The Looming Obsolescence of the U.S. Dollar

[johnkarls]

.
The Suggested Answers to the Short Quiz were posted on our bulletin board (http://www.ReadingLiberally-SaltLake.org) last Monday, and quite a number of you have e-mailed me to ask about the comment in the 3rd paragraph of Suggested Answer 8 = “the need for any ‘actual’ (vs. ‘virtual’) currencies will soon disappear – even for the ordinary commercial transactions of individuals.”

Both currently and historically, there have been many nations whose economies have NOT operated on that nation’s currency.

(1) Historical examples have been Nazi Germany which, following the worthlessness of the Reichsmark, effectively ran on British Pounds and Russia which, for more than a decade following the demise of the Soviet Union in 1989, effectively ran on U.S. dollars (indeed, if you had been stupid enough to exchange any dollars for rubles when arriving at a Russian airport, you would soon discover to your chagrin that nobody would accept them, and you’d wind up just throwing them away and hoping you had enough U.S. dollars left to survive your trip!!!).

(2) There have always been quite a few small countries that do not issue their own currencies and effectively run on another nation’s currency.

(3) 12 of the 27 members of the European Union run on the Euro rather than their own national currencies. One of the 12 (Greece) is teetering on the edge of bankruptcy and its outstanding debt obligations are virtually worthless.

(4) In 2009 during California’s continuing flirtation with bankruptcy, it was forced to pay government workers and suppliers in IOU’s which effectively became an unofficial currency worth less than “face value” in terms of dollars.

*****
Some countries, both historically and currently, have provided that their currencies are exchangeable and/or secured. For example, the United States dollar used to be on “the gold standard” with the value of the dollar pegged to $35/ounce. Originally, the dollar was secured by gold reserves in Fort Knox sufficient to permit all the dollars in circulation to be exchanged for gold.

However, even in those days, the U.S. ran a balance-of-payments deficit with the rest of the world with many nations demanding gold for their dollars. For quite a few years, the U.S. remained willing to exchange gold for U.S. dollars even though it no longer had sufficient gold reserves to redeem all of the dollars outstanding (exchangeable but NOT secured). Finally, the U.S. gold reserves had dwindled to such a paltry amount that U.S. government was forced to stop redeeming dollars for gold.

After a country such as the U.S. “goes off the gold standard” (or whatever its currency had previously been exchangeable for), its currency is nothing more than a zero-coupon unsecured debt obligation.

Whether the zero-coupon unsecured debt obligations (aka “currency”) of a particular country have any value depends on the perception of holders of those zero-coupon unsecured debt obligations (aka “currency”) regarding the willingness of the citizens of the country that has issued the zero-coupon unsecured debt obligations (aka “currency”) to tax themselves sufficiently to repay on a timely basis any conventional debt obligations outstanding (currently $13 trillion in the case of the U.S.).

If a country is unable to repay on a timely basis its conventional debt obligations, then the value of its zero-coupon unsecured debt obligations (aka “currency”) also “goes in the toilet” as foreign holders panic in their rush to dump their plummeting dollars and/or buy up whatever U.S. “real assets” are still obtainable for the plummeting dollars before they become absolutely worthless!!!

As was noted in Suggested Answer 8, it is often reported in the media that the U.S. government has recently begun “guaranteeing” the Chinese, the Japanese and the oil-producing nations that hold vast amounts of U.S. debt obligations that (1) they can opt to be repaid in Euros at the exchange rate prevailing when the debt was acquired, and/or (2) the interest payable on the debt will be subject to a minimum equal to the rate of inflation of the U.S. dollar.

This may “keep the wolf from the door” for a short period of time, but the perception of the Chinese, Japanese and oil-producing countries will soon be that U.S. citizens are unwilling to tax themselves sufficiently to honor the new “stop gap” promises to repay U.S. debt obligations in Euros at yesterday’s exchange rates and/or to honor the inflation indexation as the value of the dollar “goes in the toilet”!!!

When that point is reached, the U.S. government will be forced to default on its outstanding debt because it is unable to re-finance it by issuing new debt obligations.

Then the currencies of other countries will fill the vacuum – though the U.S. will have to work very hard to generate a foreign-trade surplus to obtain the foreign currencies.

Sorry to have been so verbose in “setting the stage” for understanding my prediction.

My prediction???

Private currencies will become prevalent!!!

What do I mean???

Please consider two things –

(1) Money-market funds on which the owners can draw by writing “checks” or using what appears to be a credit card are already prevalent.

(2) Virtually all businesses accept at least Mastercard and Visa – which often draw on a checking account or a money-market account rather than drawing down a credit line.

At the moment, all major cards including Mastercard and Visa are denominated in terms of the local currency in which the card is used – for example, if you travel around the world, your Mastercard statement will reflect that you bought zillions of things in, say, a dozen or more different currencies, and reflect the various rates at which Mastercard and/or Visa translated those currencies into the currency of your home country in computing your new balance due.

However, if the U.S. dollar “went into the toilet” it would take quite a long while for the U.S. to earn enough foreign currencies so that its economy would be able to run on, for example, the Euro.

But virtually overnight, the units in money-market funds could begin to serve as private currencies and compete to fill the vacuum.

For example, a Merrill Lynch money-market fund might consist of Euro-denominated debt obligations of both American and European companies.

In this regard, the American companies with “real assets” that have intrinsic worth (bricks and mortar, technology, etc., etc.) would still be able to borrow, though the debt would no longer be denominated in obsolete dollars which have now “gone the way of the dinosaur”!!! Indeed, the media is currently filled with news reports regarding Greece’s teetering on the edge of bankruptcy to the effect that many Greek companies are credit worthy even though the Greek government is not. Those Greek companies have no trouble borrowing Euros or U.S. dollars or Timbuktu whatevers – even though the Greek government is unable to do so.

It would not take long for Mastercard/Visa to draw on the new Merrill Lynch post-dollar money-market fund. And for, say, Morgan Stanley to form a post-dollar money-market fund on which your Mastercard/Visa could also draw.

It is true that for psychological reasons, the Merrill Lynch and Morgan Stanley post-dollar money market funds might be denominated, say, in Euros.

But it would not be very long before the public becomes sophisticated enough to view Merrill Lynch post-dollar money market fund “units” and Morgan Stanley post-dollar money market fund “units” as the functional equivalent of “currencies” – except that they are interest-bearing currencies rather than the old-fashioned zero-coupon unsecured debt obligations (aka “currencies”) that governments used to issue.

Before anyone sends me any more e-mails, yes, the Merrill Lynch “units” and the Morgan Stanley “units” would have different values that would fluctuate with respect to each other.

But just like today’s world in which virtually all merchants accept two or more charge cards, in tomorrow’s world merchants would state their price in two or more “units” (Merrill Lynch units and Morgan Stanley units and probably several more competing “private currencies” as well).

Probably a good subject for a Hollywood movie!!!

Except that we’d have to work in some sex and gore!!!

And, of course, the mandatory “car chase” (or at least a “poor man’s” car chase such as someone trying to copy computer files before someone else erases them).