the bankers get richer each day.

  13. One of the best articles I’ve read. Also appreciate the fact that the article avoids the ‘Buy Gold/Buy Silver’ hysteria, leaving that choice up to the reader.

    All the best from the UK

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