The Dollar and Trust
Trust and confidence are supreme in economics and society. However, trust and confidence are relative. We tend to trust that which controls our lives.
OK. When there is war, instability, or global pandemic, the value of the dollar rises. There is a surge in investor confidence in US capital assets. The reason is history.
From the early 1900s, American military, industrial, and technological might has been the backbone of the global economy. That power based on trust and confidence in US supremacy, shaped the 20th Century in every parameter.
In two world wars, US intervention changed the course of history driving victory for America and its Western Allies. The US came out of these wars with greater power and prosperity- it became the sole superpower. Today, China and Asia are rising powers yes. However, the USA remains the ultimate driver of world affairs.
That ‘’Uncle Sam is Boss’’ is undisputed. Investors trust American Power. American corporations and investors rule. The preceding assertion is a fact of modern life. From the early 1900s, the world has looked to America.
The Dollar is the global reserve currency. Countries link their local currencies to the Dollar based on trust and confidence in the strength of US economy and society. Countries benchmark their economies on Dollar value. The Dollar decides value in most social and economic sectors.
That trust sits on the redundancy value the dollar possesses to absorb both national and international shocks. Redundancy – the power behind the Dollar- is the driving strength of the dollar. That redundancy is an intangible that is the reason consumers and investors trust the Dollar.
The Dollar is the face of US military, industrial and scientific might. In other words, the redundancy of the dollar is American power. That redundancy power is what enables the Federal Reserve to print trillions of Dollars when there is crisis in the economy.
Then, in the final analysis, most government debt, including Virgin Islands debt, derives mainly from annual deficits backed by the power of the Dollar. Government deficit depends upon trust in the US power matrix- whether directly or indirectly.
Global debt is valued in Dollars. Debt rules in finance. Consequently, the Dollar rules.
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7 Responses to “The Dollar and Trust”
In 1974, President Nixon signed an agreement with Saudi Arabia mandating that all trading of oil must be in US dollars. The US dollar was the petrodollar. By forcing oil to be traded in US dollars, the dollar regained its dominant status.
Oil became the lifeblood of the global economy; the country which control oil control the world. Several attempts have been made to displace the US dollar as the world reserve currency. The Euro was floated as a challenging currency. Iraq leader Saddam Hussein declared that he would sell Iraqi oil euros. In 2011, Libyan leader Muammar Gaddafi proposed creating a new currency backed by gold, ie the Dinar, for trading African and Muslim countries oil. The hegemony of the US throttled back these efforts. Now in recents month, there are new challenges to replacing the US as the world reserve currency. First, the Saudis recently refused to renew the petrodollar agreement. Secondly, there is a robust effort by the BRICS and others to replace the US dollars as the world reserve currency. What will happen next is uncertain. The US as the number #1 economy, and superpower will fight to retain the US dollar as world reserve currency. It is in the interest to do so. The question is if the dollar is replaced as the world reserve currency, will the dumping of dollars drive inflation up?