Dollar Hegemony Is Ending

I have not published a chart of US public debt in some time, having mostly concentrated on household and corporate debt with its various alphabet-soup permutations (CDOs, CLOs, CDSs, etc.).

However, after almost two years of financial sector bailouts (handing out borrowed public money to mega-rich junkies addicted to sophisticated gambling) the amounts wasted are hitting the books in a rush. They give full meaning to the title of this blog (see chart below, click to enlarge).

Sudden Debt

Public debt has increased by $2.5 trillion since just the end of 2007, when the current Great Recession is deemed to have started. It now stands at $11.7 trillion and represents 83% of GDP, up from 62% at the end of 2007.

It stands to reason, therefore, that the entire world is closely re-examining the status of the dollar as its global reserve currency. Those that are most directly affected by such a flood of new dollars (remember, more debt = more dollars) are commodity producers who price their goods in our currency, chief amongst them the oil producers.

According to Reuters, Gulf Arabs are meeting in secret (please see P.S. below) with representatives from Russia, China, Japan and France in order to agree on a basket of currencies that will be used for the daily pricing of crude oil. This is very different - and much more important - than merely settling oil trades in euro or other currencies, which is already taking place (e.g. Iran).

Unless the United States takes immediate and convincing steps to prove its commitment to a strong, valuable dollar, it will very soon face the catastrophic end of Dollar Hegemony, the foundation upon which it erected its economy post-WWII. It will lose the ability to finance its massive deficits on a global scale via its own printing presses and will be forced to accept a much lower living standard.

What should be done?

It is of paramount importance to realize that the Dollar Hegemony must end, anyway. Not because other global powers desire it, but because it is in our best interests. We ourselves should base our economy upon a more robust foundation, one that is in tune with today's challenges and opportunities: environmental and climatic change, resource depletion, transformation of energy sources and networks, transportation overhaul.

We must realize that energy security is no longer achieved by waging war in Central Asia and patrolling the sea-lanes with staggeringly costly carrier forces, but by developing renewable and inexhaustible local sources. Solar, wind, geothermal, biofuels - all must come into play as quickly as possible and transform the economy into one that grows based on infrastructure capital investment, financed with domestic saving.

Expensive? I say it is cheap, considering the alternatives.

And, anyhow, we should keep honest accounting books if we wish to compare prices honestly. Once all of the external costs of Dollar Hegemony are included and properly apportioned (defence, healthcare, environmental degradation, finance) I doubt anyone in his right mind would want to keep it going - apart from those benefiting directly from it, of course. But even they have children , don't they?

____________________________________________________

P.S. The Reuters story mentioned above has already -within hours- changed title to "Oil states say no talks on replacing dollar". It is originally based on reporting by Robert Fisk, the legendary Middle East correspondent whose book The Great War for Civilisation: The Conquest of the Middle East I highly recommend.

I am sure Bob Fisk would never stake his reputation on a story of such obvious importance unless he was absolutely certain of its validity.

Comments

[locksmith:]

You are right about debt but wrong about bigger picture. Most European countries have far more public debt than US.
ALL currencies are fiat - not backed by anything real - $ just happens to be the biggest - in the end countries like US (that produces 83% of its own energy) will have advantages over countries like Ireland and Switzerland that have huge debts and small resources (however, American social pathologies - addiction, bravado, entitlement, etc are much worse than elsewhere).

This is skirmish in the larger battle of denominating transactions in things that are real.

Oct 06 10:46 AM

[CLH:]

Kind of a senseless article. Basing our economy on green religion sounds like leftest nonsense.

Oct 06 10:49 AM

[Sudden Debt:]

On Oct 06 10:46 AM locksmith wrote:

> You are right about debt but wrong about bigger picture. Most European
> countries have far more public debt than US....

Sure, as % of GDP some do, but certainly NOT the big ones like Germany and France.

And, in fact, absolute size does matter. There is not a single country in the world whose government owes nearly $12 trillion AND issues the global reserve currency.

Please consider the meaning of "reserve currency". Who wants to hold on to rapidly depreciating money as a "reserve"?

Oct 06 11:03 AM

[dhansen548:]

Dollar hegemony is ending and with it, American military hegemony.

Our national leadership probably needs to learn how to beg for money in Chinese.

Oct 06 11:06 AM

[rich168:]

Another disguised Stimulus is in the OFFING....

The Federal Reserve is keeping the Printing press warm and ready....

Oct 06 11:13 AM

[OldFordTruck:]

Domestic natural gas should help support the transition to a more renewable energy economy. We should have started converting our transportation system over to it years ago. Higher oil prices and loss of the reserve currency will help push it into the mainstream. 10 years would be enough time to build more nuclear power plants....assuming we have the funds to build them!

Oct 06 11:15 AM

[billyboy54:]

" Kind of a senseless article. Basing our economy on green religion sounds like leftest nonsense."

only if you're a right wing nitwit......

Oct 06 11:35 AM

[Windsun33:]

The US dollar has been "demising" since at least the 1970's, and I am still waiting for it to happen.

Nearly all other currencies have problems of their own, such as a lack of transparency and/or artificial government pegging. And not sure why the Euro is so often mentioned, considering that the state of most European economies is worse than the US.

Oct 06 12:06 PM

[Mad Hedge F...:]

vhu Of course you knew it was going to happen like this. After churning around just below the old high, and sucking in as many profit takers and short sellers as possible, gold blasted through to a new high for the year of $1,038. Never mind that the triggering event is complete balderdash, a story in Britain’s Independent newspaper asserting that the Middle East is holding secret global talks to price crude in the yellow metal or other currencies (click here for story at www.independent.co.uk/... ). It didn’t hurt that Australia cut its interest rates by 0.25%, the first G-20 country to do so. There probably isn’t enough gold in the world to finance more than a few weeks of global oil production. Total gold holdings would only fill two Olympic sized swimming pools. But never let the truth get in the way of a good trade. The confirming moves couldn’t be more ubiquitous, with the Canadian, New Zealand, and Australian dollars all up big, commodities strong, and silver also going ballistic. Regular readers will all recognize these as old friends of mine, core longs that I have been strongly recommending since the beginning of the year. I have been trying to get investors into gold since it was at $800. If you aren’t in gold by now, I can only tear my own clothes and flagellate myself for my abject failure to convince you of gold’s merits. US government debt is exploding, and with foreigners holding a large part of our paper, the only way to get out of this mess is to devalue the dollar. It’s like Obama invited China’s president Hu Jintao to dinner at an expensive Upper East Side restaurant, and was suddenly called away by a crisis, leaving him with a big fat bill. Next stop $1,200, then $1,500, then the old inflation adjusted high of $2,400. If you want me to help you get set up to trade futures in any of this stuff, please email me at madhedgefundtrader@yah... If you want to know where to buy physical gold and silver in size with the tightest spreads over spot, check with the experts at www.millenniummetals.net

Oct 06 01:59 PM

[PDB2:]

"I doubt anyone in his right mind would want to keep it going - apart from those benefiting directly from it, of course. But even they have children , don't they?"

I thought those guys always eat their young... they act like they do....

Oct 06 03:03 PM

[Duude:]

I agree in part with the need to seek out alternative energy sources, and I acknowledge that our own addiction to foreign oil has resulted in enabling Muslim terrorists to wage terrorist attacks upon us and the rest of the world. But, I also know many of our own energy policy restrictions are rearing their ugly head now. We've made opening a nuclear power plant a rare event over the last 30 years. France gets 80% of their energy from nuclear plants while the US is at 21%. We've closed down most offshore oil exploration off the East and West Coasts for years. We've blocked exploration at ANWAR in Alaska. We're even blocking clean coal power plant development. Instead the government is pushing us to set up unreliable and expensive solar and wind energy alternatives. These alternatives in most cases would be set up miles away from population centers meaning we must build hundreds of miles of new infrastructure for already expensive and unreliable power. I've seen estimates of as much as $900 billion for this type of infrastructure improvement which is likely a gross underestimate if early government estimates are our barometer.

Oct 06 03:44 PM

[ryanclarke:]

The U.S. has +11 TRILLION dollars in public debt but the federal government only currently takes in as income - through taxes (mainly upper middle class income taxes I might add) - of about 2 TRILLION dollars. Now if my household income is $20,000 a year and I've got bills to pay other than paying down debt and my debt total is $110,000 maybe you can understand why I run down to the mortgage refinance company to get a new mortgage at a lower interest rate every time Bernake kicks the can down the road with a new interest rate cut. But the game's over AND EVERYONE KNOWS IT BUT WONT ADMIT IT because Bernake can only raise rates now. The Feds can only keep the game going by funding the Federal debt with massive amounts of short term Treasury notes of near ZERO percent interest rates which must continually be rolled over every 30 to 90 days. Do you think Japan is going to keep playing the game with the U.S. adapting the Japanese game plan? NO !!!!!! Japan is not and has not for some time ... which is why the Japanese currency has been gaining value on the U.S. for the past few months. Don't be surprised to see a Treasury auction "fail" .... at a time convenient for the power brokers currently ruling the game in Washington.

Oct 06 05:44 PM

[nobby73:]

Very well put, it really is that simply. I think we have all been expecting a failed Treasury auction at some point, when they stop fixing it. Given the ending of the Fed's overt purchase program, the time may be soon approaching. It's going to get pretty messy when it happens....


On Oct 06 05:44 PM ryanclarke wrote:

> The U.S. has +11 TRILLION dollars in public debt but the federal
> government only currently takes in as income - through taxes (mainly
> upper middle class income taxes I might add) - of about 2 TRILLION
> dollars. Now if my household income is $20,000 a year and I've got
> bills to pay other than paying down debt and my debt total is $110,000
> maybe you can understand why I run down to the mortgage refinance
> company to get a new mortgage at a lower interest rate every time
> Bernake kicks the can down the road with a new interest rate cut.
> But the game's over AND EVERYONE KNOWS IT BUT WONT ADMIT IT because
> Bernake can only raise rates now. The Feds can only keep the game
> going by funding the Federal debt with massive amounts of short term
> Treasury notes of near ZERO percent interest rates which must continually
> be rolled over every 30 to 90 days. Do you think Japan is going to
> keep playing the game with the U.S. adapting the Japanese game plan?
> NO !!!!!! Japan is not and has not for some time ... which is why
> the Japanese currency has been gaining value on the U.S. for the
> past few months. Don't be surprised to see a Treasury auction "fail"
> .... at a time convenient for the power brokers currently ruling
> the game in Washington.

Oct 06 05:57 PM

[bcncv:]

I agree with your thesis about uncontrollable spending, but I don't think it will result in a huge change in the status of the dollar.

For starters, there has to be something worthwhile to replace it with. And a basket of currencies makes no sense for a reserve currency. Fundamentally, a reserve currency is a currency that is used for a majority of cross border transactions. Business transactions aren't going to take place in 30% euros, 20% yet, 5 % swiss francs, or whatever they're proposing. That's just silly. And none of the other currencies out there serve as a suitable alternative for a variety of reasons.

The question that the article mentioned was the currency that oil is priced in. They can price it in any currency they want, and it doesn't change the value in relative dollars one bit. They could price it in gold, coffee beans, pork bellies, or foam pellets. A dollar will buy the same amount of oil. Not to mention they'd have a hell of a time getting the oil traders on board.

So yes, there is a lot of unsustainable debt out there. It will cause huge problems in the future. But the arab states and the Chinese only bring this up when they want something diplomatically. It won't change the dollars predominate use.

Oct 07 12:31 AM

[dollar bull...:]

they have to deny the article...last one holding dollars is a rotten egg. all the countries you mentioned are trying to accumulate commodities at a stable price, not drive the price of gold to all time highs.


On Oct 06 10:16 AM Living4Dividends wrote:

> Thanks for the article. I believe that the original article in The
> Independent and the now-deleted Reuters article were based on rumors
> and not actual sources. The fact that Reuters deleted the article
> gives credence to this argument.
>
> Japan, Saudi Arabia, UAE, and Russia have denied the allegations.

Oct 07 01:27 AM

[dollar bull...:]

our president should have been ordering more nuke plants and oil refin. as soon as this article hit the press...


On Oct 06 11:15 AM OldFordTruck wrote:

> Domestic natural gas should help support the transition to a more
> renewable energy economy. We should have started converting our transportation
> system over to it years ago. Higher oil prices and loss of the reserve
> currency will help push it into the mainstream. 10 years would be
> enough time to build more nuclear power plants....assuming we have
> the funds to build them!

Oct 07 01:30 AM

[dollar bull...:]

our president should have been ordering more nuke plants and oil refin. as soon as this article hit the press...


On Oct 06 11:15 AM OldFordTruck wrote:

> Domestic natural gas should help support the transition to a more
> renewable energy economy. We should have started converting our transportation
> system over to it years ago. Higher oil prices and loss of the reserve
> currency will help push it into the mainstream. 10 years would be
> enough time to build more nuclear power plants....assuming we have
> the funds to build them!

Oct 07 01:31 AM

[dollar bull...:]

Great post! I work in the industry, I hear on a daily basis about how bad of an investment gold is...its going higher and investors don't realize that it is due to confidence in the currency...nothing more. Moreover, if one were to look at a monthly chart, as soon as the dollar has broken the 13 MMA, it has sold off consistently for a minimum of 2 years without trading higher than the 13 MMA.


On Oct 06 01:59 PM Mad Hedge Fund Trader wrote:

> vhu Of course you knew it was going to happen like this. After churning
> around just below the old high, and sucking in as many profit takers
> and short sellers as possible, gold blasted through to a new high
> for the year of $1,038. Never mind that the triggering event is complete
> balderdash, a story in Britain’s Independent newspaper asserting
> that the Middle East is holding secret global talks to price crude
> in the yellow metal or other currencies (click here for story at
> www.independent.co.uk/...
> ). It didn’t hurt that Australia cut its interest rates by 0.25%,
> the first G-20 country to do so. There probably isn’t enough gold
> in the world to finance more than a few weeks of global oil production.
> Total gold holdings would only fill two Olympic sized swimming pools.
> But never let the truth get in the way of a good trade. The confirming
> moves couldn’t be more ubiquitous, with the Canadian, New Zealand,
> and Australian dollars all up big, commodities strong, and silver
> also going ballistic. Regular readers will all recognize these as
> old friends of mine, core longs that I have been strongly recommending
> since the beginning of the year. I have been trying to get investors
> into gold since it was at $800. If you aren’t in gold by now, I can
> only tear my own clothes and flagellate myself for my abject failure
> to convince you of gold’s merits. US government debt is exploding,
> and with foreigners holding a large part of our paper, the only way
> to get out of this mess is to devalue the dollar. It’s like Obama
> invited China’s president Hu Jintao to dinner at an expensive Upper
> East Side restaurant, and was suddenly called away by a crisis, leaving
> him with a big fat bill. Next stop $1,200, then $1,500, then the
> old inflation adjusted high of $2,400. If you want me to help you
> get set up to trade futures in any of this stuff, please email me
> at madhedgefundtrader@yah... If you want to know where to buy physical
> gold and silver in size with the tightest spreads over spot, check
> with the experts at www.millenniummetals.net/

Oct 07 01:35 AM

[MikeD71:]

"Solar, wind, geothermal, biofuels - all must come into play as quickly as possible and transform the economy"


Nope, lost me there, big time. This is not the answer, and unless I have inaccurate information, they fail wherever they are tried. And, it will only put us at a dangerous disadvantage because China and India, for example, will have nothing to do with it. Drill baby, right here...right now.

Oct 07 08:47 AM

[pdtor:]

Baby we ain't seen nothing yet. Yes the $$ needs to be taken down, what with all this debt and printing of money. But look at the alternatives in the long run. Would you trust China, Russia, Arabs, to run an honest pool. Yea that where I would put my hard earned money.The $$ is weak but for now no real alternatives. When the S.. hits the fan, and the world markets turn down who you going to turn to.I am bearish dollar long term, moderately bullish short term. we will muddle through this mess. Just we don't know hoiw it will turn out. For now safe haven is GOLD

Oct 07 08:58 AM