The Phaserl


Decline of the dollar – the consequences

by Alasdair Macleod, Gold Money:

There are signs that the US dollar, instead of consolidating the sharp rise that peaked last March, might be reversing its previously rising trend.

Certainly, a weakening dollar fits with the Federal Reserve Board deferring attempts to raise interest rates from the zero bound, and reflects the growing chatter that negative rates cannot be ruled out. It should also interest us that there is evidence the Americans are beginning to take the threats to the dollars’ hegemonic status seriously, and this is no longer just seen as a speculative possibility.

Secretary Kerry made this point for us in connection with another context, responding to a suggestion that he should renegotiate the Iran deal:

“That is a recipe very quickly, my friends, businesspeople here, for the American dollar to cease to be the reserve currency of the world – which is already bubbling out there.” So lucid was he on this subject that we can confidently assume that the dollar’s status being undermined is being taken seriously at the highest levels of government.

And it should be. China is determined to free her trade from the dollar, and we can only guess at the scale of her ambitions. More might be revealed later this month when she publishes her thirteenth five-year plan. What we do know is that she has already overtaken America as the world’s manufacturer, and despite the ups and downs of credit cycles, will dominate international trade even more in years to come.

To appreciate the importance of this change for the international currency scene, we should look back to when the dollar originally acquired the role as everyone’s foreign currency of choice. It was not, as most people think, the Bretton Woods Agreement that gave it this status, it validated it. You need to go back to the 1882 and 1900 Acts under which the US Treasury issued gold certificates requiring it as issuer to give “to the bearer on demand dollars in gold coin”.

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