Is The Dollar Our Greatest Vulnerability?

by Kevin D. Freeman on August 3, 2011

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In the past few days, we have had Vladimir Putin call the United States “a parasite,” and a Chinese ratings agency downgrade our debt. Here are the key quotes:

“They are living like parasites off the global economy and their monopoly of the dollar,” Putin said….“Countries like Russia and China hold a significant part of their reserves in American securities … There should be other reserve currencies.”

Although the United States narrowly avoided an unprecedented default following congressional approval of a last-minute compromise plan to raise the debt ceiling, China’s leading credit rating agency Wednesday downgraded U.S. sovereign debt after putting it on negative watch last month.

What appears to be bothering both the Russians and the Chinese the most is that despite America’s vulnerable financial position, U.S. Treasury bonds continue to attract capital. In fact, ironic as it seems, a crisis in the United States economy creates a panic move to cash which ultimately winds up buying Treasury bonds.

“There aren’t that many other markets that are as deep or as liquid as treasuries,” said Patrick Chovanec, an economic analyst with Tsinghua University in Beijing. “When they accumulate reserves, this is the only place they can put them.”

Fortunately, the fact that our currency maintains reserve status has allowed us to escape the worst of the 2008 credit collapse as well as the sovereign debt crisis now underway. Our concern is that we are acting as if this privilege will last forever. We believe such thinking is extremely dangerous and is protecting us from addressing the very serious underlying problems.

We must as a nation be aware that enemies of the United States are well aware that our reserve currency status has shielded us. We have received multiple reports of efforts to chip away and even directly assault that status. We cannot take it for granted especially during times of unprecedented debt increases and growing assaults on governments. Most economists find it unimaginable that we would lose reserve currency status citing few alternatives. But, even they must admit that we live in unusual times. Here’s just one example from CNS News, $2.4 Trillion is the Largest debt Increase in History:

The bill to increase the federal debt limit … would increase that limit by up to $2.4 trillion, which would be the largest increase in the debt limit in U.S. history by a margin of half a trillion dollars, according to records published by the Government Accountability Office and the Congressional Research Service. In fact, according to records published by the Congressional Research Service, if the current bill is passed and the debt limit is increased by $2.4 trillion, the two largest debt-limit increases in U.S. history would come in back-to-back years, both during the presidency of Barack Obama. Up until now, the largest increase in the debt limit was the $1.9 trillion increase passed by Congress and signed by President Obama on Feb. 12, 2010. That law increased the debt limit from $12.394 trillion to $14.294 trillion . . .The second largest historical increase in the debt limit was enacted on March 27, 2003, when President George W. Bush signed a law that lifted the limit by $984 billion—from $6.400 trillion to $7.384 trillion.

Here is another from a recent Blog:

Tuesday, August 2, 2011

The Average Life Expectancy For A Fiat Currency Is 27 Years … Every 30 To 40 Years The Reigning Monetary System Fails And Has To Be Retooled

David Galland notes:

Monetary scholar Edwin Vieira … pointed out that every 30 to 40 years the reigning monetary system fails and has to be retooled. The last time around for the U.S. was in 1971, when Nixon canceled the convertibility of dollars into gold. Remarkably, the world bought into the unbacked dollar as its reserve currency, but only because that was the path of least resistance. But here we are 40 years later, and it is clear to anyone paying attention that the monetary system is irretrievably broken and will fail.

Obviously, we need to address these problems. It is our opinion, however, that we are in the midst of a global economic war which makes the matter infinitely more serious. Quite simply, the most effective way to diminish American influence is by attacking our economy. At present, our top vulnerability is the reserve status of our currency. We have evidence of foreign players working diligently to set the stage to remove that reserve currency status.

Consider this from the Chinese Communist Party publication Qiushi (as reported in the India Times):

“Of course, to fight the US, we have to come up with key weapons. What is the most powerful weapon China has today? It is our economic power, especially our foreign exchange reserves (USD 2.8 trillion). The key is to use it well. If we use it well, it is a weapon…

China must have enough courage to challenge the US currency. China can act in one of two ways. One is to sell US dollar reserves, and the second is not to buy US dollars for a certain period of time, which will weaken the currency and cause deep economic crisis for Washington…
If China stops buying, other countries will pay close attention and are very likely to follow.

Once the printed excess dollars cannot be sold, the depreciation of the dollar will accelerate and the impact on Americans wealth will be enormous…” This approach, it said, is market-driven and it will not be able to easily blame China. The US will not be able to withstand this pressure.”

Others who have argued for a removal of the dollar as reserve currency include the BRICS nations, Venezuela, Iran, and a grouping of (Persian) Gulf States. For nearly three years we have conducted a serious effort to educate policy makers and our nation’s security leadership regarding this risk. This effort includes a Pentagon-funded study, numerous visits to Washington for private briefings, and this Blog. Sadly, during that period, our vulnerability has increased significantly as the debt has increased. We cannot let this be used as a weapon against us.

NOTE: The purpose of this blog is to stimulate discussion of issues regarding Global Economic Warfare. It is not intended to provide investment advice of any type. The goal is to encourage policymakers and the national security community to first acknowledge and then respond to the threat.

All posts Copyright (c) 2011 Kevin Freeman, All Rights Reserved

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