ONE STROKE OF HIS PEN
In one stroke of his pen, Nixon unilaterally cancelled the direct convertibility of the United States dollar to gold. This act essentially ended the existing Bretton Woods system of international financial exchange overnight. From that time onwards, the United States would not rely on the fixed value of gold to deter mine the value of its currency for which all other currencies were exchanged, but rely solely and entirely instead on the strength of its own economy to set that value for all other currencies on the world’s exchange markets. It was an act that would come back to haunt America, and along with it, the rest of the world. And we are witnessing it unfolding today.
In summary, the current world moneta ry system assigns no special role to gold. The U.S. Federal Reserve is not obliged to tie the U.S. dollar to absolutely any thing except the performance of its own economy, which we now know has tank ed magnificently downward. Worse still, it can print as much or as little money as it deems appropriate or desires.
While there are obviously powerful ad vantages to such an unconstrained sys tem, freely floating the value of one’s national money also carries along with it tremendous responsibilities and risks because it can create uncertainties for international traders and investors. For example, the U.S. dollar has been worth as much as 120 yen and as little as 80 –that’s over a 35% swing from either end. The costs of this volatility may be hard to measure but are nevertheless significant.
Furthermore, a system that absents itself and leaves monetary managers free reign to do good also leaves them just as free to do evil. As we have seen, the global recession – which started in December 2007, still very much lingers on today even as this is being written and we know it all started as a result of un mitigated greed on the trading rooms of Wall Street USA.
THE BORROWER OF LAST RESORT?
Despite its arrogance and global financial irresponsibility, the U.S. has never theless effectively become the borrower of last resort, which is an odd moniker when you come down to think about. Readers well understand what the term ‘lender of last resort’ means, but a ‘borrower of last resort’, does that make any sense? Unfortunately, under present circumstances, it does. Why? Because it is likened to a beast for which if you fail to continue feeding it will consume you.
How Much Money Does America Owe Other Countries?
A United States Treasury security is government debt issued by the United States Department of the Treasury through the Bureau of the Public Debt. In other words, it is how the U.S. Government borrows money: they issue govern ment securities, which other countries and institutions buy. And guess what? They have they been buying and buying like there is no end to tomorrow!
Take for example the case of mainland China. In July 2008, China outstanding loans to the United States stood at US$ 550-billion. By May 2011, their lending has already reached US$ 1.160-trillion! Main land China now holds 25.70% of all the debt the U.S. has outstanding.
Coming in a very near second is Japan, with US$ 912.4-billion (20.21% of total); third is the United Kingdom, with US$ 346.5-billion (7.76%); Brazil is fourth, with 211.4-billion (4.7%); and, fifth is Russia, with US$ 115.2-billion (2.55%). Together, these five countries hold nearly 61% of all the outstanding debt of America!
But they are not the only countries who are listed as major foreign holders of instruments of indebtedness issued by the U.S. Government. Even the Philip pines is now lending and holding on its books US$ 23.6-billion’s worth of Ame rica’s IOUs despite the fact that its own current external debt (as of July 2011) is already 48.89% of its total GDP?
Comparatively, Australia holds another US$ 12.3-billion worth of U.S. IOUs but its own external debt ratio is lower at 17.63% of total GDP. New Zealand doesn’t even register on the list and its own external debt is slightly lower than Aus tralia’s at 16.16% of its total GDP. As a sovereign country in its own right, that ratio is 5.2x smaller than America’s current debt-to-GDP percentage figure.
WHAT THE FUTURE MAY HOLD
We do not claim to hold any prophetic gift and no human seer or prophet can even accurately predict the remarkable rise and fall of nations, leaders and people as foretold in the Holy Book or Bible.
Sadly enough, the general population of some countries that are mentioned in the last part of this series have for decades chosen a path of a make-it-up-as-you-go morality or even amorality. Amorality admits no moral distinctions or judgments and lacks sensibility, not caring about right and wrong, adopting self-demeaning and self-destructive behaviours that include pornography, profanity, gambling, gossiping, sex outside of marriage, retaliation, drunkenness, lying, lust, greed and so on.
The financial convulsions that reared its ugly head beginning in December 2007 are now shaking the world today more violently. These convulsions have so far affected the so-called largest Anglo-Saxon economies – chiefly Britain (the old empire) and the USA (its successor) whose societies are not only amoral but as a result, have become addicted to debt.
This addiction has been fed by a finan cial services industry of their own making now bloated to many times its natural size, and in itself, in need of huge amounts of borrowed money, particular ly in the case of the United States.
The financial centres of Fleet Street (the U.K.) and Wall Street (USA), having asset-stripped their respective domestic industry sectors in the last 35-years or so while having set about lending con sumers the money to buy imported goods that they no longer make. In an ironic twist, the money is often (in many ins tances, always) borrowed heavily from countries like Japan, China, Brazil and some of the oil-rich producing Middle Eastern countries that are selling them goods and other commodities.
In return for their goods and commodities, these countries and other faster-developing economies have taken vast amounts of British Pound Sterling and US Dollar-denominated paper – a portfolio whose value they naturally wish to see preserved but on the face of it really represents nothing more than a promise to pay an obligation based largely on the performance of their weak economies as debtors or, failing that, even more borrowings from the rest of the world (that includes them) in the future. That is not borrowing from Peter to pay Paul any longer. It’s borrowing from Peter to pay Peter. Absurd, isn’t it?
China in particular – the holder of hundreds of billions of US Dollars and Pound Sterling, is already beginning to diversify into other currencies and hard assets. Taking its lead too are some of the same major lenders of America. They know, and rightly so, that the inevitable ‘bubble’ will burst sooner than later, making the US Dollar and Pound Sterling relatively far less valuable in terms of its pur chasing power and store of value.
And it’s already happening. Read on.