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Could the Dollar Fall?Could the dollar be challenged and replaced by another world currency? Will something that until recently was "unthinkable" become a reality? The global financial slump is challenging long-held assumptions.by Darris McNeelyTwo recent headlines in the Financial Times illustrate a continuing thought among world financial leaders. The first headline says, "Brazil and China Challenge Dollar." The second spotlights the lack of confidence in American financial leadership: "Dollar Falls as Geithner Hails Recovery Hopes." A warning shot is being fired across America's bow. Many want an end to the era of the dollar as the world's reserve currency. If that happens, your financial world will be forever altered. Could this happen?Similar remarks from Russia and a comment by Chinese Premier Wen Jiabao in March publicly expressed "worries" over China's significant holdings of U.S. government bonds. The Chinese have a stock of about $769 billion of U.S. treasuries. This ties China to America's good times and its bad times. By calling for the creation of another reserve currency, China, Russia and other nations seek to create an insurance for their economy against the problems generated when one country's economy goes bad. It also seeks to end the American dominance of the world economy. America's decline and China's rise fit their geopolitical ambitions. Ending the dollar's role in the world economy is not an easy matter. The Wall Street Journal wrote, "The technical and political hurdles to implementing China's recommendation are enormous, so even if backed by other nations, the proposal is unlikely to change the dollar's role in the short term. Central banks around the world hold more U.S. dollars and dollar securities than they do assets denominated in any other individual foreign currency. Such reserves can be used to stabilize the value of the central banks' domestic currencies" ("China Takes Aim at Dollar," March 24, 2009). Before the dollar, the British pound sterling formed the underpinning of the global economy. It took two world wars and several decades to change from the pound to the dollar as the world standard. Since the end of World War II, the dollar has been king. Although the current financial problems ignited in America have led to a global meltdown, it will take more than what we have already experienced to topple America from its current role. That is not to say it could not or will not happen. At the current pace of events, it seems it will not happen in the near term. Creating another world currency requires several factors to be in place. Research analysts at Stratfor Global Intelligence outlined what those factors would be: "As to a world beyond the dollar, the issue is that a reserve currency is not decided upon; it creates itself. Two things are needed to create a reserve currency. First, there must be sufficient liquidity to support a global system. That requires a central bank with an enormous amount of autonomy from a state government, and the U.S. Federal Reserve is unparalleled on this count. Not even the European Central Bank can compete. Second, the economy upon which the currency is based must be large enough to withstand fluctuations caused by other economies buying and selling its assets in massive amounts. Again, the United States is the only economy that potentially could qualify. "Part and parcel of any replacement of the U.S. dollar would be a large-scale abandonment of U.S. T-bills [treasury bills] as the core of Chinese currency reserves, which—as the conventional wisdom holds—would force intractable economic problems upon the United States. But a closer look reveals that this is not the case. First, selling U.S. T-bills en masse simply is not possible. Every seller requires a buyer, and the volumes at hand cannot be exchanged quickly. Second, starting down that road would cause the value of the securities in question to plummet, destroying the savings the Chinese have been building up for years. The so-called 'nuclear option' really is not an option at all" ("China's Calculated Currency Rhetoric," March 25, 2009). China has its own problems. The huge middle class created by their recent boom is beginning to experience layoffs and financial setbacks. The ruling Communist Party cannot afford discontent from this segment of its society. Once people have tasted materialism, they won't go back. For now it is in China's interest to blame a foreign power (America). It deflects attention from the home front. What would it mean for you?What would it mean for the American consumer if the dollar were no longer the world's reserve currency? Since the end of World War II, the dollar has been the dominant world currency. For most living Americans this is the world into which they were born. This is all they have known. Americans enjoy one of the world's highest living standards due to the stability and wealth created by America's dominant economic role. Yet the United States is now the world's largest debtor nation ($10.6 trillion). China owns more of that debt than any other nation. It is concerned the treasury bills and bonds it holds will become worthless if the dollar is devalued or the financial crisis does not turn around. They are playing a very dangerous geopolitical game with their calls for a new reserve currency. Here is what would happen in the United States if we woke up one morning to find the dollar was no longer the number one world currency. 1. Everything Americans import would cost more—everything. We would have to buy the new currency in order to trade in world markets. Last year's $4-per-gallon gasoline would quickly look like a bargain. 2. The credit market would collapse. Investors would flee toxic assets, further locking up the economy. 3. The U.S. Federal Reserve would print more money to combat the credit squeeze and the likely result would be hyperinflation, meaning higher prices for available goods. Remember the stories of Weimar Germany where it took a wheelbarrow full of money to buy a loaf of bread? Not pretty. 4. American power and influence in the world would seriously decline. Little understood today is the role of the economy in shaping and controlling world events. The dollar's place in the world adds incalculable weight to American influence. With the dollar diminished, that influence would evaporate. Russia and China are waiting for their turn to assume that power, but they would be sure to receive competition from the European Union. 5. Big losers from the fall of the dollar would include Japan and Latin America. Because they hold much of America's debt, China and the Persian Gulf states would see huge losses. Israel and Egypt would also suffer because of massive amounts of American aid they would lose. What this would mean to the Middle East calculus is unknown, but Egypt could be destabilized as a result. 6. World politics would be altered. The vacuum of power created would be contested. The EU, which would stand to gain from the fall of the dollar, would be among the chief contenders. China would no doubt make a play as well, but a number of factors would hinder its bid. Stability would rise out of the potential period of chaos when another power would became the global economy's main engine. America's time in the sun would be over. 7. American lifestyles would change radically. The end of cheap oil, low interest rates and deficit spending would mean a lower quality of life and higher taxes. What this would mean to the social fabric of the nation is unknown. But our way of life would dramatically change. This last point speaks to the character of the American people. Do they have the same qualities that helped a prior generation survive the upheaval of a Great Depression and World War II? America losing the pride of her power?Those pushing to create a different world are no doubt working hard to bring about the demise of the dollar and thus America's role in the world. In this publication we often speak of America losing "the pride of [its] power" (Leviticus 26:19). Military might is what we think of first in this regard; however, nothing would so radically change America's leading role in the world as the dollar losing its reserve status. For one, America's crippling foreign debt would get worse with decreased ability to finance the burden. In time the country would be at the mercy of those holding its obligations, with little room to maneuver. Economic slavery would be on the horizon. However, it's unlikely this is going to happen in the near term. China and several Arab states hold too many dollar-denominated instruments to see this change. They would lose too much. Right now the United States is too big, too rich and too powerful to fail. There is too much at stake on the global scene. That does not mean things couldn't change—and change quickly—but the proper circumstances have to be in place. It will not happen until the God of heaven wants it to happen. God has blessed America with its wealth, power and resulting prestige. He will move to change that when it fits His timing for His great plan for all the nations. Until then we have days to live and lives to touch. We have character to develop and mistakes to correct. We have days to love those close to us and, above all, time to discover God and His attention to the details of eternity, history and your life. Make the most of the time. WNP
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Keywords: dollar U.S. dollar China U.S. economy world economy world currency U.S. power
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