The World's Reserve
January 1, 2007
financial press reported last week that the euro, the new currency created only
five years ago and used by most European nations, has supplanted the U.S. dollar
as the most widely used form of cash internationally.
There are now more Euros in circulation worldwide than dollars.
alone is not necessarily troubling, as the dollar remains the world’s most
important reserve currency. About 65%
of foreign central bank exchange reserves are still held in dollars, versus only
about 25% in euros. And the
European Central Bank faces the same inflationary pressures that our own Federal
Reserve Bank Governors face, including a growing entitlement burden that
threatens economic ruin as both societies age.
European politicians want to spend money just as badly as American
politicians, and undoubtedly will clamor to inflate-- and thus devalue-- the
euro to fund their creaky social welfare systems.
the rise of the Euro internationally is another sign that the U.S. dollar is not
what it used to be. There is
increasing pressure on nations to buy and sell oil in euros, and anecdotal
evidence suggests that drug dealers and money launderers now prefer euros to
dollars. Historically, the
underground cash economy has always sought the most stable and valuable paper
currency to conduct business.
importantly, our greatest benefactors for the last twenty years-- Asian central
banks-- have lost their appetite for holding U.S. dollars.
China, Japan, and Asia in
general have been happy to hold U.S. debt instruments in recent decades, but
they will not prop up our spending habits forever.
Foreign central banks understand that American leaders do not have the
discipline to maintain a stable currency. When
the rest of the world finally abandons the dollar as the global reserve
currency, both Congress and American consumers will find borrowing money a more
Remember, America can maintain a large trade deficit only if foreign banks continue to hold large numbers of dollars as their reserve currency. Our entire consumption economy is based on the willingness of foreigners to hold U.S. debt. We face a reordering of the entire world economy if the federal government cannot print, borrow, and spend money at a rate that satisfies its endless appetite for deficit spending.
At some point Americans must realize that Congress, and the Federal Reserve system that permits the creation of new money by fiat, are the real culprits in the erosion of your personal savings and buying power. Congress relentlessly spends more than the Treasury collects in taxes each year, which means the U.S. government must either borrow or print money to operate-- both of which cause the value of the dollar to drop. When we borrow a billion dollars every day simply to run the government, and when the Federal Reserve increases the money supply by trillions of dollars in just 15 years, we hardly can expect our dollars to increase in value.