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US Dollar losing status as world reserve currency


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This is part 2 to yesterdays post about Why Gold Is The Ultimate Form Of Payment.

You may wonder why De Gaulle didn’t trust the dollar since the US had pledged the dollar to be as good as gold in accordance with the Bretton Woods agreement. The answer is simple. In the mid sixties the US couldn’t finance the Vietnam war without the help of the printing press. Needless to say the US money supply took off thereby debasing its own currency. For the US it didn’t matter since the world was forced anyhow to accept the US dollar as a reserve currency. Yes, the US promised the dollar to be as good as gold and yes, foreign central banks were allowed to exchange their dollars for gold but the US made it very clear that foreign nations exercising their right of exchanging dollars for gold would be considered as ‘American unfriendly’.

Sure enough De Gaulle wasn’t too much impressed and sent the French navy across the Atlantic to hand over dollars and pick up gold bullion in exchange. The US gold reserves were shrinking at such an alarming rate that President Nixon was eventually forced (1971) to close the gold window.

The bottom line is that countries printing their way out of debt will see its currency depreciating. A good example concerns the German Reichsmark. After world war I Germany tried to print its way out of its debt which eventually led to a worthless currency being used to heat up stoves.

A more recent example concerns the Zimbabwean dollar. Robert Mugabe called for the printing press coming to the rescue as well but we all know the outcome by now. Inflation numbers running at levels exceeding 200 million % aren’t exactly reflecting a strong currency showing off much confidence.

What we are witnessing these days is a massive currency debasement on a world wide scale. A trillion dollars bailout here, a trillion dollars bailout there, all done with money that does not exist but extracted from the printing press. All this freshly printed money is adding of course to governments ballooning debt which can only be paid back by issuing even more funny paper notes..

Since most countries world wide are fighting the derivative fall-out with fresh printed money (most countries are running their printing press at double digit numbers these days) their currencies will not devalue much against each other..

So in which currency to park your hard earned money then if all major currencies are debasing at the same time?

The answer is quite simple, the one and only true alternative remains of course gold which can not be debased at will.

Now let's go back to the US government’s spending attitude. As mentioned above the government has no other choice as to bail out failing banks that are too big too fail. A failing bank here, a failing bank there, the list goes on and on. You don't have to be a rocket scientist in order to understand what impact these bail outs have on the administration's budget deficit. Sure enough it'll explode.

How the government responds to exploding deficits is predictable. They just raise the federal debt limit whenever necessary. They will raise the federal debt limit to $12.1 trillion allowing them to take on another trillion dollars of debt from current levels. Current reading of federal government debt stands at $11.2 trillion which is an increase of more than $5 trillion over the last 6 years.

This chart leaves no doubt, the federal government debt is going up in a straight line which is very dollar negative. In order to prevent a free fall of the dollar the rest of the world has simply no other option as to buy this debt.

Unfortunately foreign willingness to take on that debt is in sharp decline which leaves the FED with no other option than buy up some debt itself. This is what we call turning on the printing press..
Now if the $11.2T federal debt wasn't already bad enough, the picture only worsens when looking at total US debt which clocked an alarming $57 trillion last year.

As you can see here total US debt is growing faster than its national income. Ever tried to run a business which its debt grows faster than its income? Needless to say you would be heading straight into bankruptcy. And that's exactly what's happening with the US, they're heading straight into bankruptcy which isn’t exactly a big plus for the dollar.

Eric Hommelberg
The Gold Drivers Report

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