Opinion: A Demand with Serious Implications

Chinese Prime Minister Wen Jiabao said Friday March 13th that he fears the US dollar may lose its value, and as a result has asked US President Barack Obama to find new ways to reassure all those who have invested in the US dollar – and particularly the Chinese, who hold roughly one trillion dollars worth of US debt – that it will not lose its worth in the coming months and years. There was no ‘or else’ added to Wen’s statement, but for any nation to question the value of the US dollar – as noted by the International Herald Tribune – is almost unheard of. Of course none of this should be surprising. First of all, the reason that it is so rare for a nation to question the value of the US dollar is because for the first couple centuries of the US dollar’s existence, it was literally ‘as good as gold’. You could take your US dollar to a US bank and trade it in for solid, physical gold. But that all changes in 1913 with the creation of the Federal Reserve. In 1913 – with the founding of the Fed – the US shifts to a fractional reserve banking system. What this means in essence is that banks can now lend out more money than they have, as they need only a fraction of their reserve on hand (the name of this banking system is pretty accurate, eh?). So now, in this system, your US dollar – which had always been ‘as good as gold’ – is still worth gold, but only a fraction of the amount of gold it once was worth. (For a really great explanation of how fractional reserve banking works, check out the documentary 'Money as Debt' which is available online through google video or youtube.com.)

Wikimedia commons Here's what our money looks like from the Federal Reserve. Will its latest action help us keep or lose it? image:45488:0::0

Then comes 1933, at which point a new piece of bank-law is passed in the US. Under this new law, US citizens can no longer trade in their US bank notes for gold or silver; however, foreign nations can still demand that their payment be in gold. Therefore at this point, your US dollar is still ‘as good as gold’ – well, still as good as a fraction of gold (unless you’re a US citizen, in which case it has no worth beyond its perceived value throughout the world). Weird as it may seem today – mid-march 2009 – this system was enacted with little resistance from US citizens and carried on as the status quo, until 1971. 1971 is truly a defining point in US financial history. With Nixon behind the wheel, the US government offers a new form of global financing. Under these new terms, all nations owning US debt would be offered in return for that debt exactly what the US citizens had been getting since 1933; nothing. So now your US dollar – which has forever been ‘as good as gold’ – is now as good as Kleenex, at least in reality. Theoretically, on the other hand, the US dollar has through the years gained a natural worth, which cannot be rebuffed; but this argument can only be made by someone who believes in the US dollar, and who has many, many pages to frame their argument. And that system brings us to 2009, where – in an unprecedented spectacle that no one could have ever, ever expected – Chinese Prime Minister Wen Jiabao questions the worth of the US dollar... But wait a second, though the action may be unprecedented, is it really unexpected? The US dollar over the course of the last century has gone from being ‘as good as gold’ to ‘as good as Kleenex'; and what use does China have for one trillion ‘virtual’ sheets of Kleenex for? Hell, you can’t even blow your nose with virtual debt. With that said, Wen’s statement should not surprise any of us, but it should signal to us that – as Bob Dylan once wrote – the times, they are a changing. No longer can the US expect exporters to accept virtual Kleenex for goods and services. No longer can the US expect nations to buy their debt without assurances that this debt will not continually devalue. No longer can the US carry on as the global financial leader so long as their dollar isn't clearly reliable, and clearly secure. However, there is no question that the value of the US dollar will continue to depreciate so long as the US continues to be a 'spend and consume' nation under a fiat financial system, and not an 'earn and save' nation under and intrinsically valued financial system. Though all of this may seem obvious, it is clear that precious little is being done to fix the problems of too much debt and a sickly consumerist society. Just as obvious is that nations throughout the world will not stand by idly and see their once-wise investments turn into a pile of shi... Whoa nelson, I almost let one slip there! If anything, we should be surprised that Wen’s statement didn’t include an ‘or else’, or at the very least a plan that would succeed in ‘assuring’ China that their investment would not wither into nothingness. In an op-ed article written by Thomas L. Friedman – my favorite futurist and optimist – he detailed a recent conversation between him and a Chinese factory manager who is ceaselessly amazed by the utter crap that is continually ordered and produced at his facility. Reflecting on this conversation, Friedman sussed out what American consumerism actually is today, and in a few short lines pointed out why the system is completely flawed and totally unrealistic:

Wikimedia Thomas L. Friedman, author of "The World is Flat" and "Hot, Flat, and Crowded" image:46548:4::0

“We have created a system for growth that depended on our building more and more stores to sell more and more stuff made in more and more factories in China, powered by more and more coal that would cause more and more climate change but earn China more and more dollars to buy more and more U.S. T-bills so America would have more and more money to build more and more stores and sell more and more stuff that would employ more and more Chinese … We can't do this anymore.” If this is an accurate caption of the US economic model – and in my view it is – we should all be grateful that Wen Jiabao and his contemporaries are merely asking for some reassurances that their investments have value, and instead are not saying ‘to hell with America, we’ve got the infrastructure, and so long as we get nothing of value in return for our goods and services, you’ll get nothing from us; there is a whole world out there for us to sell to, and considering what we’re getting from the US, we can’t do any worse by selling elsewhere’. In any case, two things are for sure - first off all, the financial jitters that have caused world wide panic in financial districts has spread into political capitals; and those in charge of political arenas are not afraid to point the finger and demand action. The second thing we know for sure is that it is a smart idea to keep a close eye on Obama’s reaction to Wen’s statement; the future of the world-wide financial system – where it is centered and who its main drivers are – may depend on it. Thanks for reading. GRMM