Most reports in the US media are quite optimistic about the US economy “on its way to recovery”, but the fact is that there is an even bigger crisis lurking that will have ripple effects all over the World. A specific event is going to take place in America and other countries in the near future. An event where the savings of millions might be wiped out because of the present monetary policy.
That painful loss will only be one of the many consequences of the US dollar no longer being a major World currency reserve.
The meaning of the monetary equation is that debts don't just disappear. Much less when they are in fact increasing hugely, as it is in fact happening in the US (see chart). And one of the major problems resulting from excessive debt, wrong budgetary policies and monetary devaluation is that commodity prices are about to soar.
US Currency will lose value, maybe not against other important currencies that will suffer similar devaluations, but against the purchasing power of individuals and corporations.
What we do not hear anyone reporting or discussing in the field of public opinion is the ominous fact that in the present situation, even if all the US citizens were to be taxed up to 100% of their income, the US will still not be able to balance the federal budget as it is being projected. Policy makers ignore for political expediency that with each additional budgetary commitment the debt crisis worsens.
The US dollar is the major World's reserve currency. Therefore, the US government is simply printing more dollars to cover its budgetary waste. It is the easy solution. And that is what the US government has been doing since 2009 with no apparent limitation or regard for future consequences. Today the US owes more money than all other World countries together, while the Treasury is repaying the debt by printing trillions of new dollars (see chart).
Once the US creditors figure out that such policy is untenable, World finances will collapse. Creditors will not accept additional debt in US dollars and will no longer recognize the present value of the US currency. Prices will start skyrocketing because other countries will start demanding payments in something other than US dollars. That will make the consumption-led way of life of all major industrial countries impossible to maintain. This is a very real scenario that is not far into the future but it is actually developing right now.
The US has huge advantages over most other countries because the dollar is a reserve currency. But it is not immune forever to a major debt crisis that will then be much worse than the ones taking place in Greece, Ireland, Portugal or Italy. Why? Because the US will not have any other country capable of bailing it out. Simply put, when countries get too far in debt or when they consume much more than they produce an economic collapse is unavoidable unless the wasteful policies are corrected in time. A serious correction policy has not even been initiated in the US. And the level of production will not increase while the US maintains the highest corporate tax rates of the industrial world.
A similar situation forced the British Pound to lose its predominant role as a World reserve currency after WWII. While the country was deeply in debt because of the war, Britain's leaders wanted to "spread the wealth around" and embarked in many non-productive projects of social welfare. They started spending more than they produced. The Labour Party had to devalue the British pound by 14% overnight in 1967. One of the worst decades in modern British history had just started. By 1975, inflation had skyrocketed 27%. Workers strikes were common because they would not accept lower salaries and many firms and corporations went bankrupt, creating more unemployment.
Britain had been a global superpower for over 150 years, but when they started intentionally devaluing their currency, things went straight downhill. Such a disastrous course is comparable to the one being followed today by the US. On these days there are 43 million Americans receiving food stamps as part of the welfare system. And this number has been increasing steadily during the last three years. They are already 14% of the population. From June 2010 to June 2011 the value of the US dollar has plunged 12% (see chart). That only means that the prices of all commodities will soon skyrocket in America. Therefore, everything Americans consume will be more expensive. The problem is compounded because many Americans are in turn less productive.
Such irresponsible policies are already collapsing individual State economies all over the US. A total of 46 States out 50 faced almost insurmountable budget deficits on 2011. Some deficits reached beyond the 180 billion dollar mark. State and local governments have in fact collectively spent nearly a half a trillion dollars more than they were able to collect in taxes. And they do not even have enough funds to cover obligations for their public pension funds.
Other consequences to the US currency being further devalued (or even worse by losing status as the World's reserve currency) would be much higher interest rates that may skyrocket to levels even higher than those reached during the Carter Administration. The same will happen to housing prices. And the stock market will collapse. Credit will no longer be easily available. A situation such as this may result in another depression similar to the devastating one early on the last century.
Robert Fisk, who was once described by The New York Times as "the most famous foreign correspondence in Britain", recently revealed that "In the most profound financial change in recent Middle East history, Gulf Arabs are planning to end dollar dealing for oil, moving instead to a basket of currencies including the Japanes Yen, Chinese yuan, the €uro, gold and a new, unified currency planned for nations in the Gulf Cooperation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar." The World Bank President, Robert B. Zoellick, asserted that "The United States would be mistaken to take for granted the dollar's place as the world's predominant reserve currency. Looking forward, there will increasingly be other options to the dollar". And the International Monetary Mund (IMF) went one step further by recommending for a new global world currency (the "Bancor") in a recent study titled "Reserve Accumulation and International Monetary Stability".
The danger is real, it is imminent, and the cure to this recession is to stop budgetary waste, allegedly to “stimulate the economy”. The only way out is a major increase in production and jobs. That is only possible if we help entrepreneurs to open new business and factories, to expand their existing interests and to be able to negotiate freely with workers about wages and benefits for their companies to be profitable while they open more jobs and adjust to provide decent compensation according to their ability to make money.
When free enterprise is promoted, more jobs are created. The effect of the resulting lower unemployment gives workers a stronger bargaining power to deal with employers about better salaries and working conditions. Government only role is the prevention of abuses – a proper monitoring mechanism, workers advocates and judicial action to make sure that workers/employers negotiations are fair.
The Catholic Church has taken the bull by the horns in a progressive document titled "Towards reforming the international financial and monetary systems in the context of global public Authority". This document precisely identifies the roots of a crisis that is not only economic and financial but above all moral in nature. In fact, as Benedict XVI notes, "to function correctly the economy needs ethics; and not just of any kind but one that is people-centered". When the markets move by the rule of ethics, close collaboration among workers and employers is possible because they respect each other and share mutual interests. Such close collaboration gives way to competitive products and services. On the contrary, government interference, more bureaucracy, additional regulations and more taxes will only make worse the impending disaster.