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Stefan Gleason
Stefan Gleason
Articles (18)  | Author's Website |

The Dollar Is Indeed Dying, but Not Next Week

Although the ramifications against the dollar are uncertain, it’s best to prepare today

September 27, 2016

(By Clint Siegner, Money Metals Exchange)

Some say the U.S. dollar may die five days hence.

The Chinese renminbi will kill it. Much is being made of plans by the International Monetary Fund (IMF) to add the renminbi to its basket of strategic reserve currencies called Special Drawing Rights (SDR). The IMF will make the change on Oct. 1. While the implications for the Federal Reserve Note, currently the U.S. dollar, as the world’s primary reserve currency may be profound over time and the importance of this event should not be overlooked, the impact is unlikely to happen overnight.

The composition of the SDR may change on Oct. 1, but few people understand what the SDR is. Even fewer actually have any experience trading it. For the many who wonder what an SDR is, here is a brief description from the IMF.

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. As of March 204.1 billion SDRs (equivalent to about $285 billion) had been created and allocated to members. SDRs can be exchanged for freely usable currencies. The value of the SDR is based on a basket of four major currencies: the U.S. dollar, euro, Japanese yen and pound sterling. The basket will be expanded to include the Chinese renminbi as the fifth currency, effective Oct. 1.

The IMF actually decided to make the changes to the SDR one year ago. Some expected that decision would represent the death knell for the dollar. But when the announcement came, the currency markets hardly noticed.

Mass psychology – or relative confidence – is what ultimately determines whether a dollar holds value. Not much will happen Oct. 1 if not many people care.

There have been many other threats to the confidence that underpins the dollar. Among them were straight-forward and widely publicized assaults: trillion-dollar federal deficits, metastasizing debt and an explosion in the supply of U.S. dollars. If years of quantitative easing – the Fed’s program to gin up trillions in new dollars with which to buy Treasury bonds and garbage mortgage securities – didn’t torpedo confidence, a far more obscure institution like the IMF may not do it either when it changes the composition of the arcane supranational currency.

That said, Oct. 1 could mark an important waypoint on the long road to oblivion for the U.S. dollar. The Chinese have been openly advocating for SDRs to replace the dollar as world reserves, and this event is an important step down that road.

In 2009 Zhou Xiaochuan, governor of China’s central bank, called for the creation of “an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run." There are many nations that consider the reign of “king dollar” tyrannical.

The IMF has big plans for the SDR. There will soon be an offering of SDR-denominated bonds. IMF officials hope to see large and liquid foreign exchange and bond markets modeled after those where dollars and Treasurys are traded. If they succeed, it is easy to imagine developments such as oil exporters demanding payment in SDRs and central banks swapping their vast reserves of Federal Reserve Note. In other words, the IMF intends for the SDR to replace the Federal Reserve Note as the world’s reserve currency.

However, that outcome is by no means certain. The SDR is nothing more than a basket full of flawed fiat currencies. Like the Federal Reserve Note, the others are backed by the full faith and credit of irresponsible governments who would be insolvent but for their printing presses. This includes China’s renminbi.

We fully expect the U.S. dollar will be dethroned one day, and the SDR may be part of that transition. But nothing will solve these growing problems until gold and silver are restored to broad use as money. The world needs honest money, not a basket of paper.

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About the author:

Stefan Gleason
Stefan Gleason is President of Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, TheStreet.com, Seeking Alpha, Detroit News, Washington Times, and National Review.

Visit Stefan Gleason's Website


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Comments

batbeer2
Batbeer2 premium member - 1 year ago

This is the least intelligent article I have read in years.

The most fundamental flaw is your assertion that Mass psychology – or relative confidence – is what ultimately determines whether a dollar holds value.

Anyone who spends more than 5 seconds thinking about this will understand that the value of a dollar is determined by the amount of work an American is willing and able to deliver in exchange for that dollar.

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