Death of the dollar

Considering the rate at which U.S. public debt has been increasing and dollars printed to finance it, the dollar’s exchange value has survived longer than expected.

The U.S. dollar began to crumble in 2011 when gold hit $1,900 per ounce.  But the Federal Reserve discovered that it or its dependent bullion banks (Goldman Sachs, JP Morgan Chase) could sell gold short and drive down the price of gold in the futures market, where the price is set. The banks found that they could make money doing this. The short selling, sometimes massive, drove down the price of gold so much that stop-loss orders added to the selling and then margin calls on leveraged positions would cause more selling.

The banks could then buy up the ETF gold shares below the price at which they shorted gold, convert their holdings into gold bullion and make further profits selling the bullion to Asia at the high premiums that prevail there.

As long as this scheme works, the movement into gold can be confined to Asia.

However, other changes are under way that imply a limited life to the U.S. dollar as world reserve currency.  The Federal Reserve has been printing a huge amount of dollars since 2008 to buy bonds in order to keep bond prices high and interest rates low. This is the way the Fed decided to support the balance sheets of the “banks too big to fail.” Bond prices move together in the same direction. The higher the price of U.S. Treasuries, the higher the price of the debt-related derivatives on the banks’ balance sheets.

Foreign and domestic holders of dollars and dollar denominated financial instruments have been watching the dilution of their dollar holdings by the Fed printing $1,000 billion per year.

Foreigners are also resentful and tired of the financial bullying from the reserve currency government. They are moving to create new arrangements in which they no longer use the U.S. dollar to settle their trade imbalances among themselves.

The BRICS (Brazil, Russia, India, China, and South Africa) have reached agreement to settle their trade with one another in their own currencies, thus abandoning the use of the dollar.  Bilateral agreements have also been reached between China and Japan and between China and Australia.

What this means is that the demand for dollars in currency markets will fall, and this will affect the dollar’s exchange value, especially when the Federal Reserve is creating new dollars at a high rate.

Supply and demand.  The supply is increasing, and the demand is falling.  Therefore, the price, or exchange value of the dollar, must fall.

Washington can avoid the crisis for awhile with swap agreements with its allies.  A swap agreement is when Washington swaps currencies at the existing exchange rates with the Bank of England, the European Central Bank, and the Japanese central bank.  The Fed gives those central banks dollars, and uses the British pounds, euros and yen that it is given in exchange to buy up the excess supply of dollars that are a threat to the dollar’s exchange value in the currency markets.

This arrangement can continue until the Bank of England and the ECB decide that fingers in the dike cannot prevent the collapse, or until the swap arrangements are overwhelmed by large Asian sales of dollars.

When the world decides that U.S. economic policy has killed the dollar, the world will bail out of the dollar. As the dollar loses exchange value, domestic inflation will rise in the import-dependent US, and the dollar price of gold and silver will increase beyond the reach of impoverished Americans. As the Chinese currency is coming online as a freely tradable currency, the currency of China’s large economy will be bid up in dollar value as holders exit the dollar.

As U.S. power is based on being the reserve currency, it will be the end of superpower America.

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