The end of US dollar dominance?

During the last two weeks several news stories signaled the development of the beginning of a major shift in the international financial world. Almost missed by all news channels besides BBC, just before the Chinese President Hu Jintao was scheduled to visit Washington he made a blunt statement that should have been discussed in much more detail. President Hu Jintao said that an international monetary system controlled by the US dollar was “a product of the past”. He further stated that the progression for the Yuan to replace the US dollar as the world reserve currency was a “fairly long process”, but as we know China can move quite fast when it wants to.

This important statement came just one week after China announced that US citizen and businesses are now allowed to hold Yuan within limits in their bank accounts. China is clearly mobilizing its currency system to be able to absorb huge capital flows in order to show the rest of the world that its currency has the potential to take over as the world’s reserve currency. The impact of the US losing its privilege to have the world’s reserve currency is that the United States would lose its ability to keep financing its consumption by issuing treasuries to countries around the world while exporting its inflation to those same nations that finance US consumption.

It could be that China will implement a gold standard for the Yuan in order to have a stable currency that is backed by value, rather than fiat money backed by nothing and exposed to taxation of the people in the form of inflation. The Federal Reserve Bank has been printing digital dollars and will have to commit to further ‘quantitative easing’ in order to keep the US economy from falling into a depression, without steady and sustainable job growth and a stable housing market the US recovery is a pipe dream of those that hide behind the recovery smoke screen. Further, should a country not be able to feed its citizen? If so then why are over 49 million Americans dependent on food stamps? That represents over 15% of the entire US population!

The question is why would the President of China make such a direct statement just a couple of days before having dinner at the White House? If he did not mean what he said he would have waited, but based on the timing it appears that the intentions of Chinese are clear. One of the reasons must be the fact that the US is basically insolvent unless congress passes further laws for the US treasury to issue more bonds and bills to finance the US deficit.

Timothy Geithner is the Secretary of the Treasury of the United States and made the following comment on Jan 6th, 2011 about reaching the debt ceiling of $14.3 trillion by March 2011 and the possibility of default if the US congress does not pass a bill that lets the government borrow more money, “even a very short-term or limited default would have catastrophic economic consequences that would last for decades” and further predicted it would result in the loss of millions of jobs and that “failure to increase the limit would be deeply irresponsible”

Let`s have a look at the purchasing power of the US dollar since 1920, as this graph clearly shows the US dollar has lost 94% of its purchasing power since Roosevelt made it illegal for Americans to hold gold in 1933. The decline of purchasing power has been especially rapid since the US completely left the gold standard in 1971 and replaced it with the current fiat money system as is illustrated by in the chart below.

Another very interesting statement this week was made by Alan Greenspan during a Fox TV Interview, who served as Chairman of the Federal Reserve from 1987-2006. Greenspan was asked “why do we need a central bank?” and answered with the following significant statement “we have at this particular stage a fiat money which is essentially money printed by a government and it’s usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that all of history suggest that inflation will take hold with very deleterious effects on economic activity…there are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard.” (The Video is available in our VIDEOS section)

Check back with the Capital Research Institute in the following weeks, as we tackle the steps each family needs to take to ensure their quality of life, purchasing power, and wealth are all preserved.