The Dollar

Discussion in 'West Mall' started by Musburger1, Feb 11, 2016.

  1. Musburger1

    Musburger1 2,500+ Posts

    Bevobeef posted this on another thread so I'll start here.

    The value of the US Dollar is based on its relative strength to other national currencies. The strength of the US Dollar today is not really based on the strength of the US economy but based on a fear of using other currencies of other countries instead. In other words, the US GDP or how we exchange money is not controlling the value of our money, it is the lack of growth or existence of currency fears that is controlling a strong dollar. That is because the inter-dependency of the global markets is increasing as a result of the national markets not being as isolated as they used to be - even 20 or 50 years ago.
    The bolded sentence describes a "floating" currency. It rises and falls relative to other currencies. This floating system has been in existence since August of 1971.

    Before the current system, the dollar was pegged to gold. Gold was fixed at $35 per ounce. After World War II, as a net exporting powerhouse, the United States accumulated a large percentage of the world's gold. America was energy self-sufficient and the greatest manufacturing power in history. But as 1970 approached, the US was no longer energy self-sufficient and other countries like Japan and some of the European countries cut into the US trade dominance. The country began to run trade deficits. Other countries decided to take payment in gold, which had the pace continued, would have depleted the gold reserves and eventually caused the dollar to fail as the "world reserve currency." So Nixon closed the gold window and a floating currency plan was devised. Countries would settle their balances by taking US dollars as payments. The US could not have "printed gold" infinitely but it could print an endless supply of dollars.

    So why didn't the dollar lose value vs other countries when running large trade deficits year after year? One reason is that the US and the Arab Gulf States made an agreement that oil must be sold in US dollars only. In exchange, the US military would "protect" the OPEC countries and ensure the safety of their dictatorships from invasion and/or revolution. This "Petrodollar" arrangement created a demand for dollars. If Japan wanted to purchase oil from Saudi Arabia, it would have to exchange Yen for dollars and then buy the oil with US dollars. So Japan would take dollars in exchange for their exported Toyotas and TVs and then have a reserve of US dollars which they could either purchase oil with or pump back into US Treasuries which would are used to finance the countries domestic deficits (defense spending, entitlements, etc.). This demand for dollars helped keep the value of the US dollar relatively strong, which also increased the foreign demand for US Treasuries, the enabling the US to continue running deficits.

    The combination of having the world reserve currency and military dominance supplement America's influence over other nations via financial instruments like the IMF and World Bank. When countries oppose US policy, the US can influence these countries by pulling the strings in these organizations and by using its clout with "client states" (European countries, Australia, etc.) to place sanctions to shape behavior. Naturally there is resentment and sometimes resistance.

    Under Putin, Russia has emerged as a regional military power and an energy power. Russia wants to be free of the dollar system as it acts as a collar of restraint. Russia wishes to have independence.

    China has a co-dependent relationship with the US, as the US supplies the customer base which pays for China's industry, and China acts as the financing arm for the US deficits. Its a difficult relationship to escape for both countries. Russia and China have begun trading in their own currencies in an effort to wean themselves off of dollar dependence.

    Qaddafi had aspirations of creating an African based monetary system outside of the dollar. He's dead now. Al Qeda and Islamic radicals are fighting to partition off regions of Libya, but their is no more threat of an African dollar.

    Iran recently stated they will only accept Euros, not dollars, for their oil. The Euro is probably a less stable currency than the dollar, but he Iranians do not want to be subject to US control and have shut off the flow of dollars into Iran.

    As the world enters recession, there is a shortage of dollars due to less economic activity and a wave of defaults. As a result, the dollar has been strengthening and should continue to strengthen. But this creates another bubble, I believe, and as nations pull away from the dollar train, the value of the US dollar would reverse the current trend of strengthening and rapidly go the other direction. At least that's how I see it.
     
  2. Mr. Deez

    Mr. Deez Beer Prophet

    The US has an agreement with the Gulf States, but it doesn't have an agreement with Russia or Iran. There's no reason why they can't sell their oil in Euros. In fact, if they really want to be independent of US influence and foreign influence in general, why not sell their oil in their own respective currencies?
     
  3. Musburger1

    Musburger1 2,500+ Posts

    They have every right to do so. And the US has every intention to dissuade them from doing so; sanctions, NATO expansion, and color revolutions included.
     
  4. Mr. Deez

    Mr. Deez Beer Prophet

    We already do those things for other reasons, so it's hard to know for sure. I would speculate that the biggest reason is that most people don't trust their currencies enough to do business in them.
     
    • Like Like x 1
  5. BevoBeef

    BevoBeef 250+ Posts

    The intensity of these petrodollar wars (where dollar = USD) has been increasing under the "foreign policy" guidance of the Obama years. The Euro is not really a contender in a reserve currency to replace the petrodollar. The primary threat (unless there are some new ones lately) come from the BRICS plan agreement for these 5 countries (Brazil, Russia, India, china, and South Africa) to trade in only their own currency systems. Here, Russia and China have a concerted effort between the two of them to not trade in US backed dollars. Another significant deal is a bilateral trade agreement between China and Japan to only use their own currencies in trading between themselves.

    As perverse as it may seem, the growing energy independence of the US is working against maintaining the petrodollar as a reserve currency. Less oil imports means less petrodollars flowing into the world's economy and out of the US. Now China has become the leading trading partner with Saudi Arabia, and agreements between them have been made to exclude the backed USD. The Saudis have been key in the past in making the dollar the reserve currency in the world. One of the primary reasons has been the use of our military might to guarantee their safety. Now our military size has diminished dramatically. The recent Iran deal has also worked against the Saudi reliance on us. Their beliefs now are to acquire nuclear weapons from somewhere else to keep pace with the nuclear threat from Iran.

    The importance of maintaining the USD as the world's reserve currency cannot be overemphasized. As this fact dlsappears more, the USA's ability to control the interest rate on its currency at a low level (or a near zero level) will be lost. The amount of our US debt will then start to explode out of our control as the USD being the reserve currency disappears.
     
    • Like Like x 1
    Last edited: Feb 12, 2016

Share This Page