Tag Archives: American banks

The Declining Value of the Dollar

It is inevitable that such excessive spending accompanied by high levels of national debt will have a negative effect on the countries concerned. The US in particular, is undoubtedly headed for rocky waters. As I have already explained, only twenty years ago the US possessed the largest net foreign assets in the world. Today, it is the world’s largest debtor. At one time the dollar was seen as the international currency of exchange. Increasingly this confidence is a thing of the past as the currency continues what seems to be an endless downward spiral. Just look at the statistics. The foreign exchange reserve of the dollar has fallen from 82 per cent to 52 per cent. The number of countries that currently peg their own currency to the US dollar has been cut in half. Furthermore, the currency has lost 95 per cent of its value against gold in the last fifty years, and the value of the Swiss franc as compared to the dollar has tripled in the last twenty years.
Surely, the writing is on the wall. At the very least we can expect further debasement in the US currency, if for no other reason than to devalue the massive debt carried by the US government. Even a government inspired devaluation seems increasingly likely. Such major devaluations of the US dollar have already occurred twice in the past. The first came in 1934 under President Roosevelt. He simply declared that the dollar was worth 70 per cent less than it had been previously, effective immediately. At the same time, Congress passed a law that prohibited Americans from exchanging dollars for gold. The politicians did not stop there, however, and to save their precious jobs went on to ban Americans from owning gold entirely. This ban on gold stayed in effect for the next forty years.
Then again in the 1970s the dollar plummeted. Much like today, foreign banks of the time began to lose faith in the dollar. They asked the US to honor its promise that US $35 was indeed worth one ounce of gold. In short, they asked the US government to put its gold where its mouth was. Soon the US had a problem as its gold reserve began to run out at an alarming rate. President Nixon stepped in, prohibited banks from exchanging dollars for gold and then upped the price of one ounce of gold to US $42.22. In other words, he devalued the dollar an additional 20 per cent. The result is that the dollar became a completely unbacked fiat currency, created out of nothing more than thin air.
Since such actions of the early 1970s, the value of the dollar has continued to decline steadily and is now worth less than 70 per cent of what it was worth then. Although a fiat currency may be convenient for politicians, it offers little security to investors. Politicians realize that if they get into a jam they can always run the printing presses a little longer the next year. This printing of unbacked currency may well help out in the short term, but over the long term the consequences are inevitably nothing short of disastrous. History has shown that in the end every fiat currency one day becomes less valuable than the very paper it is printed on.
Is such a situation likely with the US dollar? Alarming as it may sound, the only realistic answer is an undeniable yes if the US continues to borrow at the rate that it has been. As the US national debt continues to grow, an increasingly large part of the annual budget must go towards just maintaining interest on that debt. During the US government shutdown, it was only a series of juggling moves that allowed the US to pay US $30 billion worth of interest that was due. As Robert Rubin, US Treasury Secretary said, “This is no way for a great nation to manage its financial affairs.” What happens if the next time dear old Uncle Sam finds himself in such a predicament, such juggling moves are no longer possible? Worse still, what happens if in the not too distant future the US government finds itself unable to generate the actual amount needed to cover such debts? The result in either case is obvious, faith in the ability of the US to pay off its debt will be lost. This lack of faith will set off a series of events with disastrous consequences.
First, foreign investors who currently hold more than US $500 billion in US debt will demand a refund, causing the dollar to plummet. Then as the dollar loses value, investors who hold an estimated US $5 trillion in accounts outside of the US will realize that the dollar really is not the best currency in which to hold their funds. They will begin to cash in their chips, trading in dollars for other more stable currencies and gold. The inevitable result, a run on the dollar that will bring it crashing to the ground. Of course, legislation will be enacted to prevent the dollars trapped in the US from escaping. Perhaps another banking holiday will be declared, such as the one of the 1930s that prevented all Americans from gaining access to their funds stored in American banks.