In 1972 Lloyd Robertson informed Canadians that President Richard Nixon had met with Chinese leader Mao Zedong following a year of clandestine meetings between Henry Kissinger and Chou Enlai. It was a big deal. Nixon’s wife Patti wore a bright red coat to seal the deal..How things have changed. Today US Secretary of State, Anthony Blinken, can’t buy a meeting with the Chinese..“Stop pointing fingers condescendingly, stop grossly interfering in other countries’ internal affairs and stop deliberately creating antagonism and division in the international community.”.Ouch! So, what has changed and why does it matter to me?.The 1972 junket resulted in Nixon taking the United States off the gold standard ending the Bretton Woods international financial system. It also resulted in the United States and Saudi Arabia entering a joint price-setting arrangement to maintain low oil prices..To the delight of the Chinese, the visit cemented the One China policy in US foreign policy. Taiwan was officially recognized as a province of Communist China. Then why is there so much talk about a war over Taiwan? Next week’s topic I’m afraid..Having left the gold standard in 1971 due to domestic budgetary pressure, Nixon very adroitly expanded the petrodollar making the US currency the reserve currency of the world. If you want to buy oil, you settle your accounts with greenbacks. Or you used to..Recently, Iran and Saudi Arabia told the world that they are now best friends and the wars in Syria and Yemen will be ended. China and Saudi Arabia are going to close their oil transactions in currencies other than the American dollar. Russia and China are now best friends and will be exchanging military equipment to fend off the Ukrainians/NATO/US in the case of Russia and the US in the case of China. Brazil, South Korea, and France openly opined that maybe it is time to use currencies other than the American dollar..Ouch!.But why? Why this sudden snubbing of the American dollar and the US Secretary of State?.The bungled retreat from Afghanistan demonstrated weakness..The government-fed inflation through ridiculously inflated American budget deficits demonstrated economic stupidity..With a debt of $31 trillion and a belligerence never seen before, the US government froze Russia’s American dollar reserves when it invaded Ukraine. Germany and Japan did not have their foreign currency reserves frozen during World War II..The rest of the world witnessed this and said, “I wonder if we can use our American dollar reserves to buy gold instead?”.Last year such thoughts would have earned you a visit from the US Marines. That was then, this is now. At time of writing, the price of gold is over $2,000 per ounce..What happens if the American dollar loses reserve currency status? With enormous and continuing budget deficits and an almost unimaginably large debt, to be serviced in a rising interest rate environment, the US government counts on dumping more US Fed-manufactured dollars into the banks of foreign governments. If those governments will no longer take the American dollars, then those dollars will stay in the United States and that oversupply of dollars is a problem..The US government can maintain the budget deficits, print the money to finance those deficits and run inflation up to Venezuela levels. Alternatively, it can cut the budget dramatically. Or it can declare bankruptcy and ask for a mulligan..Help may be on the way. By law, the US administration cannot create debt above the limit imposed by Congress. Unlike previous debt limit fights, polls indicate that a plurality of American voters — including Democrats — are in favour of large budget cuts. The Republican Congress, after rebalancing power in January’s Speaker election, is about to propose a budget that is balanced in 2024 meaning a budget that cuts costs by $1.5 trillion..Ouch! Choose your poison. Inflation or recession..What happens to my pension if the American dollar loses reserve currency status? Our economy is welded to the US economy, so we won’t escape their pain. A restructuring of the US economy due to massive cuts to government spending will be felt in Canadian manufacturing cuts. Alternatively, massive inflation in the US economy will become massive inflation in the Canadian economy. When the banks stop lending money in the US, they will cut back on credit in Canada. Bank interest rates will continue to rise in a dual effort to fight inflation and to entice foreign investment..But what if massive spending cuts have a limited impact on the economy outside of Washington DC and Ottawa? What if the Canadian dollar rises relative to the falling American dollar? It might not be all bad. And an economic crash may clean up some of today’s social nuttiness..The full faith and credit of the American dollar is not the US budget but is the gross domestic product created by hardworking citizens who have built the largest consumer economy in world history. This revenue is also the stabilizing keel of the world economy so, reserve currency or not, the United States is unlikely to become Argentina or Venezuela because that would make China become Haiti..Nevertheless… buckle in for a wild economic ride.
