“Paper money eventually returns to its intrinsic value—ZERO.” – Voltaire, 1729
A storm is approaching. One that will adversely affect every single living American—regardless of age, income bracket or political party. What I am referring to is the collapse of the U.S. dollar. To understand its demise, we must first understand what a world reserve currency is and the brief history of the United States dollar as the de-facto world reserve currency and the many benefits we Americans have enjoyed because of this status.
The repercussions the loss of this status will have on our present economy and future economies of our children and grandchildren should be a hot topic for the mainstream media and should be plastered on the front pages of every newspaper—which ostensibly are in the business to report significant news. But instead, this real threat continues to be ignored.
A reserve currency (or anchor currency) is a currency that is held in significant quantities by many governments as part of their foreign exchange reserves. The reserve currency tends to be the pricing currency for commodity products traded on a global market such as gold and oil.
History has had its share of reserve currencies. They all have come and gone. These have included the Chinese Lian, the Greek drachma in the 5th Century B.C., the silver punch-marked coins of the 4th Century India, the Roman denari and the Byzantine solidus. During the Middle Ages, we had the Islamic dinar which was replaced by the Venetian ducato during Europe’s Renaissance era. In the 17th Century we had the Dutch guilder and then more recently, the British Pound Sterling. And since World War II, the U.S. dollar has reigned supreme.
After World War II, the international financial system was governed by a formal agreement known as the Bretton Woods System. Under this system, the United States dollar replaced the (British) Pound Sterling as the world's reserve currency...thus also becoming the primary currency for all international trade. Since then, there have been tremendous benefits for the U.S. financial system and American consumers, not to mention the influence and power our government has enjoyed around the world. Today, more than 60% of all foreign currency reserves in the world are in U.S. dollar.
Since emerging from WWII as one of the sole super powers, the economically nimble U.S. served as a refreshing replacement to the globe’s former hegemon: a debt-ridden and war-torn Great Britain. Initially the use of the dollar worked well. However, by the 1960’s, the weight of the system became unbearable as the American economy struggled, forcing President Richard M. Nixon to end the international convertibility from U.S. dollars into gold on August 15, 1971.
Later known as the “Nixon Shock,” the decoupling of Gold from the U.S. dollar was quickly replaced two years later by the linkage of the U.S. dollar to oil—another critically needed commodity. In 1973, a deal was struck between Saudi Arabia and the United States in which every barrel of oil purchased from the Saudis would be denominated in US dollars. Under this agreement, any country that sought to purchase oil from Saudi Arabia would be required to first exchange their own national currency for U.S. dollars. In exchange for Saudi Arabia’s willingness to denominate their oil sales exclusively in U.S. dollars, the United States offered weapons and protection of their oil fields from neighboring nations. By 1975, all of the OPEC nations had agreed to price their own oil supplies exclusively in U.S. dollars in exchange for weapons and military protection. This petrodollar system, or more simply the “oil for dollars” system, created an immediate artificial demand for U.S. dollars around the globe. As the demand for oil increased around the globe, so too did the demand for the U.S. dollar.
Ironically, it was Saddam Hussein who first threatened the United States’ control of the Petrodollar system. No OPEC country had ever dared to violate the U.S. dollar pricing rule first established in 1975. But by late 2000, France and few EU members convinced Saddam Hussein to defy the petrodollar system and sell Iraq’s oil for food in euros. So, while you may believe the first Gulf War was about protecting our interests in Kuwait, or in Gulf War 2’s case, was about searching for weapons of mass destruction, it was truly about oil—and more succinctly, preserving the petrodollar system.
As the world works through various economic crises, and fingers point to the United States as a financial culprit and master economic manipulator, there are several other currencies competing to be the next reserve currency—primarily China’s yuan and the European Union’s euro. China has been rapidly moving to internationalize the yuan (also known as the renminbi). But China and the EU are not alone. Even the United Nations wants the creation of a global currency. And more and more, we are seeing major countries announce staggering bi-lateral economic treaties that purposefully by-pass the U.S. dollar as the reserve currency.
Consider these 11 disturbing facts that point to a decline in the US Dollar, not to mention China's strategic moves to dominate the oil/gas industries worldwide:
So, with those facts in mind, and setting aside for later discussion the obvious ramifications of China establishing a dominance in the oil and gas business, the demise of the dollar will certainly bring forth radical changes to our American lifestyle.
When the economic tsunami of the US dollar losing its status as the world reserve currency hits our shores, the 2008 recession and its aftermath will pale in comparison and any recovery will never bring us back to the height of our earlier position. We can expect massive inflation as the value of the dollar plummets. There will be high interest rates on mortgages and automobiles and substantial increases in the cost of food, clothing and gasoline. The ill effects of this hyperinflation scenario will adversely affect nearly every aspect of our economy and our lives.
Today America consumes nearly 25% of the world’s oil. Our entire economy is based on an abundant supply to feed our dependent transportation system to ship goods and services over vast distances across the continental United States. So what happens if prices at the pumps double or triple from their already near- high? Does the average American consider why they pay less than half of what Europeans do for gasoline? Granted fuel taxes have a lot to do with that, but the fact that the U.S. dollar is used today for almost all international oil transactions also plays a significant role. The change in gasoline prices alone could spell doom for the American economy if the dollar is replaced as the world trade currency!
The history of fiat money, to put it kindly, has been one of utter failure. Consider that throughout history, no paper currency has survived in its original form. In fact, every fiat currency since the Romans first began the practice in the first century has ended in devaluation and eventual collapse, of not only the currency, but of the economy that housed the fiat currency as well.
Paper currencies are normally inflated away until they are worthless. Since 1950, the value and purchasing power of the U.S. dollar has declined by 90%! If a hyperinflation scenario should materialize, we could find ourselves in an untenable situation. Consider what happened to Weimar Germany’s mark after World War One. Take note of the speed at which it collapsed and the fact that the U.S. debt today was similar to Weimar Germany’s.
In April 1919, 1 U.S. dollar equaled 12 marks.
Today the U.S. government is suffocating in mountains of debt while its citizens face incredibly high unemployment, a failed real estate market, record personal-debt burdens, a weakened banking system, and a teetering economy. If the U.S. dollar loses its position as the global reserve currency, the consequences for America are dire.
So what happens if the US dollar loses its status as the world trade currency, or likewise if the petrodollar system collapses?
For starters, the value of the U.S. dollar would significantly plummet. U.S. consumers would suddenly find the prices for all those cheap imported goods would rise dramatically as would the price of gasoline. If you think the price of gas at the pumps was hurting your budget now, wait until the price jumps 50%, 75% or even 100%. Even scarier would be the total international abandonment of U.S. Treasuries! Who would be financing our sovereign debt?
The trend that countries are moving away from the U.S. dollar as a reserve currency and the petrodollar system is troubling to say the least. Why the mainstream news media fails to cover this emerging threat is beyond me, but consider yourself aware now!
What can you do to prepare the collapse of the dollar and protect your family from the resulting economic backlash?
For starters, consider putting preparations in place to store the value of your wealth by purchasing real assets like gold and silver. My recommendation is to purchase U.S. minted coins in varying weights—even junk silver (silver minted prior to 1964). Other preps would include long-term food storage and the means to secure and filter water. Consider various hard-goods and items that may prove invaluable from a bartering perspective if the economic system goes from the supermarket to the black market. For those with the means, it makes sense to secure good farmland capable of growing your own food, raise chickens, rabbits, etc. If the cost of everything begins to skyrocket, what can you put aside today at today's prices to weather the storm?
Until next time, keep your powder dry and your faith strong!
Steve Nolan, Co-Founder of SurvivalWeek.com and Publisher of The Beacon