For my entire life, the US has floated along in a fantasy economic realm created by the dollar’s global dominance.
In 1971 the dollar took a kick in the belly when Nixon severed its convertibility to gold.
A scheme to create demand for dollars was needed. In 1974 a deal was struck with Saudi Arabia to price their oil only in dollars. The dollar standard eventually expanded to all of OPEC, and the petrodollar system was born.
We moved from a gold standard pre-1971, to a de facto oil standard post-1974. The US gained an unhealthy amount of power from this move.
The dollar was king, so debts didn’t matter. Imports were always cheap, and everybody wanted to buy our debt, and trade with us. Nobody wanted to mess with us, because of our intertwined military and economic firepower.
But it wasn’t organic, real, or sustainable. And being the world’s reserve currency had negative effects here at home.
Since 1974 America has exported almost its entire manufacturing base. The dollar was too strong, and costs were too high, to be competitive in international markets. So we built a financial empire with dollars as our primary export.
Nearly half a century old now, the petrodollar system is losing some of its luster. While the greenback still makes up 50-60% of total foreign exchange reserves worldwide, that is beginning to change.
New Competition and Economic Adversaries
Russia and China’s new monetary system will represent a real threat to dollar hegemony. It will likely be backed by hard assets like gold and commodities, and they will attempt to convert the world to their platform.
Russia is forcing Europe to pay for gas with rubles, and it will soon expand this rule to all exports. Strangely, the ruble seems destined to become one of the new reserve currencies. They are the world’s largest exporter of natural gas, wheat, nickel, and a top oil exporter as well.
Last month Brazil quadrupled their reserve exposure to China’s yuan. Israel just increased theirs. And keep in mind that central banks report their reserves on a delay of 2-8 months. So we won’t hear about any mass-movements out of the dollar for a while yet.
Additionally, the world has essentially stopped buying US Treasuries. That means the Fed will likely have to print increasing amounts of money to fund our future deficits.
Eventually, the dollar’s fall will bring about a difficult transition period. It has started, and we can see it in the price of assets like wheat, gold, and oil soaring in dollar terms.
But it will also give us a way out of this awful system. A chance to rebuild US industry, and set the country on a better path.
Land of Plenty
America became a great nation by building, not through financial engineering. And it is to this we will return.
We are blessed with an incredible set of resources. Take a look at US river basins.
Our river networks are the envy of countries worldwide, but they are criminally underutilized.
“We have one of the world’s greatest waterway networks, but we are barely using it,” Joseph Linck, a Brownsville, Texas-based international trade and energy consultant, told FreightWaves.
Linck is founder and CEO of Globalstone LC and was the director of the Port of Brownsville in Texas from 1988-90. He’s currently working with a large investment bank that wants to start putting ocean shipping containers in hopper barges using inland waterways to offer the first long-haul container-on-barge service in the U.S…
“Using the waterway, it’s a solution to the U.S. truck driver shortage, because one barge takes away 70-something trucks off the road and can move freight for less than half the price,” Linck said.
Nobody’s using them because we don’t have any industry, because the dollar’s too strong. In some ways, this can’t change fast enough…
We also have: oil, gas, iron, gold, rare earth elements, uranium, and many other useful minerals. But little of it is being explored today, because the US is still a difficult and expensive place to do business. That’s due to bad regulation and the dollar’s continued strength.
Perhaps our greatest asset is America’s entrepreneurial spirit. We’re natural economic risk-takers, and in the aggregate, that’s a great thing. Just look at the US venture capital and angel investing ecosystem. There’s nothing else that’s even close to as successful anywhere else.
We have all the pieces to become a great industrial nation again. It’s a matter of time. Whether we get there in 5 years, or 20 depends on how quickly we can get the house in order.