November 26, 2022

Ron Paul – “The World Will Abandon The Dollar As The Global Reserve Currency”

In August Ron Paul accused the U.S. Treasury “guilty of counterfeiting dollars” by virtue of its monopoly power on money in America.  Paul noted that the expanding role of the Federal Reserve in monetizing government debt has resulted in a massive debasement of the purchasing power of the U.S. dollar.

Continued reckless money printing by the Federal Reserve and massive government deficits will ultimately result in the loss of confidence by holders of  U.S. dollars.  Ron Paul sees the U.S. dollar inexorably losing its status as global reserve currency unless the dollar is backed by precious metals or commodities.

Evidence of the horrendous loss of purchasing power by the U.S. dollar is not hard to understand.  The average citizen sees it everyday as higher prices and lower incomes relentlessly lower our standard of living.   The systematic destruction of the U.S. dollar’s purchasing power can be seen in a chart published by the Federal Reserve Bank of St. Louis.

How Long Will the Dollar Remain the World’s Reserve Currency?

By: Congressman Ron Paul

We frequently hear the financial press refer to the U.S. dollar as the “world’s reserve currency,” implying that our dollar will always retain its value in an ever shifting world economy.  But this is a dangerous and mistaken assumption.

Since August 15, 1971, when President Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold, the U.S. dollar has operated as a pure fiat currency.  This means the dollar became an article of faith in the continued stability and might of the U.S. government.

In essence, we declared our insolvency in 1971.   Everyone recognized some other monetary system had to be devised in order to bring stability to the markets.

Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it– not even a pretense of gold convertibility! Realizing the world was embarking on something new and mind-boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC in the 1970s to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence backed the dollar with oil.

In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite radical Islamic movements among those who resented our influence in the region. The arrangement also gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as the dollar flourished.

In 2003, however, Iran began pricing its oil exports in Euro for Asian and European buyers.  The Iranian government also opened an oil bourse in 2008 on the island of Kish in the Persian Gulf for the express purpose of trading oil in Euro and other currencies. In 2009 Iran completely ceased any oil transactions in U.S. dollars.  These actions by the second largest OPEC oil producer pose a direct threat to the continued status of our dollar as the world’s reserve currency, a threat which partially explains our ongoing hostility toward Tehran.

While the erosion of our petrodollar agreement with OPEC certainly threatens the dollar’s status in the Middle East, an even larger threat resides in the Far East.  Our greatest benefactors for the last twenty years– Asian central banks– have lost their appetite for holding U.S. dollars.  China, Japan, and Asia in general have been happy to hold U.S. debt instruments in recent decades, but they will not prop up our spending habits forever.  Foreign central banks understand that American leaders do not have the discipline to maintain a stable currency.

If we act now to replace the fiat system with a stable dollar backed by precious metals or commodities, the dollar can regain its status as the safest store of value among all government currencies.  If not, the rest of the world will abandon the dollar as the global reserve currency.

Both Congress and American consumers will then find borrowing a dramatically more expensive proposition. Remember, our entire consumption economy is based on the willingness of foreigners to hold U.S. debt.  We face a reordering of the entire world economy if the federal government cannot print, borrow, and spend money at a rate that satisfies its endless appetite for deficit spending.

Gold, Silver, Platinum and Palladium All Decline On Week

It was a dismal week for precious metals as prices declined across the board.  Platinum declined by over 3%, palladium and silver by 2% and gold by 1.5%.

As measured by the London PM Fix Price, gold declined on the week by $22.75 after a gain of $8.25 last week.  After closing Wednesday at $1,552.50 gold was hit by selling that drove the price down by $37.75 at Friday’s close.  Gold has now dipped below its 50 day moving average as it has done on numerous occasions since early 2009 but remains solidly above the 200 day moving average.  Since early 2009 the price trend of gold has remained in a solid uptrend and every sell off to the 200 day moving average was followed by significant upward price moves.  The 200 day moving average for gold is currently at $1,410.

 

Gold - Courtesy Stockcharts.com

Silver declined modestly on the week, losing $0.66 and has remained in a tight trading range over the past two weeks between $36.22 and $34.68.

Platinum was down $55 on the week, closing at $1,751, after losing $78 in the previous week.  Palladium was also weak, falling $15 to $739 after retreating $61 in the previous week.  Both metals have large industrial uses and sold off as numerous economic indicators suggest a slowing world economy.

Precious Metals Prices
PM Fix Since Last Recap
Gold $1,514.75 -22.75 (-1.48%)
Silver $34.73 -0.66(-1.86%)
Platinum $1696.00 -55.00 (-3.14%)
Palladium $739.00 -15.00 (-1.99%)

Markets had been positioned for an improving economy, higher interest rates, higher inflation and additional monetary stimulus by the world’s central banks.  Since early May, the consensus has reversed considerably.  Commodity prices have declined substantially and U.S. interest rates, contrary to the expectations of many, have declined sharply.  Contributing to the sell offs in equity and precious metal markets were midweek comments by Fed Chairman Bernanke that, despite lower expectations for economic growth, the central bank had no plans for QE3.  Markets, confronting the loss of both fiscal and monetary stimulus along with slower economic growth, sold off sharply.

The Dow Jones has plunged over 900 points since early May.

 

DOW JONE - COURTESY YAHOO.COM

Commodities have tanked by 16%.

 

COMMODITIES - COURTESY YAHOO.COM

Oil, after peaking in early May at over $112 per barrel, has declined to the low $90’s.

 

OIL - COURTESY STOCKCHARTS.COM

Interest rates, expected to soar after QE2 ended, have declined substantially with the 10 year Treasury note dropping from 3.6% to 2.9%.

10 year treasury - Courtesy yahoo finance

 

The massive amounts of debt in the system can no longer be supported by economic growth.  Bernanke knows this which is why he is terrified of deflation.  The collapse of asset bubbles have resulted in debt that is now unsupported by collateral value, threatening the solvency of banks and countries.

As the current market sell offs turn into a rout, the Fed will again turn to the only option left – money printing on a scale that will dwarf QE2.  As reported by Bloomberg, former Fed Governor Lyle Gramley said,  “The hurdle for QE3 is obviously high. But if large downside risks materialize and the economy slows enough so that the unemployment rate starts to increase again, QE3 would have to be considered.”

The Federal Reserve can’t create jobs, increase incomes, reduce unemployment or maintain the integrity of the dollar.  The one thing the Fed can and will do is produce dollars in infinite quantities to prevent a 1930’s type debt induced deflationary depression.