Dollar Shock!! UN Panel Says World Should Ditch the Dollar
Posted by slowsmile March 21, 2009
In a startling article from Reuters, I have just read how a specialist UN Economic panel - The U.N. Commission of Experts on International Financial Reform which is working with the US government - has advised that the US Dollar should no longer be the World’s Reserve currency. The main reason given for this economic bombshell is that the American government is clearly unable to to deal with its own raging financial problems and political fires as well as with the difficult and conflicting problems associated with the world reserve dollar. This would also indicate that the current status of the American economy is much worse than is currently being reported - since America may well be heading for a period of economic depression or even bankruptcy. As I’ve been saying in some of my articles, many foreign countries are both fed up with the unreliable volatility and inflation of the dollar as well as from the poor paying US Treasuries which could lead to major countries dumping both dollars and Treasuries - which would cause a run on the greenback and lead to even worse economic conditions for America, perhaps even causing hyperinflation. My guess is that other regional areas and countries like China, Europe, Russia and the Middle East have already been made aware of this change in dollar status some time ago, and that America is hoping for a gracefully managed and economically painless withdrawal of the dollar as a world reserve currency.
Notably, and under the media blanket of the current AIG furore, this shocking and huge dollar news has not been widely reported as yet. More details are likely to become known after the G20 Summit in London in April.
The likely economic impacts of this changing dollar event will be:
- The American govt. will have more economic leeway to deal with its current financial mess.
- Dollar value will slide considerably(possibly by 40%-50%) or the US govt. may well devalue the dollar soon in anticipation. Good for US exports, very bad for mainstreet Americans. A liklehood of high dollar inflation is still a very real possibility.
- Initial short term impacts on the release of this news will be a mass exodus from the US markets, a de-leveraging in all US stocks, bonds and dollar denominated assets.
- Due to the inevitable reduction in purchase and holdings of US Treasuries and dollars, the American government will now have to find another way of paying its debts and generating credit. The American govt. will, therefore, have no choice but to tax its own citizens and businesses more heavily. American financial habits and lifestyles will be forced to change radically because of this event.
- Regional currencies will spring up. As I have reported - both China(Yuan) and the middle East(Khaleeji) will be introducing their own regional currencies soon. Russia will also be using her rouble currency as a regional reserve asset.
- Gold and other precious metals, as a currency asset, will become much more important. The demand and price of gold and silver will go up because these new regional currencies will be much more competitive than a single currency hegemony.
- Any currency that is not associated with a regional currency, like the UK pound sterling, will be left out in the cold and suffer badly. Currencies like the Euro - already a regional currency - may initially do well(as a safe haven).
- The price of oil will rise.
- Economic power and wealth will inevitably shift and move from the West to the East.
Here is the Reuters article:
LUXEMBOURG (Reuters) - A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.
Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.
Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.
“It is a good moment to move to a shared reserve currency,” he said.
Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value — though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.
Some analysts said news of the U.N. panel’s recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.
“Speculation that major central banks would begin rebalancing their FX reserves has risen since the intensification of the dollar’s slide between 2002 and mid-2008,” CMC Markets said in a note.
Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.
It has significantly reduced the dollar’s share in its own reserves in recent years.
GOOD TIME
Persaud said that the United States was concerned that holding the reserve currency made it impossible to run policy, while the rest of world was also unhappy with the generally declining dollar.
“There is a moment that can be grasped for change,” he said.
“Today the Americans complain that when the world wants to save, it means a deficit. A shared (reserve) would reduce the possibility of global imbalances.”
Persaud said the panel had been looking at using something like an expanded Special Drawing Right, originally created by the International Monetary Fund in 1969 but now used mainly as an accounting unit within similar organizations.
The SDR and the old Ecu are essentially combinations of currencies, weighted to a constituent’s economic clout, which can be valued against other currencies and indeed against those inside the basket.
Persaud said there were two main reasons why policymakers might consider such a move, one being the current desire for a change from the dollar.
The other reason, he said, was the success of the euro, which incorporated a number of currencies but roughly speaking held on to the stability of the old German deutschemark compared with, say, the Greek drachma.
Persaud has long argued that the dollar would give way to the Chinese yuan as a global reserve currency within decades.
A shared reserve currency might negate this move, he said, but he believed that China would still like to take on the role.
Avinash Persaud and his team will be presenting their assessment and recommendations to the UN next Monday. If you want to watch Avinash Persaud’s current assessment of the US Dollar, here is the link to the Reuter’s Video(this video is not available on YouTube or Google Video yet.):
Avinash Persaud Video - UN Panel says World should Ditch the Dollar
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March 21st, 2009 at 12:44 pm
Despite the UN and other anti-Americans the US dollar will NOT be replaced by some other amalgam or otherwise. There are those who relish anything that hurts the USA abd hekods anyone else. They are in fact what this is all about — hurting the USA.
March 21st, 2009 at 1:10 pm
Murray…How can this special UN Panel - who are described in the Reuter’s article as working with the full compliance of the US govt. - be described as anti-American? Unless, of course, the American govt. is also anti-American - Is this at all possible?
And the article never said that, in the near future, the dollar would be would be replaced by any other single currency. The article described that the dollar was to be replaced by a basket of equal, regional currencies(probably to include the US Dollar as one of the regional currencies).
And its also worth emphasizing that America will not be the only country that will be economically hurt if the dollar falls.
March 21st, 2009 at 1:30 pm
This American would welcome the plans explained in the video of Avinash Persaud CEO of Intelligence Capital and Member of the UN Panel.
He says this is a good time to tackle the problem of global imbalances wherein whenever one country wants to save (get richer) some other country has to run a deficit (Historically and today that is the US). With a basket of currencies which I whole heartedly support, no one nation must fund the savers and the savers will not be exposed to the currency of just one country. The reality is that all exporters do not want the dollar to decline, and are mad that it has declined some and do not want it to decline anymore. They want to continue their weak currency policy so that their countries can become richer at the expense of the US public, who all the while has been successfully seduced by cheap goods
I expect the governments and the populations behind major currencies like the Yuan, Yen, Euro and others will need to adjust away from an export at all costs policy and begin consuming if they want their current overcapacity to be absorbed and unemployment managed successfuly.
He said this impending change which he predicts could leave it’s imprint on world financial affairs for 50 years will embody recognizing systemic risk quicker, accepting and dealing with the inevitable booms and busts. Not recognizing these risks and planning for them he says has more to do with worldwide circumstances today than any of the frauds which the public and politicians are focusing on as the main source of our problems.
He further says bank secrecy practiced in so many areas of the world outside of the US will have to give way to more transparency and major countries will have to be careful not to continue their tax competition. He did not say why, but I think it is a road to the bottom no one really wants to reach.
My view on any US bankruptcy, mentioned so frequently in so many ways, is that if the US is or becomes bankrupt soon, most of the rest of the world will join it. So many countries have relied too long (during the past 50 years or so) on the US to help them create the wealth they have and because they have invested in US assets or assets of other countries deriving their wealth on the US, they will feel our pain.
China is not exempt from this, it is just the poster boy most likely due to it size and dictatorial government, to be the only one to be consider to replace the US currency. They may want that “power”, but would it be wise to jump from the Dollar to the Yuan? The answer is no. An internationally sanctioned basket and multiple individual currencies or smaller baskets, are more likely to allow the world to deal most effectively with it’s diversity.
No doubt the US Dollar will be invited to be one of the weighted currencies in the new basket. If we are give a choice, I might vote against it, for then, the US will be able to do what makes sense for it’s own citizens without an obligation to consider so much how it affects the rest of the world so much. I’d pass the patton to a new team, not just another team member.
My hope would be that this new reality and continued improvements in technology will allow the US to move away from political correctness and toward a new pragmatism and seriously tap our significant in ground carbon resources to a great extent, simultaneously supporting all the other many forms of domestic energy. We will need them all unless depression reigns. The strong dollar problem could return as the world sees that we are less and less reliant on foreign sources of energy a large part of our external imbalances. And if we are not trying to pull some part of the world out of it’s problems, or keeping the oil shipping lanes open at our expense, maybe we can resume domestic manufacturing on a serious, no longer disadvantaged basis.
March 21st, 2009 at 1:36 pm
I read the article - a “basket” is nonsense as I said and simply mincing words.
The U.N. and its syncophants and supporters is largely and has consistently been anti-American. Its SECRETARY GENERAL revealed much when he described the U. S. last week as a “dead beat.” His apology is insufficient because his statement if so reflective not only of his skewed views.
For half a century the nations have lined up for Americans money - notably the UN; then slapped its face. This is simply another example.
March 21st, 2009 at 1:47 pm
Well said Chief… This currency change I’m sure will be stormy anAmerica as well as other countries will be economically hurt to begin with but, like you say, it should lead to a fairer currency system. I’m pretty certain that the dollar will be one of the regional currencies too and don’t forget that all involved regional currencies will be of equal stature and importance, which is a much fairer deal.
I also agree with what you were saying about really focusing on the financial problem - instead of being continually side-tracked by the symptoms - such as the AIG bonus furore.
I also liked the interview with Avinash Persaud, quickly described and to the point.
March 21st, 2009 at 2:05 pm
Murray…You’re completely entitled to think that a basket of regional currencies is nonsense, but, as the Reuter’s article points out, the American govt. complained to the special UN panel that it could not manage both her internal financial problems as well as the world reserve dollar because the external policies conflicted so much with her internal policies. Something had to be done, a solution found, otherwise America might have had to suffer even worse financial turmoil. Conversely, other foreign countries have complained of the instability and volatility of the US dollar.
Changing to a basket of regional currency equals seems a good compromise to me.
March 22nd, 2009 at 3:34 pm
Hello,
Thanks for sharing.
In a “weighted” basket of currencies what does a Federal Reserve Note, a Euro note, a Canadian Note, and a Mexican 10 peso note weigh? Will regional currencies back there money with G and S? If it is all about confidence, is dipping out on the role of “World Currency’, a role mind you, these elite have spilled copious amouts of blood to maintain,) much of a confidence builder? As an American citizen I am offended by everything our Nation represents yet powerless to stop its hideous fall to disgrace.
Perhaps you could look at this?
What if?
A World governing body made owning gold onerous? Could the AIG bonus fiasco play into any benefit from a commodities rise?
Example: if in fact my initial abstract premise is valid
That the 15 fold increase in the domestic money supply translates to a 10 fold increase in golds price/oz(Gibsons Paradox, Greshems Therory bad, chases good)? If so what bars a high tax or other such penalty/duty on physical precious metals owners? Now since the valve has been opened(money supply expansion/inflation)what would you or could you suggest?
A Fiat money supply in addition to the curse of a infinite numerical capacity also would seem to have an infinite number of consequences and perils.
In todays world I don’t think the Global powers will allow Gold and Fiat to coexist. Which side will win? History says Gold, but History also says Humans never stop saying “This time it will be different” ,
no?
March 22nd, 2009 at 7:45 pm
Thanks Mike…With the death of a single currency hegemony, gold, silver are bound to rise in importance. With a competing basket of regional currencies, these precious metals will be the free market ’stabilizers’ of currency valuation. For years, with the world reserve dollar, the US govt. via the Fed, has been manipulating and suppressing the value of gold to further manipulate things like the price of oil. With gold and silver backing currencies - this manipulation would all stop. There is a good chart that clearly illustrates the stability of gold compared to the dollar in my article “The Future of Gold” at this link:
http://slowsmile.hypocrisy.com/2009/03/14/the-future-of-gold/
It has been suggested recently that if the situation does get economically bad for the dollar, the best hedge would be to buy gold or silver bullion(before the dollar crashes). Do not buy EFT(paper gold stock) or leased gold - these are effectively Ponzi schemes based on the dollar which will not be a useful hedge if the dollar trashes. You can already do this on the internet - the two best bullion sites seem to be The Perth Mint or GoldMoney, which are respectable sites where you can physically buy gold and silver.
March 22nd, 2009 at 10:02 pm
Bill, you say the Fed “has been manipulating and suppressing the value of gold to further manipulate things like the price of oil.” What specific policy actions did the Fed use to accomplish this?
You make it seem like such a bad thing if true! Were I a net exporter of oil like Saudi Arabia I might see it that way, but otherwise I can’t imagine most of the world would view it as anything but a great benefit.
March 22nd, 2009 at 10:26 pm
Chief…Here are two links to the Market Skeptics site, one of my favourite economic sites:
http://www.marketskeptics.com/2009/03/how-governments-manipulate-gold-market.html
http://www.marketskeptics.com/2009/03/more-details-on-gold-suppression-by.html
These links give very detailed descriptions and reasons for manipulation of the gold markets - the US govt. being one of the greatest manipulators
And it is a very bad thing. This is how, for instance, the US govt can control the oil price. Great for the West, but not so great for the Middle East oil producing countries. Why should any country be allowed to manipulate the price of any commodity to its own advantage? Surely this makes a mockery of the so-called free markets. If you disagree with this then, when China rises in power, she will also successfully be able manipulate the price of oil and commodities for her own benefit and noone else’s. Is this OK? The implication here is that if the US govt. can do it, then why can’t China?
March 23rd, 2009 at 12:12 am
Bill you missed my point entirely. Did not China benefit from lower oil prices allegedly brought to you by the big bad US and the other foreign governments who participated in market stabilization? Maybe China participated.
You seem to ignore the overt market manipulation during the last 30 years by the OPEC oil cartel. Their manipulation is so public you do not even think of it for what it is, collusion that has as it’s sole goal increasing the price of oil by manipulating supply. Any increase in prices was not paid only by the US but every poor person in every poor corner of the world. And you weep for the oil producers who are mostly corrupt regimes whose population has little to no chance at self determination? Why not for those who cannot afford oil?
As for China, it is already one of the biggest manipulators of markets in so many ways. As an example that no one seems to care much about for now, are the two different stock markets China controls resulting in large differences in prices for the same stock. Recently the difference in their largest oil stock was that one market traded at a 52% discount to the other. FOR THE SAME STOCK RIGHTS, one named A-shares, they other H-shares. No other difference. Please do not weep for the lack of current Chinese market manipulations like you seem to for OPEC.
China is famous for restricting access to their markets while selling freely to the US, because they are an undeveloped country with vast wealth. Their wealth is currently overstated, except perhaps for their 700 Billion or so US treasury holdings which still have liquidity and interest payments still made on time. Their stock markets as well as all foreign policy initiatives are conflicted with their planned public stock ownership, controlled by a very few people with absolutely no transparency. They have way too much production capacity without a continuing and growing US consumption, vast corruption, vast differences in income disparity, vast suppression of free speech. I’m vasted out.
With more power they will continue to do what they do so well, looking out for their own interests as any government should do. They will probably be better at it than the US or most any other country.
If the hopes of some that the US will fade into the past come true, many more will someday long for the “corruption” of the US versus the New China Order. Just see how they treat their own, not just today but throughout history. The only reason they have not been overly controlling on the world stage so far, as the US has been for instance in South America, is that they were not busy with a foreign policy too oriented to a cold war with Russia since the end of WW II, and mostly because they spent their energy beating up one or more of their 50 ethnic groups or moving them out of cities by force then back in, or vice versa. Millions killed. Kind of like in Russia even without the help of Hitler.
BTW: I followed one of your links and spent some time there. Likely those guys sell a lot of newsletters or advertising and probably do OK speculating in the gold market, which based on the information available on their site, by now must be totally controlled by the Middle East and China. If so, you have seen nothing of manipulation yet.
March 23rd, 2009 at 1:44 am
Chief…Perhaps China has benefited from America’s actions, but the mere fact that all commodities are forced to trade in US dollars(via Breton Woods) therefore gives an immediate advantage to the US - no exchange rate payments in conversion of currencies. In UK & Europe - a US gallon of gasoline cost about $5.45. In America it is about $2.50(and oil prices are the lowest they’ve been in years). America also has way lower taxes than UK or Europe but some of that cheapness is due to the dollar advantage of being the world reserve currency.
And I agree, China has closed her markets from outside influence for her own protection. But she will soon have to open up these markets when she introduces her currency as the Asian reserve currency. The yuan will also probably be the strongest and most stable currency in the world - inarguably, because China is the world’s manufacturing powerhouse, and actually has considerable savings (about $2.4 trillion of reserves and hidden reserves) and as you say, China will probably manipulate the markets more and, since everyone thinks America’s manipulations are the norm, I guess China’s time is coming around.
I agree that the Chinese Communists have committed gross crimes against their own people, but it will be America’s economic weakness - from being a very powerful world watchdog and the major world creditor, to becoming what she is today, the major world debtor, running with Keynesian and Monetarist economics - both economic ways promoting that both running a deficit and debt is good for a strong economy(UK has done the same).
The point here is that America, and no one else, created her own economic problems from her own arrival as the world’s primary debtor nation. This has led to her own economic weaknesses and dangerous dependencies which are all mainly derived from her huge debts - certain other countries that have also followed America closely (like the UK) will also suffer equally.
To me it’s like a major and exciting chapter in history is, sadly, coming to an end.
March 23rd, 2009 at 3:23 pm
Slowsmile - no offense but you should consider that the use of the USD for international settlements is not imposed as much is it the ONLY currency that works. the US is the largest economic block in the world. to boot, Canada, Mexico and Brazil combined with the US are larger than Asia and blow the EU to smithereens. no one takes the UN seriously. they’ve missed the mark on every international crisis, political as well as economic, are mainly considered to be useless and are staffed with people who hold allegiance only to their “status” as glorified bureaucrats. if a country wants to go off the USD, fine, go. lastly, if the tide of quantitative easing is rising everywhere, why single the US out? doesn’t it impact everyone equally? in the end, you can base whatever you want in whatever currency but it is he or she who consumes that drives the economy. try selling Audis in Manhattan quoted in Euro. good luck.
March 23rd, 2009 at 11:29 pm
Fred…Thanks for your comments.
Many people have this same view - that the US dollar is the only currency that works for international settlements. If this is the case then why has China been trading on its borders for the last ten years in yuan - in Myanmar, Cambodia, Vietnam, Kazakhstan, Tajikistan, Kyrgysztan, Russia, Mongolia etc. And Russia has been trading her oil and gas in anything but the dollar for some years now.
Foreign governments have complained for some time about the volatility and inflation of the dollar and its consequent instability. For many years the US govt. and Fed have looked after the US dollar with “benign neglect”. This is well known.
So, from the point of view of other countries using the dollar, it plainly isn’t working very well and hasn’t done so for over 10 years.
But it isn’t just because of these problems that the UN panel has recommended a basket of world (regional) currencies. As I keep saying, the US has complained to the UN panel that it was unable to manage both the external dollar as well as its internal financial crisis because these internal and external policies conflicted so badly. Example of economic policy conflict - the US govt. has determined that it needs to use quantitative easing to increase its monetary base to alleviate the financial crisis - but by doing this, China, Japan, The Middle East etc. who hold US Treasuries will have their “savings” eroded by the inevitable inflation of the dollar and are complaining about this. So, the point here is that the US govt. What I am saying here is that the US govt. WANTS a change in status of the US dollar to a regional currency to alleviate these serious policy conflicts.
And if regional currencies do come into being - South America will most likely not join with North America as a region. For two reasons - first, SA is rich enough in oil and in her own resources to stand alone as a currency region. Two, SA is decidedly socialist and, in some areas ant-American(Ecuador has just elected a socialist leader).
And since China will most likely align itself with both Russia and Australia - both awesome regions for energy and raw resources - China is equally likely to become the economic and untouchable powerhouse of the world.