HISTORY | MONEY | GOVERNMENT | ECONOMICS | BUSINESS
Are You Prepared for the Fall of the US Dollar?
A financial empire is coming to an end, and how this will affect you
The US is the first empire in history established upon money. However, its rule over the world’s economy will not last long. Will you be prepared when it falls?
Previously on COMPLETENESS, we followed Peter and all the different types of taxes he and his heirs had to pay throughout his life and beyond it. But the money he earned and had to pay in those taxes deserves a closer look if you decide to follow a different path in your life.
There was a time when money represented gold or silver. The US dollar, for example, has its origins in the Spanish dollar coin. This coin was of regular use in the United States before its foundation and until 1857 and widely used worldwide too.
The reasons for its widespread usage were:
- The Spanish dollar was a silver coin, with a fineness of 0.9306
- Its uniformity in standard and milling characteristics.
In other words, having a Spanish dollar in your hands meant you were holding 25.563 g of fine silver. That is because it was a unit of weight.
Looking Back in History
The history of the US dollar starts on April 2, 1792. US Secretary of the Treasury, Alexander Hamilton, reported to Congress the silver content that the coins in everyday use in the country — the Spanish dollars — had. Following that model, the US dollar was defined as a unit of weight in pure silver of 371 4/16 grains (24,057 grams).
When paper money came into circulation, it displayed the explicit promise of paying the bearer of the banknote, the number of dollars (units of weight in silver) written in the note.
Thus, the banknote pictured above declared that it represented a United States debt. That debt was exactly of 48.114 grams of pure silver (two dollars) with the bearer of the said banknote, and that the debt was redeemable at their sole demand.
In 1900, the US passed the Gold Standard Act, using the gold standard after that. The mentioned act established that one dollar was equivalent to 25 8/10 grains of gold (1.67 grams) of 9/10 purity or 1.503 grams of pure gold. The Golden Standard Act thus fixed the convertibility of a US dollar to a certain amount of gold.
The Failed Attempt to Make the US Dollar Supreme
In 1944, the head of the US government, Franklin Roosevelt, thought it was time for his country to take over the currency supremacy from the British Empire. WWII was finishing, and the British didn’t “rule the waves” anymore: no less than 23 ex British colonies became independent states in the following 20 years.
Roosevelt pressed for three world systems:
- The political system — the United Nations
- The trading system — the General Agreement on Tariffs and Trade (GATT), which became the World Trade Organization (WTO)
- The financial currency system — the Bretton Woods system, including the IMF, and what is now the World Bank
Following the United States pressure, which controlled 80% of the world’s gold, the Bretton Woods system rested on gold and the US dollar. However, the greenback’s expected world domination was harder to achieve than initially thought. What was blocking the dollar? It was gold.
The Bretton Woods system rested in the promise made by the US government to back its currency with gold: US$ 35 an ounce. Every other country could peg its currency to the dollar as an almost direct peg to gold.
But, while that promise established the dollar’s credibility, it also became a straitjacket for the US government. Simply put, it couldn’t print an unrestricted number of dollars for doing something according to its will. Whenever a dollar entered into circulation, the government had to add the corresponding amount of gold into its treasury as a reserve.
And then came the wars.
The United States’ involvement in both the Korean War and the Vietnam War would cost the US significantly. The Korean War cost US$ 30 billion, and the Vietnam War US$ 111 billion (0.32 and 1.1 trillion in 2020 US$). Of course, the US couldn’t have born the cost in gold of these wars: it would’ve meant 141 / 35 = 4.03 billion ounces of gold lost. Americans didn’t win these wars either, so the recovery of the money was not possible.
Of the more than 20,000 tones they had in the ’50s, by August 1971, the Americans had about 8,800 tons of gold left. Problems were knocking the front door.
Another issue was that the Bretton Woods system was not seen as fair by all parties. The USSR declined to ratify the final agreements, alleging that the institutions they had created were “branches of Wall Street.” France’s finance minister called it a US “exorbitant privilege.” He said it resulted in an “asymmetric financial system” where non-US citizens “see themselves supporting American living standards and subsidizing American multinationals.”
Distrust in the greenback started growing, and in May 1971, West Germany left the Bretton Woods system. In three months, the dollar dropped 7.5% against the Deutsche Mark. Switzerland demanded the redemption of US$ 50 million for gold. In August, France followed suit acquiring US$ 191 million in gold. The same month Switzerland left the Bretton Woods system.
Finally, not being able to continue anymore, the US government announced the end of the Breton Woods system. On August 15, 1971, US President Nixon announced that his country stopped pegging the dollar to gold.
It became clear that the US had cheated the world, printing more money than its gold reserves would allow. But it added insult to injury. Addressing his pars at a Rome G-10 summit in November 1971, US Treasury Secretary John Connally said, “the dollar is our currency, but it is your problem.”
The evidence showed that the US dollar was only paper, but what would replace it? For twenty years, it was a trustful currency used to settle transactions in the world’s economy, the reserve currency worldwide. Was there any suitable alternative?
What followed were times of confusion and mistrust. By inertia, the greenback’s use continued as a means of settlement in international business transactions. Still, high-ranking officials in the developed world were thinking about possible replacements of the greenback. The Americans were also thinking about how to prevent that. “If only there were a way to compel the world to use it.”
The Trick
Those days Henry Kissinger was the mind behind the American foreign policy. He arranged a meeting with Saudi King Faisal and US President Richard Nixon. The idea was simple: it consisted in offering Saudi Arabia, the world’s leading oil exporter, two things: 1) security and protection against any possible threats in the region, and 2) an endless supply of last generation armament. Also, the US offered support to the king’s house against possible attempts to depose it.
In exchange for such great favors, the US only asked for two things. 1) Sales of oil were to be offered in US dollars only. 2) Saudi Arabia would purchase US treasury bills using excess dollars from oil sales. These extra dollars came after oil prices quadrupled following the 1973 boycott against the Western countries that supported Israel in the Yom Kippur War.
The US offer was a brilliant move: people might dislike the US dollar, but they could not live without energy. It was — and is — a vital necessity for all countries to buy oil. This strategy made the need for oil to be a need for the US dollar.
Now, it is a well-known fact that printing money without backing (inorganic money) creates inflation. The agreement with Faisal dealt with one of the most critical needs of the US government: the conjuring of vast amounts of money out of thin air. But it also addressed the local inflation would-be problem by “exporting” the debt generated, without creating that undesired local inflation. New dollars would come into circulation in exchange for debt papers that would go to the Arabs in exchange for dollars.
In 1975, the Organization of the Petroleum Exporting Countries (OPEC) followed Saudi Arabia’s lead. They all began to sell oil using US dollars only, an implicit agreement that continues today.
That was how, within four years (1971–1975), the United States established a true financial empire. An empire that history will recall as the only one built upon the compulsory use of its currency. Almost all governments worldwide subscribed to this money system, and a new economy based on the widespread use of the US dollar emerged.
Relating this dollar imperialism, the facts and the truth are not widely known, though. There is no gold or any precious metal behind the US dollar. The government’s credit is the only backing for it. At the same time, the US sells its debt to other countries and foreign institutions.
As we have just seen, the United States makes enormous profits from the rest of the world. This way, the US gets The Wealth of Nations by printing a piece of greenish paper.
American economist Barry Eichengreen said it plainly: “A more controversial benefit of the dollar’s international-currency status is the real resources [emphasis added] that other countries provide the United States in order to obtain our dollars. It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one” (page 3 of his book Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System).
Eichengreen is talking about the concept of seigniorage. Quoting Investopedia, “seigniorage is the difference between the face value of money, such as a $10 bill or a quarter coin, and the cost to produce it. In other words, the economic cost of producing a currency within a given economy or country is lower than the actual exchange value, which generally accrues to governments who mint the money.”
Then, as the cost for the US government to get money became very low, it was easy to fund the cost of wars and invasions and the advancement of technology and infrastructure feats. For almost 25 years, such was the case. Also, financial centers, mega-banks, and giant corporations came into existence as a natural consequence.
The Selling of Debt
The “printing” of those dollars the US needs takes the form of issuing government debt: bills, notes, bonds, and securities. This debt papers are backed “by the full faith and credit of the US government” and exchanged by the newly printed dollars.
Of course, printing money at will is like trying to restrain a runaway horse: the US national debt is now above US$ 26.7 trillion. It has even been surpassing the size of its entire economy ever since 2014. Anyway, the US must exercise some restraint to avoid a dollar devaluation.
If the US keeps those inorganic dollars inside its borders, it will create inflation, as I already mentioned. The idea then is to export those dollars to the world to keep inflation at bay locally. At the same time, it can’t print too much to avoid a dollar devaluation. So, what should the US do if it needs more dollars?
To sell its debt. In an intricate Monopoly game where the US government is the bank and the player simultaneously, it prints money and borrows it. Central banks, pension funds, commercial banks, and institutions worldwide buy American debt and use it as reserves, investments, or as a backing of financial instruments.
This mechanism of debt issuance brings back to the US a large amount of money (dollars). The flow feeds the US’s three main markets: the stock market, the Treasury Bills market, and the commodities market.
As the cost of printing dollars is much less than what those dollars can buy abroad, the US economy has distorted and become hollow. That is because it is much easier to issue debt and print money than to produce something real. The result has been a flight of industrial and technological production to other countries. The following are estimates of the US GDP by sector in 2017 made by the CIA:
- Agriculture: 0.9%
- Industry: 18.9%
- Services: 80.2%
Notwithstanding the US efforts to keep the inflation at bay (caused by the massive dollar printing), the dollar purchasing power has declined significantly. It exhibits an 84.4 % loss of its value since its unpegging from gold:
Another consequence of this international economic system based on a currency void of real value is the cyclical crises it generates.
The Last Trick?
As the US$ Dollar Index chart clearly shows, there is a cycle that repeats itself every 16 years (10+6).
After nearly ten years of inundating Latin America with US dollars, the United Stated sensed the need to put an end to it. In 1979, the low value of the currency (see chart) signaled this need to reverse the process. The trigger should be a “regional” crisis that would convince investors to withdraw their capital from the sub-continent. So:
- The US and Argentina were allies. Washington received President Galtieri warmly on his 1981 visit, where he informed President Reagan about his intentions of invading the Falkland Islands.
- The UK sent its forces 8,000 miles down to take the islands back.
- The US publicly sided with Margaret Thatcher and assisted the UK logistically
- The Falklands War started
- The US dollar appreciated
- The US Federal Reserve announced an increase in interest rates
- Investors worldwide thought that a regional crisis had started in Latin America, and capitals flew to a safe haven: The United States.
- The three US markets (stocks, treasury bills, and commodities) skyrocketed, marking the first bull market since the unpegging of the dollar from gold. The dollar index went up to 160.
- Now that the “crisis” reduced Latin-American economies to rubble, capitals flew back to the south only in enough quantities to buy some of their best productive assets cheap.
When the first cycle of 10 +6 years was over, a new one started in 1986. In this cycle, US dollars flew to Asia, which saw substantial investments in the region. The incredible growth and economic potential of some of its countries were in everybody’s mouth.
Again, in 1997, and after ten years of a weak dollar, the time for a reversal had come. The trigger, of course, should be another “crisis.” So:
- Mr. George Soros lead an attack on Thailand’s baht
- After the Thai baht succumbed, the Asian Financial Crisis affected Malaysia, Singapore, the Philippines, and Indonesia
- Taiwan, Hong Kong, Japan, and South Korea suffered also
- The US Federal Reserve announced an increase in interest rates
- The resultant panic among lenders led to a massive withdrawal of credit from these countries
- A credit crisis and additional bankruptcies ensued
- As foreign investors tried to withdraw their money, the exchange market was inundated with the currencies of the crisis countries, furthering the depreciating pressure on their exchange rates
- The three US markets (stocks, treasury bills, and commodities) skyrocketed, marking the second bull market since the unpegging of the dollar from gold. The dollar index went up to 120
- Now that the “crisis” reduced some Asian economies to rubble, capitals flew back to the east only in enough quantities to buy some of their best productive assets cheap.
When the second cycle of 10 +6 years was over, a new one started in 2002. China became a member of the World Trade Organization in 2001. In this cycle, it was the recipient of massive investments in US dollars. China’s incredible growth and economic potential were in everybody’s mouth.
Again, in 2012, and after ten years of a weak dollar, the time should have come for a reversal. Unexpectedly, something happened meanwhile.
This time, things went slightly different because the US government had to concentrate its efforts on fixing its own house. The Monopoly game players went too far in their excesses. The housing and mortgage crisis exploded in 2008 and had severe consequences. History books call it The Financial Crisis of 2007–2008.
Because of these events, the implementation of the harvesting cycle could not receive US full attention. The FED was not able to finish with its Quantitative Easing scheme until September 2014, as the US needed to print money to put out the fire.
In dealing with China, it was evident that the size of the contender required not one but several crises to produce the desired effect. We see that at least five of them took place in the period:
1. The Cheonan sinking event in 2010
2. The dispute over the Sentaku Islands in 2012–2013
3. The China-Vietnam oil rigs crisis in 2014
4. The Hong Kong’s “Occupy Central” event in 2014
5. The dispute over Scarborough Shoal with the Philippines in 2016
Surprisingly, these crises didn’t accomplish the expected results this time, and dollars didn’t return home.
New crises in other parts of the world arose to compensate for the failed attempt against China. It is not my intention in this article to cover them. I just wanted to indicate that the United States employs a system that has allowed its monetary empire to survive. It needs large amounts of money flowing back to its three main markets to give life to its economy. It requires money in order to make more money to continue the milking of other countries.
Now it’s time for some questions.
Will this strategy work forever? Aren’t there signs that not?
Without real value behind the greenback, what are its possibilities for survival in the long term?
Without a real economy, if it were to lose its currency dominion, how could the United States remain the world’s ruler?
Russia has practically eliminated its holdings of US debt, and China and other countries have reduced theirs significantly. Did you know that you are the largest holder of American debt now?
Your Country’s Debt Rests on Your Shoulders
By August 12, 2020, the US national debt was 26.5 trillion, of which:
- Foreign governments held 6.78 trillion
- 5.9 trillion was intragovernmental debt. That means the government owes to itself, i.e., to the Social Security Trust Fund and Federal Disability Insurance Trust Fund, the Office of Personnel Management Retirement, the Military Retirement Fund, Medicare, (including the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund), and all other retirement funds
- US banks and investors, the Federal Reserve, state and local governments, mutual funds, private pensions funds, insurance companies, and US savings bonds accounted for the remaining 13.52 trillion.
Three premises and four questions:
Suppose a country has a national debt of US$ 26.5 trillion. Suppose 75% of that debt is held internally by federal agencies and institutions.
Finally, suppose that you are a national of that country. Being that a country is the people that live in it:
Are you in debt with your government?
Is your government in debt with you?
If neither of you owes to the other one, do you still have something?
How are you going to pay the foreign governments to which you owe when your currency becomes unacceptable?
Remember, the nation doesn’t produce goods anymore; 80% of its economy depends on “services,” and right now, 42 million Americans live on food stamps.
Maybe you are not a person living in the United States. Perhaps you call your currency peso, rupia, euro, or dinar. Well, the same threat is over your head too. We are living in a globalized world with tightly interwoven national economies dependent on each other. This dependence between them is the biggest in human history. Are you prepared for a significant change in the world’s economic order (or disorder)? Do you have a plan in case the economic forces in action change the status quo?
In the next stories, I will be covering some alternatives. They boil down to transforming some of your current assets into others that historically maintain their value when crises arise.
Here’s to your future!
— Víctor Tapia —
Thank you for reading this article. If you have any questions or concerns, leave a comment below, I promise to respond.
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COMPLETENESS is the publication that studies the factors that restrict your freedom and prevent you from reaching your financial, health, and wellness goals. It analyzes the alternatives at hand and formulates and discusses actionable strategies.
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Víctor Tapia is a writer who specializes in bitcoin, internationalization, and wellness issues. For his website’s web presence, he writes and edits both English and Spanish articles, guides, and courses. Similarly, he focuses on producing material for other parties and produces Medium stories on various themes related to his field.
Víctor worked for many years in the field of food and beverages, both for the hospitality and food industries. Before founding My CBS in 2002, he was the General Manager at Parmalat S.p.A., the multinational food corporation, at its subsidiary in Curaçao. One of his activities is service coaching in any area of commerce and industry, including food and beverages.
You can get in touch with him on LinkedIn, Twitter, Facebook or Instagram, follow his posts on Medium, Mixturas (Spanish) and Completeness (English), or by visiting his website, My CBS.
