Ron Paul: The End of Dollar Hegemony

Ron Paul, Texas U.S. Rep., is a long-time libertarian and gold bug (meaning he thinks Nixon/Kissinger made a huge error in the early '70s taking the dollar off the gold standard). Linked you'll find a speech Paul gave on the greenback, an excerpt of which you'll find below. The italics below are my own; I think the highlighted sections tell the backstory about why Bush is handling what is usually considered around here as a bunch of "backward, retarded Muslims" with kid gloves, in the case of his infatuation with the Saudis or his handing of port security to the UAE. .

In the short run, the issuer of a fiat reserve currency can accrue great economic benefits.  In the long run, it poses a threat to the country issuing the world currency. In this case that’s the United States.  As long as foreign countries take our dollars in return for real goods, we come out ahead.  This is a benefit many in Congress fail to recognize, as they bash China for maintaining a positive trade balance with us.  But this leads to a loss of manufacturing jobs to overseas markets, as we become more dependent on others and less self-sufficient.  Foreign countries accumulate our dollars due to their high savings rates, and graciously loan them back to us at low interest rates to finance our excessive consumption.

It sounds like a great deal for everyone, except the time will come when our dollars-- due to their depreciation-- will be received less enthusiastically or even be rejected by foreign countries.  That could create a whole new ballgame and force us to pay a price for living beyond our means and our production.  The shift in sentiment regarding the dollar has already started, but the worst is yet to come.

The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency.  This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year.  Last year alone M3 increased over $700 billion.

The artificial demand for our dollar, along with our military might, places us in the unique position to “rule” the world without productive work or savings, and without limits on consumer spending or deficits.  The problem is, it can’t last.

Price inflation is raising its ugly head, and the NASDAQ bubble-- generated by easy money-- has burst.  The housing bubble likewise created is deflating. Gold prices have doubled, and federal spending is out of sight with zero political will to rein it in.  The trade deficit last year was over $728 billion.  A $2 trillion war is raging, and plans are being laid to expand the war into Iran and possibly Syria.  The only restraining force will be the world’s rejection of the dollar.  It’s bound to come and create conditions worse than 1979-1980, which required 21% interest rates to correct.  But everything possible will be done to protect the dollar in the meantime.  We have a shared interest with those who hold our dollars to keep the whole charade going.

Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism, and not because of monetary concerns or because he created too many dollars during his tenure.  Gold has to be discredited and the dollar propped up.  Even when the dollar comes under serious attack by market forces, the central banks and the IMF surely will do everything conceivable to soak up the dollars in hope of restoring stability.  Eventually they will fail.