Posted 10/7/2011

THE DOLLAR: BRUISED, BUT STILL KING

Since 1996, Washington has been throwing trillions of dollars about as if they were so many twenty-five-cent poker chips.  Clinton was guilty.  Bush was guiltier.  Obama has been most guilty of attempting to destroy the value of the dollar.

All three administrations unleashed fiscal and monetary policies which were looser than the ladies who advertise their wares on Eighth Avenue. 

Economists warned that the dollar was going to crash and set off runaway inflation.  Horrible things would happen to the U.S. economy.

As a result, many people went out and bought gold, pushing its value up to the current $1,600-an-ounce level.

But the dollar has not collapsed.  There is no runaway U.S. inflation.  And gold has not reached the heights so frequently and so freely predicted by the doomsayers. 

Why not?  Where did the economists and gold bugs go wrong?

They simply did not understand that the U.S. Dollar is the world's global currency – and has been since 1923.

The erring economists kept looking at the dollar as the U.S. currency instead of the world's currency. 

As a result, they got the arithmetic wrong.

They thought if you throw three or four trillion dollars into a $14 trillion economy, you were bound to inflate the U.S. economy.   (And it probably would.)

But the U.S. threw its trillions into a $65 trillion world economy in which over 60 percent of all monetary reserves are held in dollars.  Moreover, the world economy conducts about 80 percent of its trade in dollars.  The energy that runs the world is quoted in dollars.

When the U.S. printed its extra trillions of dollars, it spread them throughout the world, resulting in everybody suffering a little inflation and nobody, including the U.S., being clobbered by large inflation.

China's dollar reserves now buy fewer goods.  Ditto Japan and Germany.  Saudi Arabia gets less for a barrel of oil because its price is quoted in lower valued dollars.  And Johnny's mother pays more for his Cheerios because commodity prices have been pushed up by the somewhat weaker dollar. 

When Federal Reserve Chairman Bernanke and Treasury Secretary Geithner were printing all those new dollars, they were simply spreading the inflationary costs all around the world.

In a way, we've been stealing from every country in the world that stores or trades in American dollars.

That's the magic in owning the world's currency.  You can spread your troubles and travails around instead of having to pay the inflation piper.

Having that kind of leverage also encourages the U.S. Congress to be as sloppy and irresponsible as the Greeks have been for years.

At this time the major difference between Greece and the USA is that we own the world's currency and Greece does not.

But the barons and people of the world are beginning to rumble about our abuse of the dollar.

If we do not correct our loose monetary and fiscal performance, we may wake up one day to find ourselves confronted with a new world currency – China's Yuan.

Then we really will be as helpless as Greece.

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