The Fall of Our Reserve Currency

By Jennifer Bawden
September 8, 2008

It is a universal law, what goes up must come down.

Newton’s apple falls to the ground. Speaking of apples, doesn’t one spoiled apple spoil the bushel? Those nice clean treasures are now mixing with a growing number of rotten apples.

I would like to quote the head of the International Monetary Fund, Rodrigo Rato, who warned on September 15th that “there are risks that an abrupt fall in the dollar could be triggered by, or itself trigger, a loss of confidence in dollar assets.” He was referring to the risks taken on by the US government in its backing of toxic junk being brought at an alarming rate to the Fed window.

I thought Justice Litle of the Taipan Publishing Group said it best on September 16. “You’ve got to boil the frog slowly if you want him to stay in the pot”, referring to the Fed’s influx of money and the dollar’s drop.

Don’t let the pain of gold and silver losses over the past months let us forget that simple supply and demand dictates that when sovereign wealth funds sell dollars to amortize their risk, panic ensues and gold will be in great demand.

With a massive re-inflation campaign now underway to try to jumpstart the dying banking system and the economy, we won’t have to wait long.

For the first half of 08 we all heard Paulson, fearless leader of the Committee To Save The World give his standard rehearsed and almost apologetic answer, “a strong dollar is in the best interest of our economy.” Yet his hands were ties. On August 8, just as smart investors worldwide were doubling down on their dollars short trade, central bankers started to buy, buy, buy.

They will fight hard before giving up control.

Well, it’s been generally uphill for the buck ever since and it could continue its rise as the world continues to flee to the safety of T-Bills.

The dollar’s rise has been the single largest force in Gold’s and Silver’s tumble. Second only to the great deleveraging of hedge funds and investors who inadvertently threw the baby out with the bath water.

But not to worry, the tide is rising. Liquidity is being pumped into the system in breathtaking gulps in an attempt to keep the US credit creation machine going. The reality is, the American consumer will be forced to stop spending as much on credit and our economy will continue to deflate.

The consumer is tapped out, house prices are eroding, their life savings have been annihilated in the market and many more have lost, or will lose, their jobs.

Numerous forces are at play indicating a dollar rally in the near term, but eventually the piper will have to be paid. The excesses of the credit party of US citizens and the US Government will eventually prove too great, putting heavy downward pressure on the world’s reserve currency.

Jen Bawden

Jen is a best-selling author and serial social entrepreneur passionate about disruptive technologies, with a decade of experience in Homeland Security technology solutions. She is also a contributing author at Seeking Alpha, a top financial news site, and a member of several think tanks including: The Aspen Institute, TED, The National Committee on American Foreign Policy, Renaissance Weekend, Summit Series, Task Force on National & Homeland Security, & Secure the Grid Coalition.