With the world struggling to recover from the most destructive war ever, the US led the way in restoring a stable monetary system. At Bretton Woods in 1944, the US convened a conference where the future stability of the global monetary system was laid out, based on US dollars as the world’s reserve currency. Bretton Woods established the institutions that governed the world financial system for the next 75 years, including the International Monetary Fund (IMF), the World Bank, and the International Bank for Reconstruction and Development. This dollar-denominated global monetary system underpinned the Pax Americana which endured well into the 21st century.
Today the end of US dominance in the global monetary system is on the horizon and this will have profound implications for business and personal finances. No one will be untouched. The dethroning of the dollar after 75 years of primacy will not happen overnight but it will happen. The arrival of BRICS (Brazil, Russia, South Africa, India and China), soon to be joined by 40 other countries, will change our world. The new BRICS currency, backed by gold and commodities including oil, will be attractive. If they can pull it off, this will emerge as a powerful reserve currency with its own exchange mechanism.
The end of Bretton Woods and the US dollar as the world’s prime reserve currency
This will mark the end of Bretton Woods and the US dollar as the world’s prime reserve currency. As the US dollar becomes less needed to lubricate trade and international settlements, excess dollars will come flooding back to the US creating inflation. US assets will become targets for takeover and America’s capacity to run deficits will shrink.
How and why did it happen?
There are iron rules associated with being the world’s reserve currency. These include not overspending, protecting the inherent value of the currency, and not politicizing the mechanisms underpinning the global financial system.
Protected by its Reserve Currency status and outright hubris, the US broke all these rules, especially in the last 20 years.
US deficits are out of control and this will lead to a terrible day of reckoning. These bills must ultimately be paid. Runaway deficits depreciate currency, putting at risk everyone holding US dollars, including the American People. Over-spending by government fuels inflation, always and everywhere, and this is what we are experiencing now. Each day the buying power of the dollar shrinks. Sooner or later, foreigners will look to hedge against this depreciation and that means dumping dollars for other currencies or commodities.
The US has also broken the third rule of a reserve currency “don’t politicize your monetary system”
Part of the US deficit problem is that America funded the defense of North America, Europe, much of the Middle East, and parts of Asia. Many of these protected allies are rich and yet remain unwilling to fund their own defense and this includes Canada. Meanwhile, the US taxpayer is picking up the bill, which means less capital available for infrastructure, education, productivity-boosting technology and investment.
The US has also broken the third rule of a reserve currency “don’t politicize your monetary system” and here considerable damage has been done. In recent years, the US has abused its reserve currency status time and again to impose political consequences on enemies and friends alike. Every time a nation is subject to sanctions or denied access to the SWIFT (Society for Worldwide Interbank Financial Telecommunications) such as Russia recently, this means they cannot employ their dollars to do business. If they cannot use their dollars, then why hold them?
US smashed the centuries old ultra confidential Swiss banking system and did so with utter indifference to the collateral damage
It is not only Russia that has been bullied by US monetary authorities. Allies have also felt also felt the sting of the lash. The Swiss banking system, quiet, confidential and secure for two hundred years, came under US assault. To expose US tax cheats, the US smashed the centuries old ultra confidential Swiss banking system and did so with utter indifference to the collateral damage.
These same tactics and threats have been applied to many allies over the years and they are fed up. You cannot open and close access to the global monetary system on a whim and expect people to trust it.
No wonder so many nations are looking for an alternative in BRICS. Saudi Arabia has long been a bulwark for the US dollar as the only means of buying Saudi oil. This provided a powerful wall in defense of the US dollar as a reserve currency. The fact that Saudi Arabia is moving away from the dollar as a means of purchasing oil should have everyone in Washington running around with their hair on fire. That everyone seems to be treating this with a yawn is astonishing. Maybe Euripides was right when he wrote “whom the gods would destroy, they first make mad.”
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