This trend was brought to the forefront by the sanctions on Iranian oil. The sanctions forced countries to think about using something other than the USD to purchase oil.
Even before the sanctions Russia and China made a deal to trade with each other using their own currencies. China and Japan have also agreed to do so. China and the UAE have agreed to trade oil with their own currencies. How long before the Saudi's strike such a deal? Right now if you want to buy oil from the biggest oil producer on the planet you must convert your currency to dollars. This is a HUGE part of the dollar demand. Other commodities trade in dollars but oil is the most important as it's not found everywhere but used everywhere.
The Iranian oil sanctions have forced countries like India, China, Russia, and North Korea not to just think of creative ways of buying oil but to try them. Felix Salmon made a video last week asking if gold was a currency. He walked around New York trying to buy things with a gram of gold. He was denied a few places but finally did get to buy 3 lobster rolls in times square. He should have started with Iran and tried to buy some oil. He wouldn't have had a problem. India sure didn't. This is a disturbing unintended consequence of the Iranian sanctions. It pushes forward the death of the dollar as the worlds reserve currency.
With this in mind the planed spending cuts and tax hike is not enough! The fiscal cliff looks more appealing than the effects of the loss of the dollar's reserve currency status. The myth is it won't ever happen, and if it does it won't be for another generation or two. The truth is it has already happened. The saying "The revolution will not be televised" refers to the fact that change happens in minds first, far away from television cameras or eyes. The actual act is just a manifestation of the thought. In this case we have action already but most Americans have no idea.
With so many international deals for transactions using something other than the dollar how can we say it hasn't at least started? And if it has started then how much time do we have?
The answer to that last question is not much. The move away from the dollar has started but the country's preparation for such a move hasn't. We're worried about falling off a fiscal cliff when we should be discussing ways to jump. Without reserve currency status and with the current policies in place what reason is there to hold US debt? None, and interest rates will go bonkers. And to make matters worse the dollar would tank like never before creating not just inflation but hyper inflation. If we're worried about high taxes then inflation should be number 1 on our list as it's the highest tax of all. If and when China strikes a deal with the Saudi's to buy oil in Yuan it will be too late. The task at hand is enormous as we need to save more, cut spending, and raise taxes all at the same time. We need a fundamental shift in the way we think about savings and taxes. We are not the America of 1955 and we need policy makers who aren't afraid to tell the truth about this. It seems overbearing but you must dig your well before you get thirsty.
I was in the "kick the can down they road" camp until now. The road is the dollar as the worlds reserve currency. We can see the road ending ahead so we can't kick it anymore. We don't just need a plan we need action. We can't say we'll cut spending and raise taxes in the future because no one will believe us. Especially if we don't either allow the cuts & hike to happen or enact a plan to do so. We gotta prove to the market that we can and will execute the plans we've already made. The Budget Control Act of 2011 calls for the cuts and tax hike to happen in the event nothing is done before hand. It's structured like this to force action on the part of policy makers. If they don't act then the cuts and tax hikes should be enacted because it proves our policy makers are inadequate. And the ensuing economic slowdown should hurt their chances for reelection. And at the same time sends a message to the markets that we're not complete idiots.
You won't hear about the dollar losing the reserve currency status on the mainstream financial news because it's the nightmare of all nightmares. They think you would rather sleep and maybe you'll die in your sleep and won't feel a thing..... Not likely. This is the number one reason to buy physical gold. Because the dollar will lose half it's purchasing power---- fast when this happens. And it's not a question of if, it's when. As a function of the market this needs to happen. There's a cost to converting currencies into dollars to buy everything. Also there's risk in holding treasuries to manage petro dollar reserves. So even without a grand scheme by Russia to disrupt the US economy this needs to happen. We may not have time to finish what we started in 2008 with the stimulus. Policy makers waited too long trying to look like policy makers instead of making real policy!
We now find ourselves in a predicament where we need to think about protecting the dollar and giving the world a reason to hold our debt. This means a market interest rate and a sane budget deficit. When you hear people say we need leadership in Washington what they're really saying is we need leaders who have the balls to tell the people the truth and do what's necessary to secure Americas' future instead of just talking about it. It's time to eat our veggies. We want growth but the time to put growth policies in place has pasted. It will take too long to see if they work and tweak them if they don't. We were supposed to do this in 2009-2010 but the democrats were too busy celebrating a health care victory prematurely as hell, and in 2010-2011 the GOP was too busy doing everything they could to slow growth less they make President Obama look good. Now we're up shit's creek without a paddle because the markets are not dumb. You can't tell them taxes will be raised and spending cuts will happen 3 years from now and think that in the mean time they'll invest in growth. No, they'll prepare for the tax hike & cuts now.
With that in mind it makes sense to get it over with now. Take the economic down turn now. This will force people to save now so our own citizens will be able to buy our own government debt later. Spending cuts now will be a big step in the right direction of getting our house in order. Start the ball now and keep it rolling until entitlements and our tax system makes sense.When asset prices drop far enough to reflect real opportunity corporations will come off the cash hoards. Tax reform now will give people and businesses the clarity they need to invest. It will be hell but it will be worth it. Nothing will be more hellish than the dollar losing reserve currency status while we're unprepared. So instead of being afraid of the cliff and waiting for all this to catch up with us, let's not get caught... Let's keep going.