Dollar as a World Currency
Unparalleled economic growth compared to the rest of the world has been the experience in the United States economy since the founding of our republic.
However, since the "dot-com" bubble in 2001 and the real estate meltdown in 2008, the recovery has been sporadic at best.
While the unemployment numbers in 2014 have improved, great concerns remain about the declining labor force participation rates which have somewhat masked the true unemployment numbers. The unemployment rate of 5.9% seems encouraging yet the labor force participation rate dropped to a near historic low of 62.7% from a recent average in 2004-2008 of over 66%.
Concurrent with the anemic labor rates, the national debt has exploded to nearly $17.9 Trillion in October 2014 from $5.8 Trillion in January of 2000.
The explosion of debt when coupled with record low federal government interest rates and conflicting labor rates sets the perfect storm for an economic disaster unseen in our lifetimes.
The disaster is the potential for the United States dollar to no longer be accepted as the world reserve currency.
The economic war against the United States has already begun in terms of an extensive cyber security campaign against our nation. The next face of the battle will be the brewing controversy of the dollar as the world reserve currency.
The Chinese government has already announced that it intends to have the renminbi (RMB) as the world currency. The renminbi (RMB) is the official currency of the Chinese.
The value of the dollar being the world currency is clearly known and presented by Dallas Federal Reserve head, Bob McTeer. His analysis shows the value and risks of being the world currency for a nation to be:
• Allows the United States to focus on a clearly domestic agenda
• Reduces transaction costs for Americans
• Enhances monetary policy for the U. S. with our ability to "sell" U. S. dollars and debt to foreign nations, and
• The U. S. faces the risk of having "too much" debt which would jeopardize the world currency status.
While the world currency status appears to be a purely academic exercise, it is not. The extensive unfunded liabilities and the massive explosion of U. S. federal debt combined with a "toxic" Federal Reserve balance sheet with the $5 Trillion Quantitative Easing program, puts the domestic policy of our nation in significant risk.
Currency only has value as a fiat currency when "buyers" of the currency have the perception that the currency is backed by a nation that has fiscal discipline and the ability to control its spending.
Currently, due to world instability, the U. S. is a default currency meaning that there is no where else for anyone to go. The lack of options for a replacement is changing rapidly and will accelerate unless the United States gets its economic house in order.
In addition to the Chinese, the BRICS nations (Brazil, Russia, India, China, and South Africa) have experimented with setting up a world currency alternative although those efforts have recently suffered a setback with the developing economic problems in those nations.
The net result though is that the lack of consistency in the term "full faith and credit of the U. S. government" and our exploding national debt is putting the world recovery as well as our own in great jeopardy.
The Federal Reserve ending of quantitative easing in October 2014 is a step in the right direction.
The federal government must significantly reduce the federal deficit and national debt at the same time. Should the short term interest rates rise to the pre-2008 levels, however, the interest on the current federal debt will immediately increase the annual deficit in the United States to over $1 trillion per year further reducing confidence in the dollar as a world currency.
Some may ask why we should care. The answer is quite simple.
The loss of world currency status for the United States would have the following immediate effects on our citizens:
• Higher inflation rates in our nation
• Greater currency volatility
• Higher national borrowing costs and increasing deficits
• Potentially negative effects on international competitiveness for U. S. firms and our workers
There is still time for the U. S. to retain our leading status as the world currency. Fiscal discipline is all that is required which is much easier said than done. Fiscal discipline requires a national will to be responsible and to lead the world to greater economic stability.
Therein lies the rub. This administration is embarrassed by our world leadership and lacks the desire or drive to resolve this problem.
The result our nation risks over very way of life over this fundamental shift in belief of our role in the world. We will suffer and so will the world unless voters act swiftly in 2014 to reverse our irresponsible fiscal and monetary policies.
Col. Frank Ryan, CPA, USMCR (Ret) and served in Iraq and briefly in Afghanistan and specializes in corporate restructuring and lectures on ethics for the state CPA societies. He has served on numerous boards of publicly traded and non-profit organizations. He can be reached at [email protected] and twitter at @fryan1951.
