10 Reasons Why The Reign Of The Dollar As The World Reserve Currency Is About To Come To An End

theeconomiccollapseblog.com
MARCH 26, 2012

The U.S. dollar has probably been the closest thing to a true global currency that the world has ever seen. For decades, the use of the U.S. dollar has been absolutely dominant in international trade. This has had tremendous benefits for the U.S. financial system and for U.S. consumers, and it has given the U.S. government tremendous power and influence around the globe. Today, more than 60 percent of all foreign currency reserves in the world are in U.S. dollars. But there are big changes on the horizon. The mainstream media in the United States has been strangely silent about this, but some of the biggest economies on earth have been making agreements with each other to move away from using the U.S. dollar in international trade. There are also some oil producing nations which have begun selling oil in currencies other than the U.S. dollar, which is a major threat to the petrodollar system which has been in place for nearly four decades. And big international institutions such as the UN and the IMF have even been issuing official reports about the need to move away form the U.S. dollar and toward a new global reserve currency. So the reign of the U.S. dollar as the world reserve currency is definitely being threatened, and the coming shift in international trade is going to have massive implications for the U.S. economy.

A lot of this is being fueled by China. China has the second largest economy on the face of the earth, and the size of the Chinese economy is projected to pass the size of the U.S. economy by 2016. In fact, one economist is even projecting that the Chinese economy will be three times larger than the U.S. economy by the year 2040.

So China is sitting there and wondering why the U.S. dollar should continue to be so preeminent if the Chinese economy is about to become the number one economy on the planet.

Over the past few years, China and other emerging powers such as Russia have been been quietly making agreements to move away from the U.S. dollar in international trade. The supremacy of the U.S. dollar is not nearly as solid as most Americans believe that it is.

As the U.S. economy continues to fade, it is going to be really hard to argue that the U.S. dollar should continue to function as the primary reserve currency of the world. Things are rapidly changing, and most Americans have no idea where these trends are taking us.

The following are 10 reasons why the reign of the dollar as the world reserve currency is about to come to an end....

#1 China And Japan Are Dumping the U.S. Dollar In Bilateral Trade

A few months ago, the second largest economy on earth (China) and the third largest economy on earth (Japan) struck a deal which will promote the use of their own currencies (rather than the U.S. dollar) when trading with each other. This was an incredibly important agreement that was virtually totally ignored by the U.S. media. The following is from a BBC report about that agreement....

China and Japan have unveiled plans to promote direct exchange of their currencies in a bid to cut costs for companies and boost bilateral trade.

The deal will allow firms to convert the Chinese and Japanese currencies directly into each other.

Currently businesses in both countries need to buy US dollars before converting them into the desired currency, adding extra costs.

#2 The BRICS (Brazil, Russia, India, China, South Africa) Plan To Start Using Their Own Currencies When Trading With Each Other

The BRICS continue to flex their muscles. A new agreement will promote the use of their own national currencies when trading with each other rather than the U.S. dollar. The following is from a news source in India....

The five major emerging economies of BRICS -- Brazil, Russia, India, China and South Africa -- are set to inject greater economic momentum into their grouping by signing two pacts for promoting intra-BRICS trade at the fourth summit of their leaders here Thursday.

The two agreements that will enable credit facility in local currency for businesses of BRICS countries will be signed in the presence of the leaders of the five countries, Sudhir Vyas, secretary (economic relations) in the external affairs ministry, told reporters here.

The pacts are expected to scale up intra-BRICS trade which has been growing at the rate of 28 percent over the last few years, but at $230 billion, remains much below the potential of the five economic powerhouses.

#3 The Russia/China Currency Agreement

Russia and China have been using their own national currencies when trading with each other for more than a year now. Leaders from both Russia and China have been strongly advocating for a new global reserve currency for several years, and both nations seem determined to break the power that the U.S. dollar has over international trade.

#4 The Growing Use Of Chinese Currency In Africa

Who do you think is Africa's biggest trading partner?

It isn't the United States.

In 2009, China became Africa's biggest trading partner, and China is now aggressively seeking to expand the use of Chinese currency on that continent.

A report from Africa’s largest bank, Standard Bank, recently stated the following....

“We expect at least $100 billion (about R768 billion) in Sino-African trade – more than the total bilateral trade between China and Africa in 2010 – to be settled in the renminbi by 2015.”

China seems absolutely determined to change the way that international trade is done. At this point, approximately 70,000 Chinese companies are using Chinese currency in cross-border transactions.

#5 The China/United Arab Emirates Deal

China and the United Arab Emirates have agreed to ditch the U.S. dollar and use their own currencies in oil transactions with each other.

The UAE is a fairly small player, but this is definitely a threat to the petrodollar system. What will happen to the petrodollar if other oil producing countries in the Middle East follow suit?

#6 Iran

Iran has been one of the most aggressive nations when it comes to moving away from the U.S. dollar in international trade. For example, it has been reported that India will begin to use gold to buy oil from Iran.

Tensions between the U.S. and Iran are not likely to go away any time soon, and Iran is likely to continue to do what it can to inflict pain on the United States in the financial world.

#7 The China/Saudi Arabia Relationship

Who imports the most oil from Saudi Arabia?

It is not the United States.

Rather, it is China.

As I wrote about the other day, China imported 1.39 million barrels of oil per day from Saudi Arabia in February, which was a 39 percent increase from one year earlier.

Saudi Arabia and China have teamed up to construct a massive new oil refinery in Saudi Arabia, and leaders from both nations have been working to aggressively expand trade between the two nations.

So how long is Saudi Arabia going to stick with the petrodollar if China is their most important customer?

That is a very important question.

#8 The United Nations Has Been Pushing For A New World Reserve Currency

The United Nations has been issuing reports that openly call for an alternative to the U.S. dollar as the reserve currency of the world.

In particular, one UN report envisions "a new global reserve system" in which the U.S. no longer has dominance....

"A new global reserve system could be created, one that no longer relies on the United States dollar as the single major reserve currency."

#9 The IMF Has Been Pushing For A New World Reserve Currency

The International Monetary Fund has also published a series of reportscalling for the U.S. dollar to be replaced as the reserve currency of the world.

In particular, one IMF paper entitled "Reserve Accumulation and International Monetary Stability" that was published a while back actually proposed that a future global currency be named the "Bancor" and that a future global central bank could be put in charge of issuing it....

"A global currency, bancor, issued by a global central bank (see Supplement 1, section V) would be designed as a stable store of value that is not tied exclusively to the conditions of any particular economy. As trade and finance continue to grow rapidly and global integration increases, the importance of this broader perspective is expected to continue growing."

#10 Most Of The Rest Of The World Hates The United States

Global sentiment toward the United States has dramatically shifted, and this should not be underestimated.

Decades ago, we were one of the most loved nations on earth.

Now we are one of the most hated.

If you doubt this, just do some international traveling.

Even in Europe (where we are supposed to have friends), Americans are treated like dirt. Many American travelers have resorted to wearing Canadian pins so that they will not be treated like garbage while traveling over there.

If the rest of the world still loved us, they would probably be glad to continue using the U.S. dollar. But because we are now so unpopular, that gives other nations even more incentive to dump the dollar in international trade.

So what will happen if the reign of the U.S. dollar as the world reserve currency comes to an end?

Well, some of the potential effects were described in a recent article by Michael Payne....

"The demise of the dollar will also bring radical changes to the American lifestyle. When this economic tsunami hits America, it will make the 2008 recession and its aftermath look like no more than a slight bump in the road. It will bring very undesirable changes to the American lifestyle through massive inflation, high interest rates on mortgages and cars, and substantial increases in the cost of food, clothing and gasoline; it will have a detrimental effect on every aspect of our lives."

Most Americans don't realize how low the price of gasoline in the United States is compared to much of the rest of the world.

There are areas in Europe where they pay about twice what we do for gasoline. Yes, taxes have a lot to do with that, but the fact that the U.S. dollar is used for almost all oil transactions also plays a significant role.

Today, America consumes nearly a quarter of the world's oil. Our entire economy is based upon our ability to cheaply transport goods and services over vast distances.

So what happens if the price of gasoline doubles or triples from where it is at now?

In addition, if the reign of the U.S. dollar as global reserve currency ends, the U.S. government is going to have a much harder time financing its debt.

Right now, there is a huge demand for U.S. dollars and for U.S. government debt since countries around the world have to keep huge reserves of U.S. currency lying around for the sake of international trade.

But what if that all changed?

What if the appetite for U.S. dollars and U.S. debt dried up dramatically?

That is something to think about.

At the moment, the global financial system is centered on the United States.

But that will not always be the case.

The things talked about in this article will not happen overnight, but it is important to note that these changes are picking up steam.

Under the right conditions, a shift in momentum can become a landslide or an avalanche.

Clearly, the conditions are right for a significant move away from the U.S. dollar in international trade.

So when will this major shift occur?

Only time will tell.

Original source

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A series of lectures by Maulana Imran Hossein on the world monetary system and the Islamic view.

Buying Gold and Silver

Are you a newcomer to the precious metal?

This article originally appeared in the June issue of Information Line, published by Asset Strategies International.

Don’t own any gold or silver yet? New to the precious metals? Regardless whether you are a novice or seasoned veteran, the following seven points provide essential background information you can use to help determine whether the precious metals are right for you.

1) Gold is not a commodity; it is money. Soybeans, crude oil, copper and other raw materials and agricultural products are consumed and disappear. They are commodities. Their value arises from their usefulness as a consumable item. In contrast, gold is not consumed and therefore does not disappear. Essentially all the gold mined throughout history still exists. This above ground stock of gold has value because gold is useful in economic calculation and preserves purchasing power over long periods of time. For example, the price of crude oil in terms of gold is unchanged from 60 years ago, or in other words, an ounce of gold purchases the same amount of crude oil today as it did in 1951.

2) Gold is not an investment; it is money. Gold does not generate cash-flow. Gold is not a wealth producing franchise, like a company that creates wealth by producing marketable goods and services. When you buy gold, you are not making an investment. You are simply exchanging one form of money – the national currency used in your purchase – for another form of money, namely, gold. Therefore, the decision to buy gold should be based on gold’s attributes compared to those of national currencies. In this regard, gold emerges as the clear winner. Using the example in #1 above to highlight one of gold’s most important attributes and a major weakness of the dollar, a barrel of crude oil today costs more than $100, compared to less than $3 in 1951. The dollar has not preserved purchasing power. The interest income earned on a dollar deposit over this period of time will offset some of that loss, but it is important to remember why interest is paid in the first place. It compensates you for the risk of holding dollars – risks like inflation, a bank default, capital controls and other pernicious events that are harmful to your purchasing power. You do not have these risks with gold.

3) Do not trade gold; accumulate it. It is very easy to get caught up in the emotional aspects of the precious metals, given how frequently and cleverly brokers and others benefiting from trading volumes create artificial excitement simply by fanning the flames of gold’s price fluctuations. Leave trading to the professionals and speculators. It is difficult to "make money" from gold in that way. Given that gold is money, accumulate it, or in other words, "save money". Saving money is a good thing, particularly when you are saving sound money. So plan your household budget to put away some gold every month for your retirement or simply as a matter of prudence for that proverbial rainy day. It is savings, and available until you use it to make an investment or spend on some consumer good. Over time, you will clearly reap the financial benefits from your dollar-cost averaging program.

4) Buy physical gold, not paper-gold. Physical gold is a tangible asset, while paper-gold is a financial asset. With paper-gold, you do not own gold. You only own exposure to the gold price, and the value of your asset is dependent upon someone’s financial capacity and willingness to make good on their promise to you. In other words, you have counter-party risk, which is something you do not have when you own a tangible asset. For several years, the global economy has been working its way through a financial bust, which are always characterised by the breaking of promises. For example, Lehman Brothers could not meet its promises, and more recently, the Greek government has been unable to repay its commitments. Therefore, the rule-of-thumb is to avoid financial assets during a financial bust. Given that today’s monetary and financial problems remain largely unsolved, own physical gold and not any paper-gold substitute.

5) There are only two ways to buy physical gold. Buy it and store it yourself, or buy it and have someone store it for you, which is what my company, GoldMoney, does. Each alternative has advantages and disadvantages, and every individual has to weigh up these pros and cons and decide which alternative, or perhaps both alternatives because diversification does mitigate risk, best suits his or her needs. For example, when you store gold at home, you have it at hand. However, you run the risk of theft, the cost of insurance is expensive (if you can even get it), and your liquidity is impaired because you have to return the coins to a dealer to exchange them for national currency. You may also even incur the time and cost to get your gold refined to determine the gold content before the dealer accepts it. In contrast, when you store your gold, silver, platinum and palladium in GoldMoney, you do not have it at hand, but it is stored for you in a secure bullion vault and insured. What's more, you can sell your metal 24/7 and have the proceeds wired the same day to your bank account anywhere in the world, so you have exceptional liquidity.

6) When you store physical gold with others, ask to see the audits. When storing metal with others, you do not have the storage company’s counterparty risk because you are not exposed to their balance sheet, but you do have performance risk. In other words, you have the risk that your precious metals are not being stored in accordance with the Customer Agreement. Independent third-party audits are the only practical way to gain the assurances of integrity that you metal is safe and secure. Do not store with any company if they do not have independent third-party verification provided by regular audits by one of the Big-4 auditing firms confirming that the weight of metal being stored equals the quantity of metal owned by the storage company’s customers.

7) Silver is both a commodity and money. Some of it gets consumed and disappears, for example, the silver used in photography. But like gold, it has thousands of years history as money and is accumulated (saved) as coins and bars. Silver though is very different from gold in one very important respect. Silver is very volatile, which can be measured by the number of ounces of silver needed to exchange for one ounce of gold. A year ago it was 65 ounces of silver; last month it was 32 ounces, and today it is 40 ounces. This volatility is not for everyone, but if you are prepared to accept this volatility, then own some silver too. Over the next few years, these two metals are likely to move toward their historical exchange rate of 16 ounces of silver to one ounce of gold, meaning that silver will do even better than gold, or in other words, silver has some catching up to do in this ongoing precious metal bull market.

Gold has risen ten years in a row against the US dollar, and while 2011 is far from over, it looks like gold will be higher this year too. So clearly, gold has come a long way. It is therefore natural to ponder whether you should be buying gold now. Is it too late?

Believe it or not, but I have been asked this question dozens of times over the last ten years. My answer has always been the same. No, it is not too late, which is the same answer that I have today. What’s important is not the price of gold, but rather, its value. Don’t let gold’s high price distract you from the important points that gold does not have counter-party risk and preserves purchasing power over long periods of time. Gold is sound money, which everybody should be saving.

(I got this article from this source)