Beyond the Cusp

March 13, 2014

Putin Threat Harbinger of Greatest Danger to America

Putin made an unveiled, direct threat focused to cause President Obama to stop and consider if he really desires to enter a financial war with Russia when he threatened to end his nation’s practice of utilizing the Dollar as their reserve currency. In many ways such a threat is an empty one holding little credence as very few nations would accept the Russian Ruble in payment for resources or other transactions between nations and would still demand that Putin pay them in Dollars or at least Euros. But that is this very moment and the future does not promise that the dollar will continue to be the reserve currency of the world. That begs the question of what will become the world’s reserve currency and what will such a change do to the power and credibility of the United States?

There have been many in the recent few years who have sought to find an alternative to the American Dollar as the reserve currency of the world. Most of those proposing such oppose the United States though they are not adversaries on the brink of actual war. These nations all have a couple of items in common. They are all developing nations recently joining the advanced industrial world and are entering the information economic world and are struggling to be on a par with the United States. For the reason of gaining an advantage of equal footing with the United States, many of these nations have proposed a multi-currency reserve usage if not their currency replacing the Dollar. Now there are those who believe that virtual is better who talk of a world currency driven by demand to set its value such as the bitcoin. Where the bitcoin is a quaint idea and the whole concept of a virtual universal currency, such an idea has one very glaring drawback, no nation is going to go willingly to such a system that is outside the political control of governments, though such would provide a useful reality in the monetary markets of the world. Bitcoin is an unlikely choice as the originators are not quite as well connected as would be required for nations to trust such a system thus bitcoin would need to compromise with international political powers before they could be accepted as the new universal currency. Expect some more prominent and well know entities to enter the market of virtual money with Pay-Pal, which is mostly Dollar centric, having already taken steps in that direction.

Some of the major competitors to the Dollar are the European Euro; the main reason behind the European Union was to establish a trade center equal to the United States market and the establishing of a currency to rival the Dollar, the Chinese Yen and a few others. Which nations and currencies are vying for the title of the replacement currency for the Dollar is unimportant as long as the Dollar retains sufficient stability and recognized value making it the continued universally accepted currency. Even those places which have decided to accept currencies other than the Dollar still rely on the Dollar for the setting of the value of the other currencies thus even when using the Iranian, the Chinese Yen or the Euro; these currencies are accepted in trade depending on their value as measured against the Dollar. So, even if you are paying with some other currency, your bill is still being charged in Dollars and your payment is in an equivalent amount of another currency.

So, what will it take to change the reserve currency of the world? One large step would be to have OPEC begin to use a different currency for purchases of crude oil. There is a reason the Dollar is often referred to as the Petro-Dollar, because the true value of the dollar is the amount of oil that can be purchased with a set amount of Dollars. Thus far, the only places accepting alternate payment for crude largely have been Iran. The reasons are obvious; Iran is attempting to weaken the Dollar as part of their offensive against the United States and the Western nations. The real test would be if the GCC (Gulf Cooperation Council) and especially Saudi Arabia were to stop accepting Dollars and choose another currency or group of currencies in payment for their crude oil. Even should these nations simply start accepting alternate currencies it would weaken the value of the Dollar and would be the initial step to the devaluing of the Dollar to the point that it would be dropped as the reserve currency of the world. If you question what affect such an event would have on the United States if the Dollar of today ceased to be the reserve currency of trade tomorrow, you only need look to the nation that once before minted the dollar that was the reserve currency of the world, Spain. The Spanish dollar which was the originator of the phrase “pieces of eight” as it was a bar of gold that was able of being separated into eight equal pieces that was the currency of trade. Part of the reason behind this was the Spanish exacted a serious penalty for anybody caught shaving their dollar, death. We need to remember the death of the Roman currency system and possibly a large contributor to the death of their empire was the shaving of Roman monies by, at first, the most unscrupulous and eventually it becoming almost commonplace such that it became necessary to weigh each Roman coin before accepting its value.

The Dollar is currently being shaved by a new destructive force, inflation. Because the United States has adopted the practice of simply printing monies in order to finance the government stimulation of the economy, a practice with a dodgy history and limited effect currently, there is going to come a time of rampant inflation in the United States which will result in a drastic devaluation of the Dollar. This devaluing of the Dollar will hurt far more peoples than simply the American public; it will hurt any nation holding large reserves of Dollars. This looming threat is also behind many nations’ nervousness with holding any excessively large amount of Dollars or American certificates or bonds which are Dollar based. This is what urged China to finally stop purchasing more American debt by buying bonds backed by Dollars. This, in turn, led to the Federal Reserve purchasing the Treasury Notes necessary to print additional Dollars, a practice which has artificially sustained the stock market prices and is leading them to new heights. This is an empty valuation as with time the Dollar will have to fall compared to the other currencies of the world which will make the higher priced stock market return to a value that truly represents its actual worth. The real fallout of this eventuality are the other nations whose currencies are directly tied to the Dollar and any nation with excessive holdings in Dollars as well as all those heavily invested in American companies’ stocks which are valued in Dollars. The first signs of the near universality of the effect of a devalued Dollar have been displayed each time the Federal Reserve had threatened to stop its constant Quantitative Easing which is a euphemism for making money, Dollars, out of thin air, and never a good idea. The nations whose currencies took direct hits resulting from such Federal Reserve threats are the nations most vulnerable due to their heavy investment in Dollars. This is what was behind the Chinese fire sale selling off a large portion of their Dollar reserves a few years back. That sell off came within six months of China refusing to purchase additional Treasury Notes, i.e. Dollars. Yes, the Dollar has become extremely vulnerable and yes, the Dollar may very well be on the verge of a collapse and no, we have no idea what the far ranging effects on the economies and currencies of the world when the American Dollar falls beyond the cusp into a great chasm of debt riddled valuelessness. We may not have to wait decades for an answer, but it would be best to never be in the position of realizing that everything we thought had value had become worth the cloth/paper it was printed on and not the value the pretty designs and numbers inferred. That will be a day of reckoning, a great and painful reckoning.

Beyond the Cusp

June 22, 2012

Consequences for United States Bailing Out European Union Countries

The United States has already quietly taken the initial steps to assist in easing the financial problems being experienced by some countries within the European Union. This was done by, believe it or not, exchanging dollars for equal value of Euros thus tying the two currencies to the other to some extent. Who knew that the dollar was considered to be more stable a currency than any other in this crazy world. So, in order to repair this strength in the dollar, or for whatever reason the politicians and experts are claiming, we have exchanged straight up, charging no exchange fees, of dollars for Euros in order to share the pain. As for which side is sharing whose pain might still be up for debate but it is being sold as assisting the European Union through some rough periods with members’ economies ranging from imminent default to relatively healthy considering the current world economic situations. This will in effect ally the United States with Germany, possibly France and any other country with sufficient economic strength to support and pull the countries suffering from poor economic times, some claim caused by their overly socialist policies, without having any fall into default on their debts. The amount of funding this project will require is currently uncertain, we simply know that it is going to take more and more going into the future. The outlook seems bleak to us but some have said they see the light at the end of the tunnel. Some claim that light is on the onrushing runaway train coming at us in the tunnel.

So, exactly what are the risks being taken by the United States through stepping up to join in the efforts to save the Euro and the European Union from economic disaster? The most obvious risk is that it is possible that pulling the likes of Greece, Spain, Ireland, and possibly Italy and even France through to better times may be a futile endeavor that will simply pull everybody else down with the others. This may end up being the straw that breaks the camel’s back, or the investment that tips the economy into a ruinous spiral. What makes this even more risky is that neither Germany nor the United States nor any of the others who might be called upon to finance those countries in jeopardy will simply not have sufficient treasure to succeed and thus will simply collapse along with those they were supposedly saving. This is made evident due to the facts that in order to make the necessary loans to those desperate countries, the healthy countries are taking out loans as they do not have the money on hand. The United States already has budgetary deficits such that there is insufficient cash to pay for their own bills, let alone make loans to cover other countries’ shortfalls. This leads to the big question, where can the United States turn in order to get loans in order to loan the needy European countries. Who, in their right mind, would make a loan to the United States so the United States can loan the same monies to a country to which the loaning country would not make that same loan? Simply, why would China loan Greece money via the United States when they refuse to loan money directly to Greece; or for that matter even to the United States as things stand.

The simple answer is that nobody is going to loan more to the United States simply so the United States is enabled to make the same loan to a European country in danger of default. Now we have the United States already obligating themselves to assist the European Union’s weaker nations over their current problems by extending them new loans. The United States does not have the money for the loan and nobody is offering to loan the United States the necessary funds. So, what do you think those financial wizards in Washington DC have hit upon as the solution? Believe it or not, they are suggesting that we have another round of printing money under the guise of Quantitative Easing. So, here comes QE3, and no, that is not a new Queen Elizabeth Cruise Ship. Actually, a new Queen Elizabeth Cruise Ship would be both cheaper and very likely a better investment.

So, to give a quick overview of what it means when they say Quantitative Easing as the method to ease our budgetary needs or, as in the current so-called emergency, producing funding to loan as a bailout for the European Union Euro using nations experiencing fiscal difficulties and in danger of default, the mechanisms are that the Federal Reserve instructs the Treasury Department to print money which the Federal Reserve buys and then loans out. The reality is that the money is created electronically and simply added into the currency in circulation totals. This is painless as long as the new money does not gain velocity, another way of saying actually being spent in the economy. The problem comes when all this newly created money begins to be used by the banks to make loans and such which then places the money into actual circulation. Currently, the banks are sitting on most of the invented money resulting from QE1 and QE2. The money in QE3 will not be sitting idle in any banks; it will be used to pay loan interest from one country to another country. These transactions will involve banks but also will be made available to the crediting country to use to pay their debts and fund programs or pay salaries. This will place the QE3 into circulation rather rapidly and beyond the control of our Federal Reserve bankers or the Treasury Department. The result of this will be the beginning of sharper inflation and rising prices as the dollar will be devalued by the percentage of the QE3 totals against the current currency in the economy. This will very likely spark the banks to resume loaning in a more invigorated manner thus placing the rest of the QE1 and QE2 monies into circulation which will result in even faster rising inflation. So, the result of bailing out Europe will be higher prices here at home. Sometimes it pains to be so helpful.

Beyond the Cusp

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