Thu, Nov 14, 2013 - 12:34am
I was curious. Over time in the recent past, other hegemon currencies failed, but those countries managed to hang around, even still today.
So, what happened to those folks in those countries who lost the “exorbitant privilege?”
Here is a chart showing different currencies, that were dominant at one point in the recent past. From my historical understanding, this era is referred to as the mercantilist era, and had to do with international trade following the discovery that the world was indeed round.
So, let us ask: why was such currency at the time the hegemon?
Mercantilist banks cleared transactions in the dominant currency at the time. Duh. Makes sense. Who wanted payment in something that had no value? Which bank wanted to loan value and be repaid in something not presently in demand? Since the strong banks in the dominant countries set the terms of transactions, it was natural for transactions to be cleared in the currency of the dominant trading regions or countries of the time.
But still, it nags me that each and every one of those currencies were not fiat, but real, tangible coins, or they were bills, that is, paper claims upon gold / silver specie. So, one holding a paper bill could exchange the bill for the real deal. Unlike the situation today, and unlike since 1971 when Nixon closed the gold window. So those currencies, the hegemons of the time, were not pure fiat, like today. Even that being the case, what is the lesson to learn?
The reserve currencies of the time enjoyed their prominence based on real flows of goods, and as those flows were altered, the dominant currencies changed as well. Aha, this makes sense. But still, what happened at the end of the hegemon reign?
Importantly, and questions I have had for a long time include these: if those hegemon currencies all eventually failed, then why did the countries still exist? What happened to the citizens of the countries that had the former dominant currency? What happened to their way of life? Did they end up third world countries? What happened to their living standards? Did they recover? If so, how, and what brought it about?
I am starting to think I figured it all out. I am starting to think it is not that complicated. I am starting to think that the answers are so obvious, so as to be ignored, because the answers to these questions really do not matter.
So let’s get to the point.
Unlike those from the mercantilist era, the world’s dominant currency today, the dollar, is nothing but a fiat currency. https://www.wisegeek.com/what-is-fiat-money.htm
Since this is a web site devoted to exploring the end of the great Keynesian experiment, naturally, questions arise about just that, what happens when it ends?
Plenty of intellectuals extol fiat currencies as being a good thing, including even being important and necessary, like, for example, an esoteric exposition that only Pining could like [sorry buddy, but you are the professor]. Take this intellectual effort from these guys, from an article I plucked at random during a google search:
Look at what these European intellectuals say:
“Not only the central bank of the hegemonic country can act as a lender of last resort to its own banks, but also it can do it for the state, and the national government has the ability to stimulate global, not just domestic, effective demand.
Further, the risk that the hegemon would be unable to expand demand globally, because it is forced to maintain a fixed ratio of currency to an external asset is [non-]existent. It is true that foreign countries and agents may show unwillingness to hold dollar denominated assets, but, as in the domestic case, the Fed can always monetize debt.
Again, as in the closed economy case, this only would be inflationary and lead to a run on the dollar if there is currency substitution on a massive scale, which would require a credible alternative to the dollar.
And that leads as to the current crisis and the euro, which was hailed by some as a possible alternative to dollar hegemony. It is important, however, to emphasize, that even if economic agents substitute the euro for the dollar, the United States still would not have its ability to import curtailed, since most American imports are invoiced in dollars, including commodities. Essentially, that means that the United States would still not have a balance of payments constraint. In this sense, it is the ability to determine that key commodities and particular contracts are settled in dollars, not the specific currency reserve holdings that determines which currency is dominant.”
So, let me translate some of this ivory-tower thinking and relate it to what JY said earlier in the week, as well as relate it to events in the middle east and recent developments about Iran.
First, they say it is a good thing to be able to print at will and not be restrained to a gold standard, because it means that the issuer of the fiat can bail out the banks, the governments, and on a GLOBAL basis! This is a good thing, according to these intellectuals. Since when is moral hazard a good thing, though? Maybe I missed that class in college.
This paragraph just absolutely blows me away with its imperiousness:
“Further, the risk that the hegemon would be unable to expand demand globally, because it is forced to maintain a fixed ratio of currency to an external asset is [non-]existent. It is true that foreign countries and agents may show unwillingness to hold dollar denominated assets, but, as in the domestic case, the Fed can always monetize debt.”
Did you catch that? They say printing can go to infinity because there is no tie to assets, like gold. I.e., QE to infinity. Like what Mr. TF said would happen. Hmmm . . .
Did you see the rest? Other countries may show “unwillingness” to hold dollar denominated assets, but . . . the Fed can always monetize debt.” WTF!! Let’s do this slow. So, if other countries don’t want our treasuries for their balance of payments, which means that either those treasuries are not purchased at auction, or the countries holding them exchange them for real assets, say, like the JPM building in NY with the huge underground gold vault, then those treasuries are not valueless, no, not at all, because the Fed will simply print more dollar bills and exchange those worthless treasuries with zero term, zero coupon debt notes called the US dollar!
They say that this poses no inflationary problems, either: “Again, as in the closed economy case, this only would be inflationary and lead to a run on the dollar if there is currency substitution on a massive scale, which would require a credible alternative to the dollar.”
See, they imply that inflation could only occur if there was a credible alternative to the dollar. Meaning, if folks LOST CONFIDENCE in holding dollars, and turned to something else. You know, something tangible, which holds its value, does not erode, is rare, is divisible, is interchangeable, you know, gold or silver. And on this point, they are accurate. Under no circumstances can there be any credibility lent to the concept that gold and silver are currency substitutes for fiat dollars.
This last little part is what ties it together with what JY wrote about China taking over Africa, and which zerohedge and other sites have informed us about regarding Saudi Arabia telling Mr. Obomber to invade Syria, and which Iranian developments show that the USA is soon about to lose its ability to force transactions to be cleared in terms of dollars. Here is the kicker, and the concept to keep in mind for the immediate future: “it is the ability to determine that key commodities and particular contracts are settled in dollars, not the specific currency reserve holdings that determines which currency is dominant.”
So there it is. It is the “ability to determine that key commodities . . . are settled in dollars . . . [that] determines which currency is dominant.” So, it comes down to power to control the transactions’ currency. Who controls the transaction, controls which currency is dominant.
So, adding it all up, if the USA loses the ability to control that transactions are denominated in dollars, then the USA loses its hegemon, and some other currency takes over.
We are seeing that right now, in real time. It is only a matter of time before the world’s commodities contracts are settled in something other than the dollar. When that happens, the dollar will be as valuable as whatever uses that little, colorful piece of paper has.
What evidence exists of that? Plenty.
JY mentioned the Chinese invasion, economically, of the continent of Africa. Soon, China will be the resource rich producer of goods and services, with ITS citizens and subjects the source of commerce, and from which economic power the mercantilist banks will emerge. We have all seen and read and heard that China is separately negotiating international trade agreements priced in terms other than the dollar.
We have heard, seen, and read plenty of stories of how certain of the middle east countries have benefitted from US military protection in exchange for requiring oil purchases to be priced in dollars. The Saudia Arabia mess about Syria has blown wide open that Obomber is just a Saudi Puppet bowing to his masters and trying, desperately <cough, false flag, cough> to incite a war in Syria in order to get Saudi gas pipelines routed through Syria to feed Europe.
And now, the US has been exposed as being a patsy to Iran, and the French surrender afficionados have had to come to our rescue as having the only backbone in the group to stand up against the absurd surrender terms?
And it is the Russians who are staunchly advocating peace, who took in a US national to protect him from the murderous USA spying agencies trying to silence his whistleblowing of massive, illegal spying, of USA citizens and EVERY SINGLE WORLD LEADER!?
This is crazy talk. But, it is very much fact, and very much happening right now, in real time.
Is everyone preparing, or not?
Connect the dots, and view things with an open, clear mind. Then, putting the anger aside, reach a rational conclusion of the steps to take to prepare, and do so, accordingly.
Oh yeah, and the answer to the initial question, is simple yet profound. Those people, of the regimes who were the hegemons of the time? Well, they went on living, as the economically powerful nations elsewhere rose and faded away, like the ebbing of the tide. Life just went on. Just like ours will, only differently.