Morris R. Beschloss 2014-12-30 23:09:05
U.S. Dollar Faces Threat as World’s Leading Currency Although the dollar continues to reign supreme as the world’s primary reserve currency, a concerted effort is now underway to topple the greenback from this lofty position that it has held since the end of World War II. Before the dollar’s ascendance, which paralleled America’s rise to solitary economic superpower status, the English pound reigned supreme. That ended with the advent of the Bretton Woods conference in late 1944 in New Hampshire, which led 44 countries to develop a new regulatory system, as the defeat of Germany and Japan seemed inevitable. The United States became the only major nation to come out of World War II stronger than ever and to possess the goods and services that Would be necessary to rebuild a “Brave New World.” Despite 70 years of American economic ups and downs, the superiority of the dollar was never seriously threatened. That is, until the advent of the 2008-2010 Great Financial crisis, which came close to disintegrating America’s financial institutions due to their indiscriminate housing loans and trillions of dollars’ worth of mortgage-backed securities and derivatives. The U.S. government, in concert with the Federal Reserve Board, had to bail out the U.S.-based (as well as several foreign) financial institutions to keep their heads above water. This necessarily accelerated the U. S. Treasury debt and resulted in the flooding of U.S. dollars internationally to an incomparable extent. Despite this dollar dilution, the United States maintained its global reserve currency status. A reserve currency is held by a world central bank to help global businesses to activate international transactions by eliminating the intricacies and costs of exchange rates. Neither the European euro nor the British pound were accepted as a viable worldwide alternative. But now China, whose gross domestic product is based on purchasing power parity, has practically caught up with the United States’ $16.8 trillion GDP. As a result, China is aggressively calling for a new world status for its yuan, backed by a multitrillion dollar surplus, while America’s near $18 trillion debt continues to grow unabated. Already, China has set up its currency at clearing house banks in Hong Kong, London, Macao, and Singapore, and it is aggressively going after European candidates. Beijing’s latest coup became part of the 30-year economic treaty with Russia for oil and natural gas, which also creates a joint currency and rating agency. At the same time, the so-called BRICS nations (Brazil, Russia, India, China, and South Africa) have announced the formation of a new development bank to directly compete with the dollar, according to the International Monetary Fund and the World Bank. There is now a real concern that the U.S. dollar is shrinking as a proportion of reserve currency, which allows such a basket of currencies to become viable. According to the International Monetary Fund, the U.S. dollar as a percentage of all foreign exchange holdings has dropped from 55% in 2001 to 33% in 2013. It’s a deterioration that may prove fatal to the dollar’s preeminence if America’s long-term debt expansion remains unchecked, as the new Russo-Chinese (plus potentially India) consortium congeals into a world-strengthening alternative. 2014 Global GDP Growth Again Lowered by International Monetary Fund Over the past year, the International Monetary Fund, which has been a major supplier of credit to United Nations members since the UN’s inception, and primarily backed by the U.S. Treasury, has lowered its forecast for global economic growth for 2014 in a midyear world outlook projection. At that point, it had brought down global growth estimates by 0.4% to an overall 3.4% since the first of the year, having previously indicating a drop from mid-2013 predictions. A weak first quarter for 12 globally leading and emerging market economies generated this latest downward revision; in fact, the U.S. projections had been downgraded three times (July 2013, January 2014 and July 2014). While the United States suffered a vicious winter in the East and Midwest, excess inventories and downward export activity led to a near 3% quarter-annual GDP downturn. China, meanwhile, still projecting a 7.5% 2014 increase, has been only slightly slowed. This is due to tighter credit controls that have reduced consumer and producer demand, as the world’s most populous nation re-orients its expanding economy into an increasingly urbanized approach. Russia, involved in confrontation with Ukraine and hit by increasing European/U.S. sanctions, has seen its 2014 GDP growth projections drop from near 3% to slightly more than break-even from 2013 results. On the positive side of the ledger is the United Kingdom, which has projected its 2014 GDP growth from 1.75% to 3%. This surprising comeback puts the British economy at the top of percentage growth of the 12 nations focused on by the IMF’s “World Economic Outlook” report. Germany, Japan and Spain have also indicated slight economic improvements for the remainder of 2014. Generally speaking, the International Monetary Fund is much more hopeful that the global economy for 2015 will achieve a 4% gross domestic product improvement, with the United States, China, India and Germany expected to lead next year’s economic comeback. BY Morris R. Beschloss Award-winning columnist and daily blogger for his in-depth perspective and analysis of global economics.
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