Did you hear the shoe drop?

What is a reserve currency and is it important to me?

Is the concept of a reserve currency still valid, outmoded, or a dangerous ploy to guarantee hegemony over the people of the world by one country? Is it all of the above and a system the world as a whole can no longer afford?

What is a reserve currency - in simple terms? The anchor banks and merchants the world over use to enable you and me to drive a BMW from Germany, eat peanuts from Africa while watching baseball on a big screen TV from Japan. That is when we are not in the office typing on our assembled in China, made by Dell America, sold in Norway computer.

Reserve currencies are as old as, well, for us, the Denarii; and as current as that funny ‘Euro’ looking new Ben Franklin.

But, what about tomorrow? That is a very big question. Why are we even asking the question? Also a good question. What does it involve? Trust, security, power … and the desire of people to hold and value a piece of paper that otherwise has the intrinsic value of – well, toilet paper.

The country that controls the reserve currency determines whether or not you eat cake or moldy barley rice. It controls trade, production, consumption and your well being.

For nearly three hundred years the British Pound was god. It was the reserve currency. It was the prima facie of rulers, traders and would be movers and shakers. If you wanted something you’d best have Pounds or evidence of a way to get them. With it you were king; without, a pauper. So cool that the whole world revolved around a little island previously only famous for raving red head naked crazy guys running around hitting everyone with sticks. (they still do, by the way). How could this happen? Thank you Queen Lizzie (the first one) and her pirates. They, by hook or crook, swindled and swiped every piece of gold the Spanish had and mineral laden property anyone else had. Once that was done, the Brits had a big fleet, the pirates became capitalists and the raving red heads created the Bank of England and the corporation. What does all that add up to? Control.

Control of what? Did the British produce anything? Not so much. Did they buy anything? Like buggies and candle stick holders? Not a lot. But they DID control the means of transportation and means of payment. Nothing went nowhere least it went through a British port or via a British ship or by way of permission of the British navy. Because of this and their ability to capitalize (great word) on every new idea – remember all the wannabes wanted to be in England and with it new ideas and even newer ideas of how to get and keep more money. Sound familiar Wall Street?

So, what happened? How and why did the British loose it all? (Isn’t it strange that we are now in the reign of QE II?) Well, it wasn’t really her fault. It was Tweedle(incredibly)DUM (Chamberlin) and Tweedledee (Hitler) that did it. It wasn’t so much what they did to England that brought the cards down; but what they did to America.

Huh? For lack of seemingly any other option, America became the safe harbor during WWII. Not Canada or India (both part of the empire); but the US. This was really fortuitous for us but suicide for the British. America became the new ‘England’ – in fact, many times over.

So, World War II, America’s hit and run on the world. Safely insulated away on a humungous island; beyond the reach of any enemy (physical or economic), the USA chugged along as the production plant of the world. How could a country deep in depression, no army, no navy and no recognized currency take over the world within six years?

Simple answer, England and France, owners of literally two thirds of the world and 90% of the gold reserves begged America to build and sell arms. Can’t do it says Wiley Coyote Roosevelt, no money. Well, to cut a long story short, England and France made a deal, saved their skins but lost their shorts to America, now the proud new holder (not yet owner) of everything worth anything in the whole world. Safely tucked away in America’s vaults was the gold of the world. Happily puffing away industry pushing out everything from Tanks to baby carriages and equally happily puffing away on their cigars, were a new generation of capitalist bankers in New York, the great grand cousins of those wild red heads from Scotland.

Where was the reserve currency of the world now?

Well Britain of course right? They thought so but got a very rude shock when as the war ended they tried to reassert their hegemony and the US said, like h*ll you will and threatened (in a friendly way of course) to bury their economy and through the new Breton Woods agreement; not so much an agreement as a demand from the new landlords (the USA) to pay up or shut up to the former empires. So the US became the new reserve. A great idea. Rich powerful country … basicly nice guys in pin strip suits willing to lend everyone money after the war in order to buy … what? Coke of course. America was the only engine pumping out everything a body could want. We got rich, built big houses, big cars, ate big dinners and did everything – big. Life is as it should be … what happened?

Fast forward fifty years:

America after the war was the new promised land. All the wannabes now wanted to be in New York. Everyone else wanted what Americans had. How to get it? Basically they couldn’t. Why not? No dollars. How to get dollars? Move to America? If you had a second cousin in Chicago maybe. Rob a bank? No dollars in the bank, just your worthless local currency. What to do? (do you hear the shoe coming yet?)

If you want dollars you need to build something Americans are willing to buy. Cheaper then Americans can make it. But how? America was flooding the after war markets with cheap goods, what can we do? What happened? Countries raised tariffs against US goods to protect their new industries. The US didn’t care, its local market was huge. These new foreign companies started to grow under this local protection and asked for ‘favored nation’ status so its products could enter the US tariff free. What is ‘favored nation’? A hold over from the old imperial system to protect members of the empire. Who were members of the American Empire? Western Europe and Japan. Those counties directly holding Communism back from America’s door. Sounds good, eh? Good for Europe and Japan, but as America will find out – a slower form of suicide than practiced by England and France.

American industries were now competing with cheaper foriegn products at home. Dollars were flowing out of America faster than a broken fire hydrant. What to do? Raise tariffs to protect our industry from those dasterdy upstarts of course, right? Aah, ... no. We instead moved our production facilities out of America to China (etc) in order to better compete. Logical (only to crazy people). No problem right?

Our consumers are still buying like crazy and dollars are the world currency. No problem, right?

More and more countries are becoming rich producers and consumers in their own right, with good strong currencies of their own. The Euro, the Yen, the Yuan, the Won … this is a good thing right?

The American military is being used as the world’s police force with American troops all over the world spreading more and more dollars everywhere. This is good, yes … yes?

Do you hear the shoe dropping yet?

So, you have a rich lazy complacent country wishing to buy anything it can to make life easier, passing out dollars like there is no end in sight, shedding the means of producing goods to make those dollars back off onto other countries who are hungry to make money so they can also have the good life. The people in those countries are bending over backwards to study and work hard thinking up new ideas to make money to have a better life.

While at the same time Americans are losing their jobs, going deeper in debt and are no longer able to buy more of the good life.

Is the American dollar still the reserve currency, or did the shoe already drop and America, like the British before them, just didn’t hear it.