“The Gulf single currency is not happening tomorrow or the day after,” says Kuwait’s Finance Minister Mustafa al-Shamali. “Sufficient time” is needed to prepare for such a move the minister told the Kuwaiti parliament last week.
Al-Shamali’s statement is startling in how matter-of-factly it reveals the intent of the Gulf states to abandon the dollar. Last month, veteran British journalist Robert Fisk filed a story titled “The Demise of the Dollar” in which he claimed that the Gulf countries were secretly working to set up a new currency to be used for oil trade. The report shook the markets and provoked a furor across the globe with many accusing Fisk of posting sensational stories based on obscure sources.
It turns out that Fisk was right. If anything his article understated how far along the Gulf countries had come in their quest to replace the dollar. So much so that they had set the beginning of the next year as the start of the new monetary regime. And even though they will not be able to meet the ambitious deadline, its very existence underscores the earnestness of those countries to decouple themselves from the dollar framework.
Such a move would have devastating repercussions for the United States, because it would deal a major blow to the dollar’s status as the world’s reserve currency. Once the dollar loses that special standing foreign central banks and investors will no longer be willing to continue purchasing Treasury bonds at low interest. Deprived of the ability to borrow cheaply from abroad, the American government would be forced to monetize portions of its debt in order to obtain cash for its expenditures. This would lead, among other things, to runaway inflation.
Perhaps the most telling thing about the ongoing effort of the Gulf states to drop the greenback is that none of them is an outright enemy of America. The United Arab Emirates, Kuwait, Bahrain, Qatar and Saudi Arabia maintain – for the most part – friendly relations with the United States. Their effort is thus not driven by some insidious desire to harm the US, but by the reckless monetary and fiscal policies of our own government. The spectacular growth of our national debt and the rapid expansion of the money supply have debased the dollar which has been dramatically losing value. It is all too understandable that resources-rich countries do not wish to trade their national wealth for an increasingly valueless currency.
There may still be those who think that all this is just a plot by Arabs to weaken the United States by sabotaging our currency. Arabs, however, are not the only ones trying to decouple themselves from it. Tuesday last week, Dominique Strauss-Kahn, the managing director of the International Monetary Fund, made a sobering speech in which he said:
The imperative of greater global currency stability means the world can no longer rely, as it has done since the end of the gold standard, on a currency issued by a single country.
The “currency issued by a single country” is, of course, the dollar which has been the foundation of the global monetary system ever since the Bretton Woods conference which took place in 1944. The statement of Strauss-Kahn clearly indicates that IMF leadership is of the view that the dollar era is coming to an end. This is not so surprising given the dollar’s deteriorating condition. For world finance and trade to function smoothly, a strong and stable medium of exchange is required. The dollar no longer possess these qualities and its fall is wreaking havoc all across the globe.
What will replace the dollar is unclear. Strauss-Kahn suggests that it may be Special Drawing Rights which will grow out of the IMF’s in-house account. This would, in turn, be backed by a basket of national currencies. Such an arrangement, however, would have even lesser chance of success than the current regime as it would based on fiat paper currencies of selected nations. And if we can be certain of one thing, it is that fiat currencies will never be stable for very long because politicians will always debase them by excessive printing. This is what has ultimately happened to the dollar. Its fate was sealed when Richard Nixon took it off the last vestiges of the gold standard in 1971. Since then it has been steadily losing value, a process which has dramatically accelerated in recent years. One hundred thousand dollars went a long way in 1971. Today the same one hundred thousand possesses only a fraction of its former worth.
Whatever the future may hold, one thing is clear: The era of the dollar is drawing to an end. Saddled with debts that government cannot make possibly good on, the greenback has lost the world’s trust. The plan of the Gulf countries to give it up is one evidence of that. Its precipitously falling value is another. A week does not go by when officials of countries do not plead with our government to do something about our excessive indebtedness. Most recently, President Obama was told by Chinese officials during his visit that China will not keep buying our rapidly expanding debt indefinitely. There are no signs, however, that either the president or the Congress are serious about doing anything about it. On the contrary, they are compounding the crisis by contracting even more obligations. Our national debt has recently broken through the $12 trillion mark even as those in Washington are attempting to implement a series of costly measures that would cost tens of trillions in the long term.
In light of this, is it any wonder that the world is trying to decouple itself from the currency that our own politicians are debasing with such astounding recklessness?