October 13, 2008by CaraTan

US Economy: An End to the US Dollar?

New York, 13 Oct. German, Russian, Iranian, and Venezuelan leaders have all warned that the US dollar will not be the global currency standard in the future.

German Finance Minister Peer Steinbrueck said that the financial crisis will mean that the US will “lose its financial superpower status”. He added that European and Asian currencies would move into positions of more global prominence.

Many Asian countries have massive reserves which should protect them from the impending financial turmoil. Russia does as well, and is considering using its large reserves to establish a gold ruble. The US ended the gold standard in 1933 with President Franklin D. Roosevelt. With the adoption of fiat currency, the gold standard is not used by any country anymore.

Putin blamed the US for the crisis, (amid his own massive financial crisis) and said that the US system which has “claims to leadership” is flawed.

All this is after Iran’s Ahmadinejad called the US dollar, a “worthless piece of paper.” He and Chavez are close due to their common anti-American sentiments and the fact that both Iran and Venezuela are big oil producing nations.

“They get our oil and give us a worthless piece of paper,” Ahmadinejad remarked, in an effort to convince other OPEC nations to adopt another common currency, like the Euro. “All participating leaders showed an interest in changing their hard currency reserves to a credible hard currency,”

Chavez added, “the empire of the dollar has to end. Don’t you see how the dollar has been in free-fall without a parachute?”

The fact is, these countries, as well as all the other US trading partners, are happily accepting US dollars for the goods they sell, Iran included. These countries, especially China, value the US dollar and US denominated assets more than they value their own products. They view the US dollar as a safe currency.

Fact: The strength of the US dollar = the strength of the financial institutions in the US. The two have a positive, direct correlation. Once countries lose enough faith in the US financial system and diminish their UD dollar reserves, we will know these leaders are finally putting their money where their (collective) mouth is. And even if this ever happened, they would further create a market for US exports due to the weak dollar…and they’d be buying again.

Many people talk about the US trade deficit as if it is a bad thing for Americans and the US government. But a trade deficit simply means that the US lifestyle and progress is voluntarily being financed by the rest of the world. The massive imports to the US mean that the US dollar is strong and in demand, and the US people can enjoy a wider variety of products at lower prices.

Furthermore, the sought-after US dollars which these foreign countries are seeking and earning often get invested in risk-free US assets like Treasury Bills and US bonds, hence financing the US government and banks.

Ideological and political agendas are behind the German, Russian, Iranian, and Venezuelan statements about the US dollar. Saddam said a similar thing. Many do not like the US imperialism, hubristic attitude, and general claims to economic and political superiority.

The US embargo on trade with Iran is further explanation. After the Iranian hostage crisis, all loans to Iranian banks were stopped, and up to $12 billion in Iranian assets in the US were frozen. Bill Clinton extended this embargo to the Iranian aviation industry and even threatened embargoes on other nations that trade with Iran. Including Iran in the Axis of Evil and protesting its nuclear development certainly added to the situation.

Given the fact that Iran has limited US trade dealings and US dollar transactions, it is easy for Ahmadinejad to entirely discount the dollar. The US had a trade balance of a measly $165 million with Iran (Jan-Aug 08), according to the US Census Bureau. This means that Iran buys more from the US than the US buys from Iran, not leaving Iran with any US dollar reserves.

For comparison, Turkey, which has approximately the same population as Iran (70 million), has a positive balance of about $4.6 billion from the US.

However, the story is different with Venezuela. The US is Venezuela’s largest trading partner, with the South American nation taking in more than $30 billion up until September of 2008, and this figure is only increasing.

Russia is in the same boat, bringing in almost $12 billion in the same period, and $15 billion in 2007. Germany pulled in more than $30 billion in that 2008 period and a total of $44.5 billion in 2007. China sucked up $167.6 billion in greenbacks from Jan-Aug 2008 and $256.2 billion in 2007.

The fact is the US dollar remains the predominant international currency in the world, and not even the financial problems in the US today have been able to discredit it. Until these nations stop trading with the US, and once the US trade deficit disappears, the bold statements these leaders have made will have some integrity.

Ron Portobello, EconomyWatch.com

blog comments powered by Disqus