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On Monday, the Vatican called for creation of a “global public authority” and a “central world bank” to regulate the world’s financial institutions. As Reuters reported, “The document from the Vatican’s Justice and Peace department should please the ‘Occupy Wall Street’ demonstrators and similar movements around the world who have protested against the economic downturn.”
The Vatican got very specific in its recommendations. It condemned the “idolatry of the market” and called for global wealth redistribution, asking nations of the world to participate in an “ethic of solidarity.” In a passage that could have been ripped from Marx, the Vatican stated, “If no solutions are found to the various problems of injustice, the negative effects that will follow on the social, political and economic level will be destined to create a climate of growing hostility and even violence, and ultimately undermine the very foundation of democratic institutions, even the ones considered most solid.”
This is wrongheaded in the extreme. By impoverishing the middle and upper class in order to press for greater “fairness,” the socialism implicitly supported by this document pushes a utopia of equality in poverty.
But the Vatican’s call for a “central world bank” is telling. It shows where countries that want to cut the U.S. down to size are putting their efforts – into multilateral financial schemes. China, in language creepily mirroring that of the Vatican, called months ago for “international supervision over the issue of U.S. dollars” and the creation of a “new, stable and secured global reserve currency.” Brazil, Russia, India, China and South Africa have called for a new basket of currencies that would act as the global reserve.
Our opponents for fiscal dominance are right to put their focus on our currency, since that is where America is most vulnerable.
When it comes to America’s ability to raise debt in order to finance its outlandish spending habit, we rely on the one foundation-point in an unstable financial world: our status as the global reserve currency. Being a global reserve currency means that foreign countries stock up on dollars, knowing that they can always use it in trade. If the dollar lost its status as the global reserve currency, other countries would hold fewer dollars; they would buy fewer bonds, since bonds wouldn’t be as valuable; we wouldn’t be able to raise cash.
There is another problematic element to dropping bond prices – it means that we would have to print dollars or raise taxes in order to pay off bond inflation rates. When bond prices drop, the interest rates automatically rise. For example, if a $100 bond has a maturity of $110, it has an interest rate of 9.09%; if then the price goes down to $95, the interest rate will be 13.6%. With higher interest rates, we have to pay back more money to those who buy bonds. The deficit worsens. We either have to raise taxes or print dollars to rectify the imbalance.
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