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The US Dollar: An Advanced Obituary (Part Three)

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Source: Operation Disclosure | By David Lifschultz, Contributing Writer

Submitted on January 22, 2023

THE US DOLLAR: AN ADVANCED OBITUARY PART THREE

The underpinning of the US world order is now under attack in what appears to be a sanction war of the US that has gone to a bridge too far. In 1945 when the US GDP represented 50% of the world GDP, and much of the nations it competed with as England were bankrupt or destroyed as Germany, the US created a new US world order using the dollar as the world’s reserve currency under Bretton Woods agreements backed by 20,083 tons of gold in the US Central Bank Reserve against 33,300 tons of gold in total world central bank reserves. It was redeemable in gold at the US Central Bank from 1933 until 1971 at $35.00 for each ounce of gold only to fellow central banks. This history of the gold dollar is given in the next link going from $18.93 an ounce in 1833 to $1,926.30 today. This reflects a massive debasement of the currency and accurately reflects the decline of US power. It might be said to be on its last legs.

The US dollar was redeemable in gold to citizens and non-citizens from 1879 to January, 1933 and was then restricted to being redeemable in gold only to central banks from 1933 to 1971 at $35.00 an ounce at the end in 1971. The debasement of the currency, or inflation, helped to lower the real cost of the US debt of 28 trillion dollars in US debt redeemable only in a fiat dollar on a US GDP of 23 trillion dollars today as the gold value is 1,927.20 per ounce from at one time less than $20.00 an ounce. The net deficit position on the international account of the US will soon exceed 20 trillion dollars. This means we have inflated away most of our Federal debt as the actual inflation is much more.

As the teacher of J. M. Keynes. Alfred Marshall explained, the gold system cannot work as the gold cannot create from within itself the additional gold to pay the interest as the gold is barren. This goes back to Aristotle or the infallible Bible. Since capitalism really means the economy based on usury, it is founded on an unworkable premise. For example, if there are 205,000 tons of gold in the world lent at ten percent interest or usury payable in full interest at the end of a year, the interest cannot be paid as it does not exist.  When Keynes created the Bretton Woods system, he solved this problem of his teacher by creating the concept of the bancor which is now called the SDR or Special Drawing Rights. The SDR is a form of inflation created to handle the dilemma that Marshall found unsolvable by gold. It is a fraud. The usury system cannot be solved except by inflation or by usury being outlawed in a Christian or Islamic society. When I discussed this concept under my piece entitled “Goethe, Faust and the Euro” to Swiss bankers in Zurich, they were very, very interested as they were thinking of creating a banking division for Islamic finance on a non-usury basis. There would have been no interest in the subject in 1900.

https://operationdisclosure1.blogspot.com/2020/12/an-introduction-to-goethe-faust-and.html

The problem now for the Bretten Woods system is that all the currencies are tied together on nothing but a fiat dollar. In the meantime, BRICS-7 is working on a new currency. We understand from the geopolitical analyst Pepe Escobar that the BRICS-7 are considering a currency with gold backing which would relegate the dollar to the status of the collapsing and intrinsically valueless crypto currencies as the dollar suffers eventually a massive bank run in its race to oblivion. Note the quote below from the next article.

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Global South: Gold-backed currencies to replace the US dollar

The adoption of commodity-backed currencies by the Global South could upend the US dollar’s dominance and level …

https://thecradle.co/article-view/20532/global-south-gold-backed-currencies-to-replace-the-us-dollar

Off the record, New York banking sources admit the US dollar would be “wiped out, since it is a valueless fiat currency, should Sergey Glazyev link the new currency to gold. The reason is that the Bretton Woods system no longer has a gold base and has no intrinsic value, like the FTX crypto currency. Sergey’s plan also linking the currency to oil and natural gas seems to be a winner.”

The subject is dealt with in more detail in the next link.

THE ASSAULT ON THE US DOLLAR EXORBITANT PRIVILEGE

The writer of this letter to the Financial Times Zoltan Pozsar is the global head of short-term interest rate strategy at Credit Suisse 

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Since the end of the cold war, the world has largely enjoyed a unipolar era — the US was the undisputed hegemon, globalisation was the economic order and the dollar was the currency of choice. But today, geopolitics once again poses a formidable set of challenges to the existing world order. That means investors have to discount new risks. 

China is proactively writing a fresh set of rules as it replays the Great Game, creating a new type of globalization through institutions such as the Belt and Road Initiative, the Brics+ group of emerging economies and the Shanghai Cooperation Organization, a collective security alliance of eight countries. While under lockdown, Beijing forged a special relationship with Moscow and Tehran. 

This relationship with Russia, with the unwitting assistance of global warming, is helping extend China’s BRI through Arctic shipping lanes. And late last year, we saw the very first summit between China and the Gulf Cooperation Council and hence a deepening of China’s ties with Opec+. All of this may eventually lead to “one world, two systems”. If we are drifting from a unipolar world to this multipolar one, and if the G20 fractures into the camps of the G7 plus Australia, Brics+ and the non-aligned, it’s impossible that these rifts will not affect the international monetary system. Growing macroeconomic imbalances in the US further add to these risks. 

The dollar-based monetary order is already being challenged in multiple ways, but two in particular stand out: the spread of de-dollarisation efforts and central bank digital currencies (CBDCs). De-dollarisation is not a new theme. It started with the launch of quantitative easing in the wake of the financial crisis, as current account surplus countries frowned at the idea of negative real returns on their savings. But recently, the pace of de-dollarisation appears to have picked up. Over the past year, China and India have been paying for Russian commodities in renminbi, rupees and UAE dirhams. India has launched a rupee settlement mechanism for its international transaction while China asked GCC countries to make full use of the Shanghai Petroleum and Natural Gas Exchange for the renminbi settlement of oil and gas trades over the next three to five years. With the expansion of Brics to beyond Brazil, Russia, India and China, the de-dollarisation of trade flows may proliferate. 

CBDCs could accelerate this transition. China has changed the strategy through which it internationalizes the renminbi. Given that financial sanctions are implemented through the balance sheets of western banks, and that these institutions form the backbone of the correspondent banking system that underpins the dollar, using the same network to internationalize the renminbi may have come with risks. To get around this, a new network was needed. Around the world but particularly in the global east and south, CBDCs are spreading like fast-growing kudzu vines with more than half of the world’s central banks exploring or developing digital currencies with pilots or research, according to the IMF. They will be increasingly interlinked. Central banks interlinked through CBDCs essentially recreate the network of correspondent banks that the US dollar system runs on — instead of correspondent banks, think more of correspondent central banks. 

The emerging, CBDC-based network — enforced with bilateral currency swap lines — could enable central banks in the global east and south to serve as foreign exchange dealers to intermediate currency flows between local banking systems, all without referencing the dollar or touching the western banking system. Change is already afoot. The current account surpluses of China, Russia and Saudi Arabia are at a record. Yet these surpluses are largely not being recycled into traditional reserve assets like Treasuries, which offer negative real returns at current inflation rates. Instead we have seen more demand for gold (see China’s recent purchases), commodities (see Saudi Arabia’s planned investments in mining interests) and geopolitical investments such as funding the BRI and helping allies and neighbors in need, like Turkey, Egypt or Pakistan. Leftover surpluses are held increasingly in bank deposits in liquid form to retain much-needed options in a changing world. In finance, everything is about marginal flows. These matter the most for the largest marginal borrower — the US Treasury. If less trade is invoiced in US dollars and there is a dwindling recycling of dollar surpluses into traditional reserve assets such as Treasuries, the “exorbitant privilege” that the dollar holds as the international reserve currency could be under assault.

David Lifschultz
THE LIFSCHULTZ ORGANIZATION
DAVID@LIFSCHULTZORGANIZATION.COM

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