The Falling U.S. Dollar

One could not tell by watching the news that the U.S. dollar was in major decline and oil prices were reaching close to $100 a barrel. Instead the top stories were Brittney Spears latest drama, the newest foul singer on American Idol and the latest diet fade for 2008.

My local newspapers, the Gainesville Times and the Atlanta Journal Constitution, did not even enlighten me either. Sure they had the oil barrel price but no real indebt articles. Nothing about the instability of the stock market, nothing to the reason of the rising gas prices, nothing about the falling strength of the U.S. Dollar.

Thank God for the internet and the Financial times of London, I am aware of the ongoing international financial crisis aggravated by the millions of people defaulting on their mortgages and the consequent fall in the value of U.S. currency.

40 years ago British news reported that the British currency, the pound sterling, was devalued by 14.2%. In comparison, the American currency dropped in value by 16% in just a few weeks this past November.

Forty years ago currency had a fixed value, only fluctuating one or two cents either way. After the devaluation of the British pound and partly because of it, fluctuating currency rates became the norm, with values changing daily.

A British news item from 40 years ago may not seem all that important today, but there are lessons from it that resonate in it right now in today's headlines. To understand this fully lets step back in time just a bit further.

A century ago British currency, the pound sterling, the international trading measure of standard. A reserve, the was the only way a currency could be considered stable, if they had a reserve of pound sterling to back up the printed notes they were exchanging.

Prior to WWI if China wanted to do business with France or Germany, payment would be arranged in pound sterling, not between their own national currencies. Only the British pound was relied on to maintain its value from time of purchase until time of payment.

Helping with the international standard was the fact that the pound was also on the gold standard and notes could also be exchanged for gold. The Bank of England guaranteed this, and Great Brittan had the gold to back it up.
After WWII Brittan found itself greatly impoverished, but even after the war the British currency was till continued to be used for trade as the sterling pound being the standard. This consisted mostly with countries that had been British colonies - roughly one quarter of all the worlds nations - and all were still doing a great deal of trade with each other and the mother country. The system was advantageous for Britain, as the various nations maintained substantial reserves in London.

By 1967 Britain was still having serious financial difficulties. Manufacturing had declined. To boost the manufacturing sector, the labor department at the time decided devalue the currency, thereby making exports cheaper and more competitive.

Those behind that decision did not foresee that it would lead to the death of the sterling area and the end to the British currency as an international trading currency!!!!

In that bit of history lesson, we find lessons that the United States could learn today. Since WWII, the American dollar has been the worlds main trading currency. When Ghana, in West Africa, wants to buy oil from nearby neighbor Nigeria, the oil is priced in U.S. Dollars and payment is made in U.S. Dollars, not in Ghanaian cedi or the Nigerian naira.

Neither of these currencies can be used for international trade. They are known as soft currencies - they can not be exchanged over a bank counter anywhere in the world outside their own countries borders. Most countries currencies are soft currencies and are like that.

There are only a few currencies in the world that are considered a HARD currency and can be traded anywhere - the U.S. Dollar, the Euro, the British pound, the Canadian & Australian Dollar & the Japanese Yen. One reason they are considered HARD currencies is that they generally maintain their value and therefore can be relied on.

Besides being a HARD currency, the U.S. dollar is the worlds reserve currency. Many commodities, including oil, are priced and based by the U.S. dollar. This is to Americans advantage. Since the American media is nothing to go by, few people in this country realize the consequences if this would ever change.

But in fact it almost DID !!! Not that you would have known by our news reporting services. But it almost happened the weekend of November 18th 2007. OPEC countries meeting in Saudi Arabia heard some of their members calling for oil to be price in Euros.

When Rafael Correa, the president of Ecuador, stated that "OPEC needs to sell its oil in a 'stronger currency", he summed up the discontent widely shared by other OPEC members and expressed strongly by Iran and Venezuela, "If we continue to trade in a weak currency (the U.S. dollar) - we will need to sell more of our oil to buy the same amount of goods and services elsewhere." ( "OPEC Looks to switch to a STRONGER Currency." London Financial Times, 11-19-2007)

If oil were to be priced in Euros, it would cost Americans much more to buy it. Further, if the dollar should become a soft currency due to its unreliability, the United States would actually have to pay in Euros. That means America would have to sell sufficient enough goods in Europe to buy oil from the Middle East.

Americans have enjoyed the luxury of enjoying cheaper oil and gas prices partly because the liquid was priced in dollars. Other countries had the problems of shortages and high prices to deal with because they had to come up with dollars to purchase the product in the first place.

The United States could soon have that problem, if OPEC every decides to switch. The last meeting of OPEC in November it was only one vote that kept the currency of oil trading in dollars. The next meeting of OPEC may turn out different.

Where would America come up with Euros if they needed them?? The United States in the only major country in the would which is experiencing a travel tourism boom decline. Ask any American who has a friend or relative from abroad. Ask about the absurd stories of hassle and humiliation of entering or exiting the country. ( "America the Unwelcome", London Financial Times, 11-26-2007)

So what is the problem?? How have we come this far?? A country who was the financial leader of the world to the point where OPEC wants to replace the dollar as its trading currency.

DEBT - This is the root cause of our problem. Americans have been overspending for decades not only on a personal level but all the way through to our high government levels. To the point that our government debt is being financed by other countries.

The only reason the United States could do this was precisely because the dollar was and still is for the moment a world trading currency. Other countries gladly accepted U.S. dollars as payment for goods and were happy to bank those dollars to pay for their own future needs.

But this is no longer the case. As of late, there is a realization around the globe that the dollar is loosing value. Consequently, countries want to and are divesting themselves of their U.S. dollars, but want to do it slowly to avoid a panic that might wipe out the value altogether.

That's exactly why China, holder of billions of dollars of U.S. debt, is diversifying into other currencies.

The subprime mortgage crisis was a trigger, itself a reflection that too many Americans were in way to far over their heads in debt. Banks have made it possible, through credit cards and personal loans, for people to live far beyond their means, buying things they w3ant, regardless of whether they needed or could afford the new gadgets.

Faced with numerous people filling courthouses filling bankruptcies to get out from the mountain of debt they created for themselves, banks went to congress to have the laws changed making it harder to file for bankruptcy.

Americans could no longer avoid their accumulated debt, the mountain they built on their back. This along with the increase in adjustable rate mortgages, backfired on the banks, which now find themselves with people struggling to balance their credit card bills and their ever larger mortgages and finding these same people ending up in foreclosure.

America is not the only country affected. According to the BBC, after the United States, the United Kingdom and Australia and the next two countries with the highest amounts of personal debt and all three countries and set to weather some very hard and rough financial storms in the very near future.

Most Americans seem blissfully unaware of the dollar's decline, they seem very content watching the evening news and hearing the next drama unfold for Brittney Spears or which contestant sung badly on American Idol. They are unaware of the repercussions for them on a personal level what the dollar's decline will do. At the very least fuel for them to go to work will cost substantially more, maybe 8.00 or 9.00 per gallon (if they have a job to go to). Also since everything we buy at the store get there by truck that runs on fuel that will cost more, so will everything in the stores. Everything we buy must get transported somewhere !!!!

Ironically, neither energy or food costs are included when the government makes out its core inflation rate, often used to determine annual cost of living increases for SSI benefits. Life is set to get harder for most Americans in the months ahead. With a Presidential election looming over us also. God help us all.

Just one man's opinion. As always, put the wind in your hair and keep the sun to your back. Be good and stay safe. Peace, Love and prosperity to all.

Good Journeys !!!

Frank WOLF TM © 2005 1-12-2008
watchdog taking a BITE out of corruption!

Copyright © Frank J. Ball Sr.
If you like this Articles or any others that you read and would like to hear me in person, I am available for speaking engagements.
I still have some 2008 dates available; contact me at 706-348-1306

all rights owned by Frank J. Ball Sr. All rights reserved. Written permission must be secured from owner to use or reproduce this material.