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Westerners are funny people. Westerners have never experienced currency devaluation, EVER! “The Almighty Dollar” has ruled the world their entire lives.
Westerners are funny people. Westerners have never experienced currency devaluation, EVER! “The Almighty Dollar” has ruled the world their entire lives. Telling a Westerner there might be a problem with the U.S. Dollar is like saying the sun might not show up tomorrow morning. It has never happened; could never happen! Well, it turns out the U.S. Dollar isn’t as “almighty” as it used to be, and some new global currency might be ready to shock the world, literally.
And no, I’m not talking about Bitcoin.
Before I get into what the exact problem is for Westerners, and really the world as a whole, I must explain how this problem came to be, and the nature of the situation at hand. You’ll need some context to understand what’s going on. I don’t know everything about it, but I know enough to paint the broad strokes of a likely upcoming scenario for CT readers.
The U.S. Dollar has been the world’s “global reserve currency” for over 70 years, since the Bretton Woods Conference during WWII. The amount of debt England incurred during war time forced it to pass the global reserve currency status over to the United States in front of the representatives of all the major nations.
You might have heard about a great economic boom time in the 1950’s within the United States. This was when everyone bought new televisions, drove new Chevrolet Bel Airs, had a white picket fence, and one male salary easily covered it all with plenty to spare.
This is the benefit of having “global reserve currency” status. It allows a currency to be worth much, much more than any other country’s currency. It allows Americans to pay US$2.50 for a gallon of gas while other countries pay US$6-9 USD a gallon. It allows the U.S. to build the greatest military in the history of mankind and put a military base in virtually every country on the planet, just because.
But while this expansion of economic and military power has been great for the Americans, it has led to some negative feelings elsewhere.
If you were an American, would you be cool with Russia putting an active military base in the middle of Los Angeles? Or sending a Russian military drone to attack buildings in Memphis?
Welcome to how the rest of the world sees the United States. In effect, America is seen as an international thug, a global bully with nuclear warheads, and an unlimited credit card to make as many as they want and put them wherever they want.
Times have changed, and the shoe is on the other foot. America -- land of perpetual warfare -- is swimming in US$18 trillion in national debt. The U.S. owes almost US$3 trillion to just Japan and China alone as it prints about US$696 million per day. According to the International Monetary Fund (IMF) or the world’s loan shark, China has even passed the U.S. as the world’s largest economy.
A large part of having a global reserve currency is your currency becomes global in demand. It is the international baseline currency for all trade. Countries are agreeing, in principle, to trade with your currency being the means to an end. Over the last several years, many countries, especially in East Asia, have stopped using the U.S. Dollar for trading purposes. These are called “bilateral trade agreements,” and they’re becoming as popular as cat videos on YouTube.
So what are other countries starting to use instead?
The Chinese Yuan, also known as the Renminbi. Countries are trading so much Yuan that it has become the second most used currency in the world, passing the Euro in 2013 whereas ten years ago, it wasn’t even considered tradable.
That’s how powerful China has become as a global trade partner within the last decade. And the IMF along with the World Bank have taken note and are rumored to be ready to do something about it.
Next month, the IMF and World Bank will hold their annual meeting on October 9-11 in Lima, Peru. Every five years, the IMF discusses reserve currency status, and the Chinese Yuan will be evaluated at the 2015 annual meeting. The word on the street is that during or soon after this annual meeting, these organizations will announce that the Chinese Yuan will become a global reserve currency.
It will not replace the U.S. Dollar per se, but it will become an officially recognized option for global trade as a reserve currency. The Euro, Canadian Dollar, Japanese Yen, British Pound are also reserve currencies, and the Yuan would join this “basket of currencies.” In other words, the U.S. Dollar will have some real competition.
But what does this mean for the U.S. and dollar values?
Nothing good; we are witnessing China dumping almost US$100 billion in U.S. Treasuries, financial centers like Toronto, London and New York dealing directly in Chinese Yuan, and China opening their own financial support organizations like the BRICS Development Banks and the AIIB (Asian Infrastructure Investment Bank) to work around the IMF and World Bank.
The Chinese have not gotten much respect from the western-run, U.S. based IMF and World Bank, and so they have built their own infrastructure to go around them, globally.
The rest of the world loves the idea! Even longtime BFF of the United States, Great Britain, has joined up as a “founding member” with the AIIB, even against the behest of the U.S. Why? It is because the world sees the handwriting on the wall. China is the economic future, and you’re either on board or you are on the Titanic with the U.S. while England is just hedging their bets, and rightly so. The Chinese Yuan is kind of the “bitcoin of the fiat currency world” or FOREX markets. And the smart money is moving out of the US dollar, which has been slowly happening over the last decade.
So why did I write this article about this “rumor”? I believe this will come to pass, as does Bloomberg Business, and here are three reasons why.
One, as I mentioned before, the Yuan is the second most used global credit currency, and fifth most used for payments in the world, according to SWIFT (Society for Worldwide Interbank Financial Telecommunications), which is reason alone to place it amongst the leading currencies extant, officially.
Secondly, these decisions are handled every five years by the IMF, and the Yuan was almost granted reserve currency status back in 2010. The reason the Chinese did not get the designation was that global adoption was too low at the time and was no “freely usable.” It has gone from under 2% usage to around 10% of all currency trade since. Problem solved.
And third, the Chinese are getting to the point where they can create their own financial system with the assistance of Russia with the BRICS and AIIB banks.
The IMF and World Bank need to decide whether they’re in on the Yuan or out? My guess is that they will be smart loan sharks and vote to include the Yuan this year.
What does this mean for the U.S. Dollar? Is this “the collapse” every non-conformist economist and doomsday-sayer has been preaching about for the last decade or more? Yes and no. Think of it as you’re an only son or daughter, and you’re three years old, and your parents have a new child. Who is getting 90% of the love over the next couple of years? Who will all of the friends and who will the extended family come by the house to see?
Is the U.S. Dollar still THE world’s currency? Yes, but it will be about as attractive as a red-headed stepchild. In other words, it is set up for a soft-kill scenario. No “Ole Yeller” type stuff, but some bullets will be on hand for use in the near future.
If you live in the West, and this goes down, be afraid, be very afraid. The world is starting to prepare for life without the dollar and westerners should, too!
It could actually mean a lot of good things, as far as U.S. Dollar values are concerned, if that is what’s important to you. If the Yuan goes global, or viral, officially, demand for dollars will go down noticeably. This will likely not be a full collapse, but a devaluation of unprecedented proportions. If you remember American economic times in the late 1970’s, you’re getting warm. With a global Yuan to use freely, its values will climb, and countries will start dumping U.S. Treasuries at a record pace (see: August’s US$94 Billion UST selloff by China).
When you are the global reserve currency, over 50% of your currency resides overseas. As countries around the world see a better, appreciating option to use, they will see China dumping out of U.S. Treasuries and will follow the leader. Many, many dollars will eventually return back to the only place they have good value in the short-term, i.e. the United States. The Federal Reserve is known as “the buyer of last resort,” usually because nobody else wants American debt products anymore. This would accelerate under such conditions.
Now the U.S., which has been practicing Keynesian economics for the past 20-30 years, and printing money like it's going out of style, will actually live to see the money go out of style! The “quantitative easing” chickens will come home to roost, and the U.S. will see a flood of dollars from around the world, a tsunami of depreciating currency.
This, by definition, is called “hyperinflation” or when the base currency supply of a nation increases dramatically. When you have too much of something, it naturally loses value.
Now do I think the U.S. Dollar is going to collapse next month? No. The dollar has 2-3 more years left, in my opinion. As I mentioned before, China, with the help of Russia, is working on their own global economic infrastructure, and have given up on getting a fair shake from the western-run IMF and World Bank. Their new system will take another 2-5 years to become fully vested and ready for the world. Any decision made in favor of the Chinese Yuan by the IMF would increase interest and investment in the Yuan, and hurt the dollar. It is a giant global economic pie, and the Yuan would just take a much larger slice, and the U.S. Dollar has the most pie to lose. A lot of money that is in the dollar now would start to move to the Yuan, having an erosion-like effect.
The dollar is heading for a devaluation, but probably after the U.S. presidential elections next year. What would it look like if the U.S. went the way of Greece, Cyprus, Argentina and Zimbabwe, and had their first true economic collapse?
What comes next is what was always destined to come. It was always a matter of when. Gas goes from affordable to not affordable at all. Milk goes to US$12-15 a gallon if you can find some for sale. Truckers may no longer come to your city to deliver food. They may get laid off, get robbed on the highway, or sell/steal the food themselves to stay above water.
Imagine living in New York City without food shipped in by truck? Imagine 8 million people looking for food from a place that must have it imported? How would you like to live there for a month?
How would the American job market respond? Jobs are far harder to come by than the government will tell you. Whatever the national line is multiple that number by three and you should be close to the real unemployment rate, while the dollar is not even in real trouble, yet.
Do any of us want this to be the future? Of course not. There are many countries worldwide who use the dollar as their national currency. What would happen to them?
Global reserve currency status has lasted similar to a human life in duration. Every 65-70 years, it is passed on to the next worthy recipient. The U.S. Dollar is at 71 years and the sands are running out of the hourglass. A massive global military can only hold the walls for so long. Bad domestic economic policy and the rest of the world having enough of America’s…control will come to a head, sooner or later. And later just jumped in a cab.
If you are American, or in a country that is “pegged” to the U.S. Dollar in some form or fashion, take some advice. Grab some bitcoin! It isn’t going anywhere, and can be exchanged for any reserve currency around. While the dollar looks more and more like the Titanic, bitcoin is becoming the little lifeboat you really may want to be on, just much sooner than you ever imagined.
One thing that should also happen is business adoption and interest in bitcoin is expected to increase. Any business that will be around long term, which isn’t crushed by the economic forces in this scenario, will become very interested in digital currencies. When that toilet paper of a western global currency is seriously devalued, you better believe business owners and merchants will start to look at a growing global currency that can move digitally in seconds much more seriously.
By the way, if the dollar begins to collapse, or the global FOREX markets are destabilized in a significant way by a new reserve currency, the turmoil will affect every country on Earth. All countries would take a hit for months, or years, depending upon how dependent the economy is on the dollar. That wouldn’t be a “western problem” by any stretch of the imagination.
Why would all countries take a hit? Because the FOREX or Foreign Exchange markets are a lot larger than the stock market. Try two hundred times larger than the New York Stock Exchange! So any “Black Monday” stock market crash would be a nice wave to surf on compared to a tsunami that could be triggered in a major FOREX market destabilization.
When this finally does come to pass, now or later, it will be the biggest transfer of wealth in our lifetimes. Fortunes will be made, and lost, within the economic storm that ensues. Those that are prepared will prosper. Those that are not…
If the world’s reserve currency becomes unstable, hundreds of billions of dollars, if not trillions of dollars would move within days. Watch the trading floor at the end of “Trading Places” (Eddie Murphy, Dan Ackroyd, 1983) for a preview of how the world would react to such change.
The world is in a global recession right now. America, the EuroZone, China, South America, Japan and everyone is hurting right now and a destabilizing economic move would take everyone down a couple of pegs. Nevertheless, this may be a medicine that the world must take.
Could I be wrong about this possible economically tumultuous outcome? Yes, I could totally be wrong, and so could hundreds of economist who are saying the same thing, but I doubt it. I’m an old economics major who spent years working on Wall Street. I looked behind the curtain of Western economic philosophy, didn’t like what I saw, then or in the future, and that’s why I got into Bitcoin to begin with.
I’ve devoted my life to spreading the word about Bitcoin, educating those who don’t know about it, and making sure I avoid the looming dollar collapse. When, not if, it happens, it’s gonna be bad. Really bad.
Next month, we’ll see if that eventuality is on a fast-track or if people get a couple more years before the volcano of hyper-inflation erupts. Whatever happens, I won’t be at the bottom of that mountain, and the news says many of the wealthy elite won’t be either. They’re heading for Chile, the Cook Islands, New Zealand, anywhere else where they can’t break a dollar. Who can blame them? They have already gotten tipped off, like Martha Stewart. They already know what’s up. Shouldn’t you?
“The future of money” doesn’t have a dead president on it. It has a QR code. My question to you is: Are you going to be on the right side of history? Or will you become a statistic? It is time to seriously consider what you and your loved ones would do without U.S. dollars to live on.
Find a good answer. That’s a question all of us will have to answer, sooner or later.
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