Nathan Lustig

It stared with leaders like Hugo Chavez, Mahmood Ahamdinejad and Saddam Hussein who wear their anti-Americanism as a badge of honor.  Next, it was the developing countries who generally liked the US but felt they were not getting a fair shake.  Next was Russia and India.  Then came China, America’s largest trading partner and largest foreign holder of US dollar denominated securities.  Yesterday, it was the oil producing countries in the Middle East.  Even Germany has quietly started to complain.  What issue has managed to unite most of the world?  The US Dollar’s viability as the world’s reserve currency.

Back in April, I questioned whether the US Dollar is America’s Achilles Heel.  Each day, I am more and more convinced that it is.  Back when leaders like Chavez were the only ones questioning dollar hegemony, most of the rest of the would could safely ignore his statements as the ramblings of a dictator blinded by anti-Americanism.  Most people did.  When developing countries complained about the devaluation of the dollar, people could brush the complaints off as jealousy.  When Russia started rumbling about moving away from the US dollar, some people started to take notice, but were not concerned, as they viewed Russian statements as posturing to reassert itself on the global stage.

Finally, when China’s central bank head made statements that he was not happy with the huge increase of the money supply, people began to take notice, but were still not convinced that there was a problem.  Next, China signed currency swaps with countries like Argentina, Brazil, Thailand and others that allowed businesses to do deals in Yuan, rather than relying on the US dollar.  This was a clear shot across the bow at US dollar hegemony.  China has also stopped buying longer term US securities, prefering short term notes that they can roll over more quickly, while stockpiling raw materials, rare earth metals and precious metals.

Yesterday, the world had to take notice when the Middle East oil states held secret meetings with China, Russia, Brazil, France, Japan and others to discuss selling oil against a basket of currencies and gold, rather than US dollars.  The US was left on the sidelines.  Pretty much everyone is denying that these meetings took place, but where there is smoke, there is fire.  It is the logical progression for the rest of the world.

They cannot attack the US militarily and win, so they have to attack the US’s biggest asset and its biggest weakness: the reserve status of the dollar.   It is America’s soft underbelly.  I don’t believe that these countries are moving away from the dollar because they do not like the US or want to see the US fail.  They are moving away from the dollar because they are scared.  They are scared that the US will continue to print huge amounts of money to inflate away its massive $90T+ unfunded liabilities (yes, T=trillion) and national debt, making their dollar denominated securities go down in value.  I have seen people say that America’s unfunded liabilities between the debt, medicare and social security is over $120T, or about 10 years of GDP.  You can see their fear in skyrocketing gold, which hit a record high of $1,045 per ounce today.  The oil producing nations are tired of pumping their tangible, natural resources in exchange for dollars that are not backed by anything.  They are simply looking out for themselves.

Taken together, these country’s actions are a frontal assault.  They are saying “enough is enough.”  They do not want to accept our paper, which is backed by nothing, in exchange for their manufactured goods or natural resources.   Unless the US takes decisive action to stop the erosion of the dollar, I fear that the US will lose its biggest competitive advantage: the reserve status of the dollar.  If this happens, our standard of living is fated to go down.