by Alasdair Macleod, GoldMoney:
This might seem a frivolous question, while the dollar still retains its might, and is universally accepted in preference to other, less stable fiat currencies. However, it is becoming clear, at least to independent monetary observers, that in 2018 the dollar’s primacy will be challenged by the yuan as the pricing medium for energy and other key industrial commodities. After all, the dollar’s role as the legacy trade medium is no longer appropriate, given that China’s trade is now driving the global economy, not America’s.
At the very least, if the dollar’s future role diminishes, then there will be surplus dollars, which unless they are withdrawn from circulation entirely, will result in a lower dollar on the foreign exchanges. While it is possible for the Fed to contract the quantity of base money (indeed this is the implication of its desire to reduce its balance sheet anyway), it would also have to discourage and even reverse the expansion of bank credit, which would be judged by central bankers to be economic suicide. For that to occur, the US Government itself would also have to move firmly and rapidly towards eliminating its budget deficit. But that is being deliberately increased by the Trump administration instead.
Explaining the consequences of these monetary dynamics was the purpose of an essay written by Ludwig von Mises almost a century ago.[i] At that time, the German hyperinflation was entering its final phase ahead of the mark’s eventual collapse in November 1923. Von Mises had already helped to stabilise the Austrian crown, whose own collapse was stabilised at about the time he wrote his essay, so he wrote with both practical knowledge and authority.
The dollar, of course, is nowhere near the circumstances faced by the German mark at that time. However, the conditions that led to the mark’s collapse are beginning to resonate with a familiarity that should serve as an early warning. The situation, was of course, different. Germany had lost the First World War and financed herself by printing money. In fact, she started down that route before the war, seizing upon the new Chartalist doctrine that money should rightfully be issued by the state, in preference to the established knowledge that money’s validity was determined by markets. Without abandoning gold for her own state-issued currency, Germany would never have managed to build and finance her war machine, which she did by printing currency. The ultimate collapse of the mark was not mainly due to the Allies’ reparations set at the treaty of Versailles, as commonly thought today, because the inflation had started long before.
The dollar has enjoyed a considerably longer life as an unbacked state-issued currency than the mark did, but do not think the monetary factors have been much different. The Bretton Woods agreement, designed to make the dollar appear “as good as gold”, was cover for the US Government to fund Korea, Vietnam and other foreign ventures by monetary inflation, which it did without restraint. That deceit ended in 1971, and today the ratio of an ounce of gold to the dollar has moved to about 1:1310 from the post-war rate of 1:35, giving a loss of the dollar’s purchasing power, measured in the money of the market, of 97.3%.
True, this is not on the hyperinflationary scale of the mark – yet. Since the Nixon shock in 1971, the Americans have been adept at perpetuating the myth of King Dollar, insisting gold now has no monetary role at all. By cutting a deal with the Saudis in 1974, Nixon and Kissinger ensured that all energy, and in consequence all other commodities, would continue to be priced in dollars. Global demand for dollars was assured, and the banking system of correspondent nostro accounts meant that all the world’s trade was settled in New York through the mighty American banks. And having printed dollars to ensure higher energy prices would be paid, they would then be recycled as loan capital to America and her friends. The world had been bought, and anyone not prepared to accept US monetary and military domination would pay the price.
That was until now. The dollar’s hegemony is being directly challenged by China, which is not shy about promoting her own currency as her preferred settlement medium. Later this month an oil futures contract priced in yuan is expected to start trading in Shanghai.[ii] Only last week, the Governor of China’s central bank met the Saudi finance minister, presumably to agree, amongst other topics, the date when Saudi Arabia will start to accept yuan for oil sales to China. The proximity of these two developments certainly suggest they are closely related, and that the end of the Nixon/Saudi deal of 1974, which created the petrodollar, is in sight.
Do not underestimate the importance of this development, because it marks the beginning of a new monetary era, which will be increasingly understood to be post-dollar. The commencement of the new yuan for oil futures contract may seem a small crack in the dollar’s edifice, but it is almost certainly the beginning of its shattering.
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