The Americans are delighted with their economy; they congratulate themselves on their prosperity, and offer their economic success to the world as an example. For them, the rest of the world (except for Europe perhaps, Great Britain and other anglo-saxon countries) simply does not know how to manage things.
The graph (at the end of article), explains why they are so satisfied with their economy.
In 1948, the total amount of dollars held by Central Banks around the world amounted to some $15 billion dollars – the dollar reserves of those banks. The total of gold, valued at $35 dollars an ounce, also in Central Bank reserves, amounted to some $34 billion dollars. In physical terms, the gold weighed 970 million ounces. The value of gold in the reserves of the Central Banks of the world, the U.S. included, amounted to over twice the value of the dollar reserves.
For twenty years, up to 1968, the increase in the amount of dollars in the hands of Central Banks of the world was quite restrained, although constant. The United States were careful to restrain their monetary and credit expansion, because the dollars held by foreign Central Banks were redeemable in gold. During those years, however, the U.S. were steadily losing gold reserves to those Banks, as they satisfied the demands for redemption of their dollar I.O.U.’s. (dollar bills).
In the years leading up to 1968, General de Gaulle in France had been firm about the Bank of France’s policy of dollar redemption for gold. In the Spring of 1968, the good General found himself facing a near revolution, and was almost overthrown. World leaders noted the curious coincidence of events.
The flight of gold from the U.S. persisted, notwithstanding arrangements between the more developed countries, not to demand gold for dollar redemption among themselves.
Finally, on August 15th, 1971, President Nixon threw in the towel, and simply ceased redeeming dollars with gold, at any price. In 1944, the Bretton Woods monetary arrangement had stipulated that dollars would serve as Central Bank reserves as good as gold, because all dollars would be redeemed for gold on demand at the rate of $35 dollars per ounce. Nixon killed the Bretton Woods agreement.
There was no new international agreement. The Central Banks of the world simply went on receiving dollars for their reserves, without any possibility of redeeming them for gold. World Central Bank reserves, as far as dollars were concerned, became simply papers.
As the graph shows, once the U.S. were freed of the commitment to redeem dollars, they embarked on an unrestricted credit expansion. Dollars in the hands of foreign Central Banks were like checks that are never cashed. A lovely arrangement, for the United States.
From 1971 to 1997, the U.S. provided reserves to foreign Central Banks, in an amount in excess of $1.1 trillion dollars (that is, one million and one hundred thousand millions of dollars) of green paper dollars, created out of nothing by their monetary and financial system. (The amount is approximate, but the approximation is sufficient to show the colossal increase).
On the other hand, the rest of the world had to buy these dollar reserves, by exporting products to the U.S. From the U.S. to the rest of the world: papers. From the rest of the world to the U.S.: merchandise, companies, banks, properties and equity. Things of value, in other words.
The effect on the United States has been to provide them with a bonanza, a bonanza available to anyone who might have a limitless credit card, whose balance it is unnecessary to pay, and which is forever going up.
This is the postwar bonanza for the U.S., which Americans tend to think is due to their superior productive and organizational ability. Actually, it is the collection of tribute from the world, on a scale which makes the Roman Empire pale by comparison. The Americans have had an imperial "bread and circuses" at the expense of the rest of the world. No wonder they are smiling!
Their apparent success allows them to preach to the rest of the world on the need for banking transparency, on the need for more open banking systems, on the need for the elimination of corruption and cronyism from the financial systems of the rest of the world. They proclaim the need for adapting to globalization, which favors the U.S. because it allows the Americans to buy up the world with their paper dollars. For the same reason they proclaim the need for privatizations, which are indeed desirable, if privatization did not imply that Americans can buy, not with goods, but with papers, anything they desire, especially strategic resources such as, for example in the case of Mexico and Brazil, "Pemex" and "Petrobras".
Unlimited imports of merchandise – the credit card has no limit – allow the U.S. to continue the credit expansion, for cheap imports keep prices under control. The U.S. has transferred its inflation, to the rest of the world, exporting it in the form of dollar reserves in Central Banks around the world.
When dollars arrive in foreign countries, the local Central Bank purchases the dollars in exchange for the local currency. More reserves equals more local currency. More currency means prices rise; as prices rise, cheap exports to the U.S. decline. The remedy: devaluation. Other countries must devalue their currencies in order to have the privilege of receiving papers from the U.S. Devaluation destroys local financial and productive systems, because in order to persuade local savers from exchanging their local currencies for dollars, interest rates, for instance in Mexican pesos, are raised. Mexico and Brazil are classic cases.
It is a curious fact that not one Nobel prize winner has pointed out these extraordinary circumstances. The reason must be, that dollar reserves are such a gigantic tribute operation, that it is not convenient to point out these things.
Privatization, opening to U.S. investment, globalization, transparency, and the struggle against corruption, are words which hide the purpose: to concentrate unlimited power, by using irredeemable dollars to buy up the world.
The graph shows that gold in world Central Banks has for all practical purposes not increased in 50 years: there is only 12.3% more gold in their vaults, in ounces, than there was in 1948.
From the U.S., we cannot expect any advice whatsoever, that goes against U.S. interests. It is we – Mexico specifically - who must determine what our interests are; protecting them is our affair. The U.S. will never tell us that our situation, worse day by day, is the consequence of the monetary system which the U.S. controls. Brazil, the most recent victim. Ecuador, another. Argentina is stumbling. Hong Kong and China will devalue sooner or later. Chavez in Venezuela will fail to turn his country around. We are all in the same dollar reserve boat. For Mexico, dollarization, currently being suggested by some American politicians and seconded by myopic Mexican businessmen, is surrender to the U.S.
Mexico must think fast. We must reform our monetary and financial system, and base it upon a currency with a real value, which will not depend on the dollar reserve system which guarantees instability. Only a silver currency can meet that vital requirement.
http://www.plata.com.mx/plata/plata/worldres.htm is the URL for this article and the table.
Admittedly, this man is angry and critical. He is a Mexican proponent. But it does seem he has a point. Whether and how we can continue as we are is the question. Recently our Balance of Payments has been increasing (record last week?)and the value of the dollar visa vis gold is changing for the worse. If you think of gold just as another international currency, then as ours deteriorates there will be enormous strains on other countries and especially those who hold dollar denominated assets.
First, he blames the US for the irresponsible fiscal policies of third world governments. Surely you do not subscribe to the "blame America first" mantra, do you? I suppose the problems of the rest of the world has absolutely nothing to do with their patent disregard for private capital formation and their pathetically weak judicial structure to protect it. What I mean is, they tax the heck out of capital to make it incredibly unproductive, confiscate it from those who are most productive with it in spite of their overbearing taxation when the government decides that the economic problems they are having are a result of greedy capitalists and the real solution is a socialistic one.
I mean, give me a break, look at today's headlines in Venezuala. Are you going to say with a straight face that their economic problems are our fault? They have incredible natural resources and a leg-up on the rest of the world due to their unique geographical location so that they should be or at least be on the way to becoming a real economic force. But are they? No. And if you have to look anywhere further than the fascists and socialists for the proper place that blame should reside then you are a willfully ignorant.
Contrast that with Japan that has virtually NO natural resources yet due to their relatively (relative to the rest of the world, not us) good protection of capital and strong legal and judicial system that protects their capital markets, they have become an economic juggernaut (even though they have been in a recession for about 10 years).
While there are many flaws in the US system, the flaws are more than mitigated by the governments in the rest of the world not understanding the value of capital markets and how to protect and nurture them. Heck, most of the US government officials do not understand it well enough but somehow they have remained protected and have been nurtured.
The old gold standard had its pros but it also had some definite cons. But I assure you that we are not in the situation merely due to eschewing that standard. Our debt is huge on its face, but it is the smallest it has been in the last 30 years as a percent of GDP.
The credit card example is more one for third world countries, not us. We have always made good on our promissary notes and that is the ONLY reason they are so valued around the world. The history of our borrowing and the fact that our GDP to debt ratio (our ability to pay in the future, so to speak) is so much better than most.
No one is forcing them to hold these dollars. If they would like to buy cars with them, our auto industry will be happy to oblige. Would they like some semiconductors? How about some wheat, or corn? We have a lot of things here that they could buy with these dollars, and if they would shut up and spend them instead sitting on them and bitching, our unemployment would go down, our balance of payments deficit would drop, and they wouldn't have so many of those nasty dollars cluttering up their vaults.
Our business hours are typically 9 to 5, Monday through Friday. They can call or write. All dollars are welcome; come spend them.