Posted by MataHarley on 19 March, 2009 at 1:59 pm. 5 comments already!

The Obama admin spending may just be the final straw on the already fragile status of the dollar as the world’s reserve currency. Today there’s news that a UN panel is recommending ditching the US dollar in favor of a shared basket of currencies instead.

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.

“It is a good moment to move to a shared reserve currency,” he said.


Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value — though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.

Some analysts said news of the U.N. panel’s recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.

Financial Times Gwen Robinson also reports on this today, speculating that the Fed’s move to purchase $300 billion in long term Treasuries. and the world’s disenchantment with the US’s economic policies being implemented, was among the reasons for the overnight sell off of the dollar.

All eyes have been on the Fed in the past 24 hours – and all currency gyrations, particularly the dollar’s sharp depreciation – have been attributed to the Fed’s move to spend $300bn on buying long-term Treasuries, among other measures. As some currency analysts observed on Thursday, however, the dollar’s steep decline suggests there may have been some over-reaction to the Fed’s move.

But there are other factors at work behind the dollar’s downward trajectory – not least, growing disenchantment in some parts of the world with US economic policies (or lack thereof), and rumbles about dumping the dollar as the world’s reserve currency and adopting a shared basket of currencies.

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The bottom line was summed up by Chalongphob Sussangkarn, a former Thai finance minister and now president of Thailand Development Research Institute, who said:

The US deficit is so huge. This is why all countries, particularly East Asia, are concerned because we hold a lot of these assets. What happens if the US dollar falls 40 percent? Many central bankers will be losing huge amounts of money.”

Such fears, now spreading among governments about their relatively large holdings of dollar reserves, have been fuelling moves at the United Nations and there is now growing speculation among analysts and forex markets that the UN is preparing a recommendation to member countries to move away from using the dollar as the world’s reserve currency and instead, adopt a shared basket of currencies. No matter that the UN often appears bureaucratic and ineffectual – it sometimes does make an impact – and almost certainly will if it goes ahead with such a push.

Growing speculation about such an announcement was “as large a reason for the overnight sell-off in the dollar, as was the Fed’s announcement to buy US Treasuries as part of their quantitative easing policy”, noted Richard Grace, CBA’s chief currency strategist in a Thursday note.

Grace appears to hold out hope that dollar continues it’s prestigious position, saying the UN doesn’t have the clout of the G7 or IMF; and that the US has the largest economy and most sophisticated bond market in the world.

But the move away from the dollar has been a steady one. Even in the past years, the Euro had been rising as a replacement currency… strong in liquidity in a short time, and a push by the European and Middle East nations to become the trading currency of favor. That is until it faced it’s own economic and financial crises. Another option may have been China, who was eyeing taking on that prominent currency role with the yuan. However any rapid crash of the US dollar takes the Chinese economy – as well as any others holding vast amounts in US dollars – down as well. China hopes for a gentle fall of the dollar.

Thus the UN reasoning of splitting the risk among many currencies. No matter what they choose to recommend, a demotion of the dollar as the world’s reserve currency has severe repercussions on Americans and their future lifestyles.

The dollar has been experiencing a slide since since the early 1900s, but the lion’s share of the decline has been over the past three to four decades, when it unhinged the relationship between gold and the dollar in 1970.

The below video put out in 2007 by Mcalvany ICA – a gold share investment company – has an excellent historical recap of the US dollar.

The nation’s currency who holds the position of the reserve currency benefits from both political and economic clout. But most important, the US trade deficent can only be supporte if the foreigner banks continue to hold U.S. debt in dollars as their reserve currency.

As the Obama admin drives up spending on his agenda, without shoring up the heart of the credit/financial problem, we become ever more dependent upon loans from foreign nations – most notably, China.

Yet China sent a shot over the US financial bow when, in February, Luo Ping, a director-general at the China Banking Regulatory Commission, gave a speech in New York expressing that nation’s skepticism over the future of the dollar. as it relates to the exploding debt.

Mr Luo, speaking at the Global Association of Risk Management’s 10th Annual Risk Management Convention, said: “Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

However, Mr Luo said Chinese officials would encourage its banks to finance domestic mergers and acquisitions rather than provide rescue finance to distressed financial companies in other countries: “There will be no bottom-fishing of financial institutions, particularly in the US, because there is a lot of uncertainty about the quality of the books.”

China has made note of the economic repercussions that piled onto the CRA rewrite of regulations and increased enforcement on banks when the Gramm-Leach-Bliley Act repealed the Glass-Stegall Act in 1999, and signed into law by President Clinton. Both original 1930’s bills were sponsored by Democrats: Senator Carter Glass of Lynchburg, Virginia and a former Secretary of the Treasury: and Congressman Henry B. Steagall of Alabama, Chairman of the House Committee on Banking and Currency.

Scott posted a Shepard Smith segment that ties the relationship between CRA and repeat of Glass-Steagall together for those that can’t seem to follow the snowball-to-avalanch chain of events that led to the current US economic woes. CRA begat the toxic assets and abnormally drove up the housing prices. Gramm-Leach-Bliley allowed the toxicity of overvalued assets to spread even more wildly.

Luo’s opines that the repeal of the act fueled the economic crisis, ignoring the massive influx of new buyers and the beginning of toxic assets under CRA. But being the socialist at heart, supports government nationalization as the ultimate prevention.

Ron Paul, whom I tend to agree with on his economic principles (if not other arenas) warned us about this back in 2007.

Remember, America can maintain a large trade deficit only if foreign banks continue to hold large numbers of dollars as their reserve currency. Our entire consumption economy is based on the willingness of foreigners to hold U.S. debt. We face a reordering of the entire world economy if the federal government cannot print, borrow, and spend money at a rate that satisfies its endless appetite for deficit spending.

At some point Americans must realize that Congress, and the Federal Reserve system that permits the creation of new money by fiat, are the real culprits in the erosion of your personal savings and buying power. Congress relentlessly spends more than the Treasury collects in taxes each year, which means the U.S. government must either borrow or print money to operate – both of which cause the value of the dollar to drop. When we borrow a billion dollars every day simply to run the government, and when the Federal Reserve increases the money supply by trillions of dollars in just 15 years, we hardly can expect our dollars to increase in value.

Just as a caveat, Ron Paul is also a proponent that the Iraq war was actually waged as a dollar defense mission… to counter Saddam’s increased trade in Euros instead of dollars.

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So what happens to the US when the world no longer revolves around the dollar? Contrarian Investor’s Journal had an interesting – and somewhat prescient – observation in a post from spring 2008.

Now, what happens if one day, the US dollar no longer becomes the reserve currency? When that day arrives, future generations of Americans will live far much worse their fathers and grandfathers. Why?

The never-ending ballooning Current Account Deficit (CAD) of the US is a reflection of the nation’s spending beyond its means (see Understanding the Balance of Payments for what Current Account Deficit means). The only reason why they can get away with it for so long is because of their reserve currency. As we said before in How does the US export inflation?

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Once the US dollar loses this special status, the nation loses its power to expropriate resources from foreign countries. Since the US has been doing this for decades, their economy’s capacity to cater to the nation’s needs has largely being eroded. In the jargon of the Austrian School of economic thought, the US had been eroding its economy’s capital structure and engaging in capital consumption. An analogy for this situation would be this: Let’s say a king had been spoon-fed with a silver spoon since a child. He was reliant on this servants to take care of his everyday needs as well as to cater to his every whims and fancy. One day, a revolution broke out and the king was overthrown. All of a sudden the king was reduced to a commoner. It is unlikely that he can fend for himself because he does not have any essential life skills every commoner has to learn from young.

Not sobering enough? If you really want to depress yourself, read FinancialSense’s David Andrews particularly morbid op-ed from May 2006, “ROAD KILL ON MAIN STREET”.

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It was just a few weeks ago that Obama made an attempt at “Thelma and Louise” cliff humor INRE his healthcare reform proposals:

Inflation, or hyperinflation is the future of the US. When that happens, Obama may lament how economic reality thwarted his dream of “remaking America”…. perhaps never recognizing that it was his own overreach that pounded the last nail into the US economic coffin.

In the wake of his Thelma and Louise humor, it’s a bitter irony that he may well go down in the history books as the lemming who led the rest of the nation’s lemmings off the cliff by trying to do it all… too much, too soon.

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