In "Buck" we trust!

Sometimes we listen people wondering « What is going to become with dollar ? » or « Is America going bankrupt ? ». These concerns have accelerated since recent U.S. downgrade by S&P rating agency. Let’s get deeper into details and try to understand what is really happening.

A Bit of History to Start

Let’s get back to 1944 when World War II was still raging and the most of developed countries were partially or completely destroyed trying to repair their economies and industries. At this time 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference. This conference marked the beginning of the new Bretton Woods system of monetary management.

What this system was standing for ? United States being much less affected by the World War II than Europe, was nominated to be the country driving world’s post-war recovery. This decision was backed by huge gold reserves America was holding. The main outcome of the conference was the following : Traditional gold standard has been replaced by « US dollar standard ». It means that all currencies are backed by dollar and dollar is backed by gold. This principle allowed to significantly ease post-war monetary turmoil. 

Consequences

On August 15th, 1971, the United States unilaterally terminated convertibility of the dollar to gold. As a result, The Bretton Woods system officially ended and the dollar became currency backed by nothing but the promise of the federal government. This action, created the situation in which the United States dollar became the sole backing of currencies and also world reserve currency. Since that moment, most international trading and exchange has been done using dollars as the world exchange currency.

Back to Today

Why all mentioned above is important? We used to say that national currency is backed by national economy. It is true for all modern economies… all except United States! Intrinsic value of dollar isn’t entirely replying on the U.S. economy, but it is also dependent on the world’s economy as a whole. Basically we can compare the actual situation to gold standard with U.S. having exclusive right to “create the gold”. Some kind of monetary alchemy… Every dollar printed by FED has value “by definition”. In fact I can take this dollar go to Russia which would gather some new oil for me and sell it for this dollar. I can have the similar scenarios all around the world.

Conclusions

United State can print as much dollars as they want/need assuming that all “new dollars” go abroad. While they are abroad there won’t be hyper inflation in the United States itself. While dollar remains world reserve currency there is no risk of hyper inflation. Remember dollar has ALWAYS value! United States won’t never go bankrupt as they can print dollars and pay off their debt.

I’ll quote Alan Greenspan’s recent interview right after S&P’s downgrade of the United States. The former Federal Reserve Chairman said literally the following: "This is not an issue of credit rating, the United States can pay any debt it has because we can always print money to do that. So, there is zero probability of default."

However I would mention some risks likely to change my opinion regarding the dollar :

-       Cirque shown by Democrats and Republicans regarding debt ceiling has revealed a presence of the political risks in U.S. which we tend to ignore sometimes. In my opinion this « risk » mostly bears to the pre-electoral battle rather than real « political risk ».

-    Second risk stands for loosing of dollar of the status of the world’s reserve currency. Here my opinion might appear questionable, but I’m tending not to take this risk seriously just because none on the Earth would win if America goes bankrupt. Dollar loosing its privilege status is the surest way to the U.S. default. Hopefully politicians are clever enough to understand that.