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Today, we happen to live in a world, where about 85% of world trade is paid for with the US dollar, a fiat currency. It is not like it does not have an intrinsic value — it does, but this value is basically provided by goods produced outside of the US. Even from the time of the Bretton-Woods agreement in 1944, when, to all appearances, the US dollar had a fixed gold content and was valued at $35 per troy ounce, in fact, it worked as the Eurodollar, backed by the entire volume of the European trade. Obviously enough, the relatively puny gold reserves in the US banks wouldn’t cover the value of all the printed dollars, if they were called back all at once. This became apparent, when the US had to back out of the Bretton-Woods agreement in 1968, since it could not cover its obligations with gold, when the faith in its economy started to falter.
After some uneasy recession-tinged time, the reaganomics managed to fix the problem of the insufficient content of the fiat US currency by hitching it to oil, which served as the next gold. From the 1980s, the gold content of the Eurodollar was changed to the oil content of the Petrodollar, backed by the compact with the Saudis. However, even the Saudi oil also was soon dwarfed by the increasing volume of the international trade within the rapidly globalizing world. Today, in fact, the fiat dollar is being backed by the production of the entire dollar-trading world. However, even though this production was indeed monetized in this rather unusual way, by separating production and consumption, there was no institutional foundation under this arrangement, which could be compared with the Bretton-Woods or even the agreement with the Saudis.
Thus, the immense amount of the US dollars, which was performing in fact an increasingly valuable and necessary service of monetizing the entire global production, had to find a domestic foundation as its de-facto collateral. Which it did, by creating a series of bubbles. as a collateral for the fiat dollar as the de-facto universal currency were used highly illiquid US assets, starting from the Internet-based companies during the Internet bubble of the 2000s and ending with the US mortgages, ranging from half-built McMansions to ordinary houses, which in no way had any value as collateral on the international market.
This shows that the current problem cannot be solved by the vaunted bailout, inasmuch dramatic its sum and circumstances. In the best case, it will end by printing more money or US treasuries, which would then have to find some real value for their international buyers to hold themselves upright.
The root of the problem is much bigger than just monetary difficulties, which can be sorted out by a clever design without changing the foundation of the current world order. One country, however large, cannot serve as the source of 85% of the currency covering the international exchange trade. In its day, at the start of the 20th century, this, at considerable pain, was found out by Britain. The British Empire controlled most of the global trade of the time, including such necessities as rubber and nitrates. However, even before World War I, which taxed its resources heavily, and as early as in 1913, the British banks held less gold than, for example, the banks in Germany. Gradually, in the course of two world wars, the British empire was dwarfed by the rising US, which pushed it aside as the world dominant in 1944 with the signing of the Bretton-Woods agreement.
Today, there is no single country able and willing to assume both the burden and the perks of dominating the huge globalizing world. Apparently, the US itself is also too overstretched, just as it was the case with the British empire in the first half of the 20th century. Perhaps, the time has come to think of new global mechanisms, able to support the trade flow in the globalizing world by helping to monetize its production.
A good starting point would be to consider the ideas of J. Stiglitz on introducing a universal currency and creating mechanisms of sovereign bankruptcy. We should always keep in mind the turbulent start of the 20th century and try to avoid its repetition amplified by about an order of magnitude. The globalizing world at the start of the 20th century had population in hundreds of millions. Now, we are speaking billions.
my contact e-mail is badalien00@gmail.com
