Why U.S. dollar is destined to lose its dominance.

 DEBT, DEFICITS AND DECLINING MANUFACTURING CAPACITY

FINANCIAL IRRESPONSIBILITY HAS ITS LIMITS

We are continually hearing about the end of dollar hegemony, or the end of the dollar's reserve currency status and the end of the petrodollar. We also hear defenses that the preeminence of the dollar will continue for a very long time. 

I suspect that many do not understand what all this means and how it will effect them if the dollar should lose its predominant position in world trade.

At the end of WW2 the United States was in effect the only untouched economic world power. All of Europe, Russia, Japan and much of the industrialized world were either devastated by the damage caused by the war or were in a period of revolution and economic and political chaos. The United States was the unparalleled economic, political, military and industrial power. It had a reputation as being a nation with a legal system that guaranteed the possibility of opportunity and an economic system undamaged and based on the dollar, with a reputation of "As good as Gold" This position was destined to be unchallenged for at least some time.

It took the other  major industrial powers at least 2 decades to recover from this situation and to be able to experience a normal economic situation and see prosperity in their future.

The United States had an industrial base that was unchallenged and could produce an abundance of necessities to satisfy domestic demand which was strong due to the pent-up demand and savings that had increased due to a shortage of domestic goods due to the war. It also could furnish these products to the rest of the world.

I remember the debates that were going on the middle of 1960's about the virtues of deficit spending, some had experienced the opportunity for amassing great wealth due to the government's spending in a mobilized war economy. The opposite side believed in a sound and strong dollar policy.

At the same time the country engaged in the Vietnam war, 10 years of accelerated government spending and also the introduction of government programs like Medicare, Medicaid and other expensive programs that required increased government spending. The government and elected official realized that to finance these things it would need to raise taxes significantly and that would cause some to experience political consequences.

We must remember that way before this the western powers embraced Keynesian economic theory with the premise that the government could regulate the economy by engaging in deficit spending when there is economic slowing and then recoup this spending or debt in economic good times. Deficit spending is in effect government debt. With this in mind we must take note that the last balanced federal budget was in 1969, just 24 years after WW2. These deficits and debt also began to destroy the buying power of the U.S. dollar and when foreign counties began to demand they exchange their paper dollars for gold, the government responded by denying that ability. The U.S. ended this convertibility in 1971. It was the beginning of the real decline in the U.S. position as the greatest economy in world history.

So here we are now 50 years later and the U.S. is still trudging along, some say the ride will last forever, but sadly this ride is approaching its end. The U.S. debt is now $34 Trillion, its annual deficit is approaching 30% of the budget, the U.S. manufacturing  capacity is only 30% of its nearest competitor, China. 

This ability to engage in these deficits and debt has been due to the reputation of this country earned in prior decades, but now we have reached the limits of these policies.

These deficits and debt have been possible due to the fact that the United States has been able to spend way above its real wealth by buying energy, materials and manufactured goods from around the world with constantly declining in value dollars. We receive huge container ships of goods and send them home with ships of paper dollars. If the United States had goods that were needed and competitive with its trading partners they could send those dollars back in exchange for goods made in the USA. The reality is that these countries have placed those surplus dollars in U.S. debt with an interest return below the rate of the dollar's decline in buying power or inflation. We have in effect been playing a winning scheme were our partners have been on the losing side of this scheme.

So contrary to the narrative that these countries are conspiring against us, we have really mortgaged our future and they are about to end their part of this schemc. The move now is for these counties to do transactions with each other in their own currencies and eventually to a common currency that they can all support. If Brazil receives Chinese currency for its agricultural products they can spend them in China for most anything they would want at very competitive prices. China can take Brazilian currency for its goods and buy grain or beef or raw materials from Brazil.

The United States has fewer and fewer goods that out trading partners can economically spend those dollar on and they are now disengaging in buying U.S. debt that has been a loser for them. While I use China, it applies also to Japan and Saudi Arabia, large holders of U.S. debt that are in the process of liquidating those holdings and buying gold or other solid investments.

The United States has now accelerated this problem by denying China the purchase of certain products that China bought from us, not necessarily because they could not produce these things, but because it was a place to spend their surplus U.S. dollars. China has now replaced these products with their own manufacture or from some more friendly partner. In the end the U.S. will be the loser as has been demonstrated by the policy of not selling computer chips to China, so they now make chips themselves and have made them more competitive priced than U.S. chips. China did not purchase U.S. farmland to damage the United States, but just an economic decision to hedge against the declining buying power of the dollar. The U.S seems to believe that the rest of world owes the U.S. by financing its debt.

The other example is sanctions, the United States has escalated a policy of economic sanctions that have all backfired and damaged the U.S. more than the sanctioned countries. The U.S. and European sanctions on Russia have in effect begun the deindustrialization of Europe. They may, even this winter, experience a lack of heat and food for their populations. The confiscation of Russian assets in U.S. and EU denominated currencies has sent alarm bells off  around the world that it is time to shift to another means of currency transactions. These realities are happening now and it appears that it is irreversible, no matter the political direction of the United States.

So what does it mean to average U.S. citizen not engaged in world trade or currency speculation. First off it will demand an end to the growing U.S. debt. which would mean an end to deficit spending. If the Federal government balanced its budget, now near an impossibility, it would result in an economic crash of historic proportions, possibly the worst economic crisis in human history. If they would raise taxes to create a balance it would decimate the economy by removing all that money from  the real private economy, the economy that produces wealth, not just redistributes it. If they would cut government spending it would also create a collapse, because now near 50% of the economy is government generated. The United States and western Europe will likely have the same fate. It is, in effect, the paying of a long overdue bill, that will take decades to manage.

This is of course if our leaders decide to bite the bullet and take the medicine for a self created financial debacle. It appears they are groping for some easy out, confiscate the savings of everyone? replace the dollar with a digital currency that they can further control and debase? Or the time tested policy of global war? What is needed is repentance for breaking the laws of finance and a good faith effort to mend their ways. Either way, it will be very painful in the least or a global disaster at its worst. It is time for leaders with wisdom and the talent for diplomacy, something that at present, is not a reality.