Last week, I wrote an article based on former Congressman Ron Paul’s comments on the world’s “unbelievable trust” in fiat dollars. Essentially, Mr. Paul argued that trust is crucial to maintain a fiat dollar’s perceived value. More, the world’s current trust in fiat dollars was not merely surprisingly strong but “unbelievable” given the dollar’s fundamental disabilities and future prospects.
This week, I’ll gild that lily with a few more comments on that “unbelievable trust” in the fiat dollar.
I can remember that back in the 1950s and ‘60s, the paper dollar was described as being “good as gold” because foreign-held dollars could still be redeemed with gold. People trusted the paper dollar because it was “good as gold”. They’d become habituated to trusting in paper dollars because they were still backed by gold (at least, internationally). However, it’s important to recall that although people seemingly “trusted” in paper dollars, they really trusted in the gold that backed paper dollars.
America went completely off the gold standard in A.D. 1971 when President Nixon ordered that the dollar could no longer be redeemed in gold. The dollar became intrinsically worthless and a pure fiat currency.
Nevertheless, people had been so conditioned to trust in paper dollars over the previous 30 to 40 years while those dollars were still redeemable in gold, that they continued to trust in (now, fiat) paper dollars out of habit.
Shortly after the dollar became pure fiat, the government negotiated treaties with Saudi Arabia (and later OPEC) whereby those oil-producing nations agreed to sell their crude oil for only fiat dollars. As a result, the intrinsically-worthless fiat dollar acquired a perceived value because you couldn’t buy crude oil on the international markets without fiat dollars.
The world’s demand for crude oil implicitly backed the fiat dollar and it became the “petrodollar”. If you wanted crude oil, you had to have fiat dollars. Insofar as we used to trust in paper dollars because they were “good as gold,” we now trusted in fiat dollars because they were seemingly “good as crude”.
In A.D. 2000, Saddam Hussein threatened the petrodollar’s hegemony by daring to sell Iraqi crude for currencies other than fiat dollars. The US government invaded Iraq in A.D. 2003, wrecked that nation and hanged Hussein.
But the monetary genie was out of the bottle. The dollar was no longer the only currency that could be used to purchase crude oil. The world’s trust in the dollar and the dollar’s perceived value began to erode.
Today, although the dollar is still the world’s preferred currency for most international transactions, you can purchase crude oil with almost any national currency. The fiat dollar remains the world’s “petrocurrency,” but that status is based more on tradition than requirement. The world tends to trade in dollars because it has traded in dollars, not because it must trade in dollars. As a result, the world still trusts the dollar, but more as a habit or convenience than as a requirement.
Given that the primary basis for the perceived value of the fiat dollar for the past 40 years has been it’s standing as the “petrodollar,” and given that that status is diminishing, the dollar is vulnerable to losing its role as world reserve currency and suffering a correlative loss in global trust in the dollar.
Insofar as trust in dollars die, the dollar dies.
• Financial Trend Forecaster recently posted an article entitled “More on the PetroDollar” that asked,
“The End Of An Era: Is The US Petrodollar Under Threat?
“Recent trade deals and high-level cooperation between Russia and China have set off alarm bells in the West as policymakers and oil and gas executives watch the balance of power in global energy markets shift to the East. . . . [A] consequence of closer economic ties between Russia and China could also mean the beginning of the end of dominance for the U.S. dollar . . . .
“If Russia’s ‘pivot to Asia’ results in Moscow and Beijing trading oil between them in a currency other than the dollar, that will represent a major change in how the global economy operates and a marked loss of power for the U.S. and its allies. With China now the world’s biggest oil importer and the U.S. increasingly stressing domestic oil production, the days of dollar-priced energy, and therefore dollar-dominance, look numbered.”
Interesting implication: The rise of fracking and US oil production necessarily means that the US will purchase less foreign oil. Result? The US dollar will be less spent, less received and less demanded in international oil markets. As the global demand for fiat dollar falls, the globe’s habitual use of, and trust in, fiat dollars will also fall.
If the trust dies, the dollar dies.
It’s also interesting that if the global economy slows or even slides into a depression, there’ll be less international trade and less demand for dollars. Less international demand for dollars should also diminish the dollar’s perceived value. Diminished need for dollars should render trust in dollars less necessary.
As the global economy slows, so should global trust in the dollar’s value.
“Beijing has been looking to promote the Yuan as an alternative reserve currency. Having that status would allow China cheap access to world capital markets and cheaper transaction costs on international trade, not to mention increased clout as an economic power commensurate with its rising proportion of world commerce.
“An article in the International Business Times pointed out that ‘more than 10,000 financial institutions are doing business in Chinese Yuan, up from 900 in June 2011, while the pool of offshore Yuan, non-existent three years ago, is now near 900 billion ($143 billion). And the proportion of China’s exports and imports settled in Yuan has increased nearly sixfold in three years to nearly 12 percent.”
Point One: The growing use of China’s Yuan in international trade is evidence that China’s challenge to the dollar’s global dominance is succeeding.
In just three years, the number of “financial institutions” (banks) using Yuan have grown by eleven times and the proportion of Chinese international trade denominated in Yuan is up sixfold.
If the same rates of increase continued over the next five years, it’s conceivable that international trade in Yuan could become predominate. Use of dollars might be reduced to that of an “also ran”.
Can global trust in the dollar survive the growing use of Yuan?
Point Two: The fiat dollar is intrinsically vulnerable. Like virtually all other fiat currencies, the dollar can be expected to eventually collapse under the weight of its inherent lies, false premises and unpayable debts. But, in addition to threats posed by the dollar’s inherent contradictions, there are significant forces in the world (China, Russia, the BRICS nations; some Muslim nations, etc.) that are actively working to diminish or destroy the dollar’s perceived value.
More, the US government arrogance in international affairs has alienated people of many of the world’s countries. These people might cheer if the dollar’s value and power were significantly diminished.
Is the inherently weak dollar still strong enough to resist these challenges?
Written by: ALFRED ADASK – continue to ADASK’S LAW