The US Dollar – sure it seems as if it’s accepted everywhere and that’s because it is. However, there is a real possibility that very soon all that could change. The fact is that with the way things are going in the world, we could very soon be looking at piles of worthless pieces of paper stuffing our wallets. It’s all because of a decision made <a href="http://www.investopedia.com/terms/b/brettonwoodsagreement.asp">around 75 years ago in New Hampshire</a>.</p><h2>The World’s Reserve Currency</h2><p>There’s a good reason why Great Britain is called that – it’s because until fairly recently, Great Britain <em>was</em> pretty great. It was a world spanning empire with colonies in every corner of the planet. In fact, they used to say that <a href="https://en.wikipedia.org/wiki/The_empire_on_which_the_sun_never_sets">the sun never set on the British Empire</a> because it literally had colonies in every hemisphere on the planet.
Given how powerful the Brits were, it’s not hard to understand why the British Pound Sterling came to be seen as the most stable currency in the world. After all, with the backing of the Queen of England, who could possibly say that the money wasn’t good? Of course, it helped that the Brits had a ton of gold stashed away in London, much of it looted from their colonies, but I digress.
The point is, the Brits basically ran the world and London was considered to be the most important city on the planet. The British Pound was also pegged to the value of gold and as a result, other countries would buy and sell things in British Pounds and they knew that if they ever needed to exchange the money, they could turn it in to the Bank of England for the lustrous metal.
All that started to change after World War I. While the Brits emerged from the war with even more colonies than they had before (they carved up the old Ottoman Empire between themselves and the French, much to the chagrin of many people in the Middle East today), their economy had been weakened.
Come World War II and Hitler basically took down the British without ever actually invading the British Isle. He was able to all but bankrupt the British Economy, which desperately reached out to the United States for help in the form of the Lend Lease Act (a program where we gave them arms in exchange for a promise of the use of land in the British Isle during the course of the war).
The whole storm basically hit the fan in Bretton Woods, New Hampshire in 1944 where a new World Order was put in place (and you thought they were just conspiracy theories – well, they are, but this one is real, just not some evil supra government). The US Dollar was pegged to gold at a value of $35 to one ounce of gold and became the new standard for international currency exchanges.
The US Government in turn agreed to pay out one ounce of gold to anyone who turned in $35 in US currency. This pretty much lasted until 1971.
Today, the US Dollar is worth a dollar because, well, Uncle Sam says it’s worth a dollar. Take a look at the US dollar sometime and you’ll see that it says that it’s backed by the “Full Faith and Credit of the United States.” In other words, it’s worth what the Government says it’s worth but ultimately, it’s just a piece of paper. There’s nothing that actually backs it up.
This means in essence that the world’s governments who trade in the form of dollars do so because they believe that the United States is a stable country with a stable economy. They believe that in times of trouble, the United States will survive as a nation and continue to pay its debts.
What happens if the US ever stops paying its debts? Well then we got some biiig problems my friend. Debts are basically a commodity. They are bought and sold on the open market kind of the way that you can buy and sell a silver bar as I mentioned last week.
In fact, it’s possible to purchase some debts for pennies on the dollar – legally, you could pay say $50,000 and then several people legally owe you say $5,000,000. Pretty cool huh? Just don’t expect to collect that money any time soon. Thanks to debtor laws in this country, it’s pretty hard to collect debts from someone who refuses to pay.
US Dollar debt is pretty much the same thing – the US Government sells off debts to other countries in exchange for dollars, which it then goes and prints up. These other countries are then free to buy and sell our government’s debt as they see fit.
In fact, our government currently owes a little more than $19.7 trillion. To put that in numbers, it’s exactly $19,720,830,822,303.49 as of this writing (it goes up constantly so it will be more when you read this).
For now, other countries just keep rolling over our debts, taking fresh loans out for us in order to pay back our existing loans. That’s where the deficit comes in – we spend more than we collect in taxes every single year, without exception. That’s why our national debt keeps getting bigger.
In fact, the last time we had a balanced budget (i.e. we didn’t spend more than we collected in taxes) was back in 2001, just after Bill Clinton left office. Think of it like taking out new credit cards in order to pay down old credit card debt. It ends up being a vicious cycle where you just keep seeing the total balance going up and up and up until you end up on the street and penniless.
Our government is kind of like that and that’s why the US Dollar is in trouble – for now, the world keeps extending us more and more credit because they still believe that we’ll pay our debts off, somehow. Doesn’t matter how insane our debts actually have become – like the idiot who has a good credit score but runs $100,000 in credit card debts, they just keep extending more money to us.
Eventually though, we’re going to get to the tipping point – the point where other countries won’t trust the US Dollar and where other countries are going to start selling them off in droves.
What happens when they do that? You have a wallet full of pretty pieces of useless paper thanks to inflation (too many dollars chasing too few goods means that you need a whole lot more dollars to buy those goods).
For now, this hasn’t happened and there is just one reason why – because the world is scared sh*tless of what happens next. If we stop trading in dollars, what replaces it?
Many people point to the Chinese Yuan but there are problems with that country’s money and with the fact that they don’t allow the Yuan to be freely traded on the open market. Others have suggested the Euro but with the problems in the Euro Zone right now, the Euro is looking pretty shaky too.
In short, we’re in luck in the short term because there is no good alternative to the US Dollar. For now. And that’s the real kicker – because eventually, probably pretty soon, we will see something emerge and that will be the end of the Dollar’s supremacy in the world.