End of Dollar Era? (July 2011)
With
NASA’s domestic manned space programme on the scrap heap and a
looming austerity poised to squeeze medicare and social security, Obama could well be the president who closes the book
on the legacies of Kennedy, Johnson and Roosevelt. However, is the heritage of another Democratic predecessor also threatened- Truman's 1945 Bretton Woods Act that established
the American dollar as the world’s reserve currency? In April, at a
George Soros funded conference calling for a "second Bretton Woods",
Keynes’s biographer, Robert Skidelsky, opined about the
paradox of a single country owning the world’s reserve currency, which "sooner or later must lose credibility" as the home country runs ever
larger deficits to provide the world with enough liquidity (1). At the same conference Nobel Prize winner and
former World Bank Vice President Joseph Stilgitz called for a new "global" reserve
currency to “take off the burden of any single country” (2). An
increasing number of international actors
are agreeing. At the ninth meeting of the Shanghai Co-operation
Organisation in June, Iran's Vice President Mohammad-Reza Rahimi
proposed setting up a new regional currency due to the rising volume of
trade among member states (3). More significantly at a spring summit
meeting, the five BRICS nations – Brazil, Russia, India, China and new
member South Africa –called for “an eventual end to the long reign of
the US dollar as the world’s reserve currency” and a greater role for
Special Drawing Rights in “a broad-based international reserve currency
system.” (4) And then there’s gold. As the "barbarous relic" breached
£1000 a troy ounce this month central banks appear to have caught the
bug. Russia has raised its bullion holding to over 824 tonnes -7.8
percent of total reserves- and plans to continue buying at a rate of a 100 tonnes a year. Banco de Mexico governor Agustin Carstens, who applied to be the next IMF head, increased his country’s
holdings by more than 12 times in the first quarter of 2011 (5). In a
footnote to NATO’s Libya venture, in the months leading up to
intervention Gaddafi is reported to have called on African and Muslim
nations to sell oil and other resources only for gold
dinars (6).
Perhaps
then it is unsurprising that Obama has been photographed bowing to the
leaders of creditor nations, begging the question posed by former director of the National Economic Council, Larry
Summers: “How long
can the world’s biggest borrower remain the world’s biggest power?” But
given that America’s fiscal and financial challenges would be
insurmountable if the dollar were not the world’s reserve currency, the
question could easily be “What will America do to defend the reserve
status of the dollar?” The move to a new global monetary system may be
inevitable, the hope will be for a peaceful transition, but
history warns us to prepare for upheaval.
>>>The Recovery- American Ugly 