USD: Reload

During World War II the U.S. economy was the only one in the world that was not bombarded. On the contrary, the economy was strengthened by gold in exchange for tanks and food for which the American government shrewdly charged U.S. dollars. This is precisely how the “gold standard” for the dollar was introduced. According to the standard, one U.S. dollar was set at the equivalent of approximately 0.89 grams of gold (US $35 per one troy ounce). Thanks to the war, the dollar became the world’s main currency with all prices of goods re-calculated in dollars for international settlements. Starting from the early 1950s, countries and private enterprises began buying dollars for international settlements in export/import transactions.

Figuratively speaking, a two-storey financial house was built. On the first floor were goods and raw materials from all over the world. On the second floor were dollars to bolster international trade. Such a status of the dollar allowed the U.S. Federal Reserve System (the central bank of America) to print money in larger volumes than the country actually needed.

In order to avoid galloping inflation, the U.S. government developed a stock market, which was a virtual trading floor where the value of assets could fluctuate, but would always grow in the long run. As a result, the excess amount of dollars from the commodities market was injected into the stock market, thus slowing down the rise in prices of real goods and services. The stock market is the third floor in the financial house and is larger than the commodities and money markets combined as it constantly grows in monetary terms thanks to derivative financial instruments such as derivatives, forwards and futures. These are contracts that allow one to play on the future prices of goods.

However, there appeared to be so many instruments on the upper floor that it became very difficult to control the prices of goods on world markets. In order to create a shortage of dollars, the FRS brought down the pillars of legislative regulation on the third floor in 2000, which precipitated the financial crisis in the U.S. eight years later and most of the money on the third floor was buried under the avalanche.

According to the assessments of Dmytro Shmetilo, General Director of the British investment bank Argo Capital, investors around the world have already lost over US $15 trillion as a result of the stock market crash.

The disappearance of such a large amount of dollars from circulation resulted in a shortage on world markets, which subsequently led to a drop in the prices of raw materials and commodities such as coal, iron ore, oil, real estate and technologies and allowed the U.S. to renew printing of its currency to preserve the status of a superpower.

Attempt at changing the order of the day

The main economic lever of the U.S. is manipulating the dollar. The large mass of dollars in circulation allows the U.S. to regulate the prices of goods made in other countries and create a crisis whenever it is convenient without suffering from it. To protect themselves from such voluntarism on the part of the U.S., many countries do not discard the idea of strengthening their currencies. For example, OPEC countries are considering converting oil quotations from U.S. dollars into dinars.

Russia can use the ruble in its relations with partners and buyers of energy resources, while China and the European Union, as rumor has it, even discussed the introduction of a joint currency called “eurani” to replace the dollar.

“The introduction of a regional currency would allow Persian Gulf countries, Russia and China to mitigate the influence of the U.S. and afford them the opportunity to independently dictate the prices of raw materials and energy resources,” academician Viktor Naidyonov stressed.

Needless to say, such a state of affairs is totally unacceptable to the U.S. When exporting countries tried to sell their goods for their own currencies, the destruction of competitive currencies became the most important task for the U.S.

To understand how this was done, NBU Deputy Governor Oleksandr Savchenko suggested looking back to September 2008 when Lehmann Brothers, one of the largest investment banks in the U.S., filed for bankruptcy. This particular bank was the most important player on the loan default swaps market (CDS/CDX), otherwise known as insurance in cases of a borrower’s bankruptcy.

After the Lehmann Brothers declared bankruptcy, the investors lost insurance on all debt liabilities of borrowers in developing countries. That became the beginning of the global withdrawal of capital from those markets and a rise in the demand for the dollar.

“Now, when we can look back to the start of the crisis, there is a sense that it was provoked by the U.S. in order to destroy the zones of influence of regional currencies that threatened the dominance of the dollar in global trade,” Savchenko noted.

The strengthening ruble and Euro rendered the purchase of dollars unprofitable for investors. “After the value of regional currencies versus the dollar crashed, the priorities of investors changed and they once again gave preference to the U.S. currency, given that the value of assets in dollars is dropping, while assets in regional currencies are growing in value,” says Serhiy Yaremenko, an advisor to the Minister of Economy. He says that in such conditions introducing new regional currencies such as the Euro is nonsense. “The U.S. dollar continues to dominate,” the expert assures.

The U.S. could do away with the dollar only in the event that its economy completely crashes in the throes of the current global financial crisis. In order to not repay its enormous foreign debt of US $13 trillion to other countries, the U.S. could simply introduce a new currency, for example, the Amero.

However, the probability of this happening is quite low, as there are too many countries in the world that have nuclear weapons and would not want to lose the money they invested in the U.S. economy.

For example, an advisor of the Central Bank of China Yu Yongding already demanded guarantees that the U.S. treasury bonds that China bought in the amount of US $682 bn be redeemed.

However, even if the U.S. refuses to repay its debt, nothing will keep the countries cheated by the U.S. from not recognizing the Amero as the new currency for international trade and using dollars instead.

“This will be the cheapest way out of the situation and a chance to finally create a common independent currency like the predecessor of the Euro – the ECU (European Currency Union, a non-cash currency used in the European currency system from 1979 to 1998). Seeing as the dollar denominations of 1, 2, 5, 10, 20 and 100 bills account for less than 1% of the non-cash dollar circulation, losses to the world economy from exchanging this amount of money into a new currency will be minimal,” says Yaremenko, adding, “The U.S. clearly understands such risks, which is why nobody will give up paying in dollars.”

By Oleksandr Dubynskiy