In the aftermath of WWII the American economy was that shining city on a hill. After saving mankind from the Nazi’s, America had the only intact manufacturing base and was the repository for most of the world’s gold. Those circumstances propelled the US dollar to world’s reserve currency status. And for the past seventy years, this status has been the cornerstone for America’s power base and hegemony around the globe.
But the 1960’s ushered in a time of great fiscal mismanagement. President Johnson’s dual wars on poverty and Vietnam led to worldwide distrust about the greenback’s purchasing power in relationship to gold. This eventually led to Nixon’s baneful decision to close the gold window, which untethered the exchange between gold and the dollar.
With China challenging the United States as a major player on the global energy scene, it is also making strides on internationalizing its currency. An increasing amount of China’s trade with other countries is now issued and settled in renminbi. To better accommodate this, The People’s Bank of China (PBOC) has implemented swap arrangements with over thirty other central banks. In other words, the renminbi is making moves to become a functioning reserve currency. In fact, the yuan recently joined the International Monetary Fund’s basket of reserve currencies.
The ill-fated, dollar-denominated Treasury market is set in stone. However, if you believe the Chinese currency will seamlessly replace the dollar as the world’s reserve currency, think again. The truth is that none of these fiat currencies can really survive for very much longer. Given the record amount of global debt ($230 trillion, 320% of GDP), there is destined to be a reset of all paper currencies to once again be backed by precious metals.
The catalyst for the next crisis will be the collapse of the gargantuan bond bubble that has been carefully constructed by central banks over the past nine years. Unfortunately, this will not be a proactive or voluntary reset. It will be forced upon us once faith in central banks is shattered as the next depression overtakes the worldwide economy. The negative ramifications from governments’ annihilation of free markets are soon to be felt.