What To Expect When The Reign Of The U.S. Dollar Comes To An End
By Martin Hutchinson, Global Investing Strategist, Money Morning
Money Morning
Speaking last week, the Chief Executive of Goldman Sachs (NYSE: GS) claimed that if the “fiscal cliff” of tax increases and spending cuts go into effect on January 1, the U.S. dollar would lose its reserve currency status.
As the Vampire Squid’s representatives often do, Blankfein actually has it backwards.
Contrary to what Blankfein thinks, a legitimate movement to deal with the fiscal cliff would cut the federal deficit in half, make the country more or less solvent and strengthen the dollar.
However, the problem is that the fiscal cliff involves pain. And since politicians like to delay pain as long as possible, the chances are good the fiscal cliff will be postponed again.
Instead, the country will likely continue to run trillion-dollar deficits in the hopes that Ben Bernanke can finance them through even more quantitative easing. It’s the only play in the Keynesian playbook.
Unfortunately, that is the policy most likely to crash the dollar — and it’s headed our way.
So what will the world look like when the dollar has crashed, and international investors and traders have lost all of their confidence in the greenback?
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Before the Rise of the Dollar
Ever since the Bretton Woods agreement in 1945, the U.S. dollar has been the world’s reserve currency. So far, that role has been relatively unquestioned.
But prior to that, beginning in 1914, the world had relied on two reserve currencies. One was a declining British sterling. The other was a rising U.S. dollar.
Oddly enough, the sterling was the stronger of the two in the 1930s, after Britain went off the gold standard in the 1920s. That’s largely because while the U.S. suffered through the Great Depression, Britain managed to enjoy something of an economic renaissance.
Before 1914 though, the British gold pound was the world’s main reserve currency for over 100 years–ever since the Napoleonic Wars.
Just as with the dollar today, when it came to true international transactions and investments, there was no real alternative to sterling at the time.
However, that wasn’t always the case, either. History is full of examples where there was no one true reserve currency like the dollar or the gold pound.
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