Well, well, well, it has finally arrived! The New York Times printed an Op-Ed piece by Jared Bernstein, former economic advisor to Joe Biden and part of the economic team for the White House from 2009-2011. In it Mr. Bernstein floats the trial balloon filled with highly flammable gas which suggests the U.S. should “voluntarily” give up the throne of issuing the world’s reserve currency.
You had to know sooner or later something like this would come out. Clearly China, followed by the rest of the world and including most all of our allies already know the dollar will be replaced …but, someone had to “warm up” the U.S. population for the inevitable. Before going any further, please understand that the average American has not one clue about currency fluctuations, cross rates, or what a strong or weak currency even means to trade, trade deficits, purchasing power or anything else. The only thing the average American knows is how much more a trip to the store or anywhere else costs now versus last week or last year …but, someone (in this instance Mr. Bernstein) has to put the story out there so no one can say “but they gave us no warning.”
The word I would use to describe his use of “voluntarily giving up as issuer of the reserve currency” is “cute,” very cute. Actually the word should be “disingenuous” because the privilege and power that goes hand in hand is enormous and any nation would love to have this ability. (And please don’t tell me China doesn’t want this privilege, they just don’t want it now or right away but they are certainly posturing to assume this role). Issuing the reserve currency means many things. It means you do not need to accumulate foreign reserves for trade because your currency IS the reserve. It means you don’t have to (but certainly should) work to produce goods for trade because you can simply print some money for settlement. It means your interest rates are lower and currency values are higher than they otherwise would be if you didn’t issue the reserve currency. It means you can wage war without paying for it by simply printing up more money. It means your standard of living is far higher than it otherwise would be based on your domestic production and trade.
No country in all of history ever “gave up” reserve currency status willingly. It either waned away and or was taken away. In this instance Mr. Bernstein says it will be “relatively easy” and the only pain may be just 1% more inflation than we already have. Really? He says instead of the 1-2% inflation we currently have, it might go to 2-3%, I can only laugh at this! First off, inflation is not 1-2%.
First, if inflation was still being calculated the way it was 30 years ago, it would be reported very close to 10%. Second, giving up the privilege to issue the reserve currency would immediately devalue the dollar. My guess is the dollar would devalue 25-35% in value for trade terms. This would immediately make foreign produced goods cost 1/3rd to 50% more overnight …THEN his definition of inflation would set in. You see, if the dollar is replaced, foreign central banks will immediately sell dollars to purchase whatever the new reserve currency is (even if it’s a basket) …”selling” dollars will push the “price” (purchasing power) of the dollar down, this is simple economics. Dollars will also come rushing back to the U.S. since they will have a hard time “spending” outside of our borders. Can you imagine what trillions of dollars crashing our shores will do to the prices of goods?
Before going any further, let me explain “inflation” to you …and I assure you Mr. Bernstein knows this all too well. “Inflation” is defined as the growth rate of money supply. The BLS has bastardized the definition to mean “CPI” which they can and do change, massage or outright lie to come up with an inflation rate …to their liking. The “inflation” has already happened as the money supply has exploded in recent years, giving up the reserve currency status will only expose the reality. Foreign goods will explode in price (and so will domestic goods as producers will be able to raise prices) in literally an overnight experience. I will call this “pent up inflation” if you will for a lack of a better term.
This is simple to explain, the dollar has been the reserve currency. It also has been THE ONLY currency that oil could be traded in. Both the reserve status and “petro” status have worked to support the “price” of dollars. If/when both of these props are pulled, WHOOSH! …the dollar will trade lower to a price on its own merits rather than those which include artificial demand. This is your “inflation” that can be felt and quantified, this is your immediate and overnight drop in the standard of living.
As I’ve said, “they” know this but they also know the world is moving away from the dollar so “face” must be saved. It’s a nice plan with a few exceptions. One exception is the fact we will no longer be able to stick our noses in everyone’s business all over the world, our military will have to shrink by necessity. Another factor that’s not so “nice” is along with a lower living standard …we will have to get back to work producing the things which have now become unaffordable to buy from foreigners (this is actually a good thing). Thirdly, if the dollar continues to exist, it will mathematically need to be “killed off.” I say this because “we” collectively owe too many of them to ever be paid off. The only way to pay them off is to devalue even further or outright kill it in lieu of a new currency.
I will say in a nutshell, we have overspent, over borrowed and “over abused” our privilege as reserve currency custodian so badly that the most likely fate to “giving up” our privilege will result in banana republic status. Think about it if you will, what does a banana republic produce? Bananas right? What does the U.S. produce? Dollars …and here’s the catch, what use will our biggest “product” be worth when it is no longer sought after?
It does not have to be this way forever, in 10 to 20 years the U.S. can rebuild, retool and restructure but it will be painful and the standard of living will have a MAJOR setback. The “mindset” of the nation must change from one of entitlement to one of self-sufficiency. “Entitlement” has been “learned” (taught) for 50 years or more now, this will take a long time to “un learn.” Unfortunately, part of the unlearning process in my opinion will include mass riots, unrest, violence and part of the herd being culled either through cold, heat or lack of food. Don’t like what I am saying here if you don’t want to but it is the truth, the writing is on the wall and now even Washington is spelling it out for you.