Great Depression Online Archive Issue:

A New Global Reserve Currency?

Great Depression Online
Long Beach, CA
March 31, 2009

Inside This Issue You Will Discover…

*** A Trillion Dollar Problem
*** Quantitative Easing Exemplar
*** A New Global Reserve Currency?
*** And More

“If you owe the bank $100 that’s your problem.  If you owe the bank $100 million, that’s the bank’s problem.” – J. Paul Getty

A Trillion Dollar Problem

China’s got a problem. 

Actually, China’s got a trillion dollar problem.  For they’ve lent the U.S. government over $1 trillion in cold hard cash.  And now they’re coming to the upsetting realization that, in real terms, they’ll never get all of it back.

Here’s why…

“The more you owe, the more it becomes attractive to devalue the currency,” pointed out Warren Buffett at the annual Berkshire Hathaway meeting back in May 2006.

Last week the U.S. government began a policy of direct dollar devaluation.  In a move that historically has been reserved for banana republic governments of the southern hemisphere, the Federal Reserve began buying U.S. government debt.  Here are the particulars reported by Bloomberg…

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“The Federal Reserve bought $7.5 billion of Treasuries in the first outright purchase of U.S. government debt by the central bank to keep consumer borrowing costs low since the 1960s [Editors note. Remember the U.S. was still a creditor nation in the 1960s].

“It is the first step in a six-month program to buy up to $300 billion in Treasuries.”

Quantitative Easing Exemplar

Where the $300 billion is going to come from is what makes China – and the $1 trillion they hold in U.S. government debt – so edgy.  For it is no secret, the Federal Reserve will note an IOU in a ledger somewhere and – out of thin air – they’ll have $300 billion to loan to the government.

In simple terms, this would be like if you were up to your eyeballs in debt…and you wrote yourself a check for several thousand dollars, deposited it in your account, and then withdrew it as cash.  Of course your bank would stop this sort of monkey business from going through and you would have some legal problems…and forget about getting a loan anytime soon…if ever.

Yet when the government engages in such shenanigans, it is called ‘quantitative easing’ monetary policy.

The fraudulence and dishonesty that’s inherent to ‘quantitative easing’ makes it indefensible, in our opinion.  We’d rather live in an honest world that rewards honest individuals – and honest governments – for their prudence, perseverance, and moderation, than one that strives for the easier softer way.

Plus, aside from the prospect of a hyperinflationary blowout, ‘quantitative easing’ by the U.S. government could bring about the end of the dollar’s global reserve currency status.   

A New Global Reserve Currency?

Several weeks ago (One Billion Communists) we scribbled about China’s warning to Washington…not to devalue the dollar.  With the Federal Reserve’s purchase of Treasuries last week, the U.S. government effectively told China…too bad your dollars are your problem.

China responded over the weekend by challenging U.S. global financial leadership.  What follows was reported by AP on Saturday…

“In his second rebuke of U.S. leadership this past week, the central bank governor, Zhou Xiaochuan, said China’s rapid response to the downturn – including a 4 trillion yuan ($586 billion) stimulus package – proved the superiority of its authoritarian, one-party political system.

‘“Facts speak volumes, and demonstrate that compared with other major economies, the Chinese government has taken prompt, decisive and effective policy measures, demonstrating its superior system advantage when it comes to making vital policy decisions,’ Zhou said in remarks posted on the People’s Bank of China's Web site.”

This Thursday, April 2nd, the Group of 20 (G20) leading economies is meeting in London to attempt to unstick the economy from the barrel of cold molasses it has fallen into.  Britain and the U.S. want the G20 talks to be about nations pitching in for global stimulus.  And the European Union is too fragmented to know what it wants.

What does China want the G20 meeting to be about?

“China has made its agenda clear: It wants a stable U.S. dollar, and has even advocated the creation of another global currency altogether.”

Sounds unthinkable…right?  Well last week a United Nations expert panel published a report in favor of the idea.  In other words, if the U.S. government doesn’t succeed at destroying the dollar first, this most certainly will.

Sincerely,

M.N. Gordon
Great Depression Online

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