It is difficult - but essential - to gain a perspective on the predicament facing the United States. We need to understand the precariousness of the dollar, the impossible debt burden we collectively face, and the emergent storm clouds on our financial horizon. First, the mountain of debt we are facing.
President Bush and the current Congress have together authorized and borrowed more money from foreign governments, banks, companies, and citizens than all of the previous 42 U.S. administrations combined. From 1776 to 2000, the first 224 years of U.S. history, 42 U.S. presidents borrowed a combined $1.01 trillion from foreign governments and financial institutions.
In the past four years alone, the Bush Administration has borrowed $1.05 trillion. The Federal debt increases $300 billion each year. In addition, our ''balance'' of trade - or lack thereof - runs an annualized deficit of $800 billion. This means that the Treasury must now borrow $3 billion per day! Total U.S. outstanding debt now exceeds a staggering $8 trillion dollars, of which a large majority is owed to foreigners.
The Precarious U.S. Dollar
Two-thirds of world trade is conducted in dollars. Over 70% of central banks’ currency reserves are held in the American currency. The U.S. dollar is the sole currency used by international institutions such as the International Monetary Fund (IMF).
This confers on the U.S. a major economic advantage: the ability to run a trade deficit year after year. It can do this because foreign countries need dollars to repay their debts to the IMF, to conduct international trade, and to build up their currency reserves. The U.S. provides the world with these dollars by buying goods and services produced by foreign countries, but since it does not have a corresponding need for foreign currency, it can sell far fewer goods and services in return. Thus, the U.S. always spends more than it earns, whereas the rest of the world always earns more than it spends. This U.S. trade deficit has now reached extraordinary levels, with the U.S. importing 50% more goods and services than it exports: currently $800 billion annualized.
Getting a share of this economic free lunch has been one of the motivations behind establishing the euro. Were the euro to become a reserve currency equal to, or perhaps even instead of, the dollar, countries could reduce their dollar holdings while building up their euro savings. E.U. countries would be able to reduce their subsidy to American consumption and other countries would then be subsidizing E.U. consumption instead.
A move away from the dollar towards the euro would have a disastrous effect on the U.S. economy as the U.S. would no longer be able to spend beyond its means. Worse still, the U.S. would have to become a net currency importer as foreigners would undoubtedly seek to spend back in the U.S. a large proportion of the estimated three trillion dollars which they currently own. Furthermore, the U.S. would have to run a trade surplus - for the first time in a century - providing the rest of the world with more goods and services than it receives in return.
A Crash Ahead?
A rapid and wholesale move to the euro might even lead to a dollar crash as everyone sought to get rid of some, or all, of their dollars at the same time. But that is not an outcome that Europe, Russia, and China would be seeking because of the huge effect it would have on the world economy. A ''soft landing'' would appear to be in everyone’s interest (except, of course, Islam’s). The problem is that when investors see a downward trend in the making, there tends to be a stampede for the exits.
The Oil Factor
Sales of oil and natural gas on international markets have been exclusively denominated in dollars, because originally the U.S. was the world’s leading oil producer - up until the early 1950s, the U.S. accounted for half or more of the world’s annual oil production. The tendency to price in dollars was additionally reinforced by the Bretton Woods agreement, which established the IMF and the World Bank and adopted the dollar as the currency for international loans. The vast majority of the world’s countries are oil importers and, since oil is such a crucial commodity - and increasingly so - the need to pay for it in dollars encourages these countries keep the majority of their foreign currency reserves in dollars, not only to be able to buy oil directly but also to protect the value of their own currencies from falling against the dollar.
The fact that oil sales, and loans from the IMF, are dollar denominated also encourages poorer countries to denominate their exports in dollars, as this minimizes the risk of losses through any fluctuations in the value of the dollar. Furthermore, since many of these exports are essential raw materials which richer countries need to import, their denomination in dollars reinforces the need for rich countries to keep their own currency reserves in dollars. Seventy percent of the world’s currency reserves are in dollars. At the moment.
The Quiet Game
While the denomination of oil sales is not a subject that is frequently discussed in the media, its importance is certainly well understood by governments. For example, in 1971 President Nixon took the U.S. off the gold standard and OPEC considered moving away from dollar oil pricing, as dollars no longer had the guaranteed value they once did. The U.S. response was various secret deals with Saudi Arabia in the 1970s to ensure that the world’s most important oil exporter stuck with the dollar. And since the Saudis did, OPEC followed suit.
The Iranian Oil Bourse
The Iranian Oil Bourse1 is scheduled to commence operations on March 20, 2006. This bourse will be a trading exchange whereby the nations of the world will now have the option of selling and purchasing their oil in euros rather than dollars. This Bourse will directly compete with the two American-owned exchanges: The International Petroleum Exchange (IPE) in London, and the NYMEX (New York Mercantile Exchange). This represents a direct threat to the supremacy of the U.S. dollar as the world’s reserve currency. The availability to shift to non-dollar reserves would create a major structural change in the global monetary environment and could usher in a traumatic effect on the U.S. economy.
Numerous economists have expressed alarm about Iran’s ambitions, saying that ''the impact of the Iran Oil Bourse on the American dollar - and the U.S. economy - could be worse than Iran launching a direct nuclear attack.'' (Some pundits have even suggested that this could be an additional explanation for why the Islamic republic appears to be the U.S.’s next target.)
According to a recent report by Federal Reserve Bank of San Francisco, the dollar’s position is already on the decline in many countries. China has officially declared that it will diversify a part of its foreign exchange holdings into oil by building a strategic petroleum reserve. Construction of the storage tanks has begun but will take several years to complete.
Other Indicators
The new expansive leader of the Federal Reserve, ''Helicopter Ben'' Benanke, has replaced Alan Greenspan. The only hope in addressing the mountain of debt we all face will be to repay it with cheaper dollars: inflation is virtually a certainty. During Alan Greenspan’s tenure at the Fed, the dollar was reduced in value by half. More to come, but can it be controlled? It is very significant that the Fed will now no longer be publishing its report card, the M3 liquidity index, which economists have traditionally used to monitor the liquidity of the U.S. Hmm.
America has become the world’s largest debtor. Who’s really in charge? The Bible warns us:
The rich ruleth over the poor, and the borrower is servant to the lender. - Proverbs 22:7
Your personal stewardship plans need to maintain surveillance on the likelihood of serious inflation ahead, and perhaps worse…
Do your own homework! The welfare of your family will depend on it.
