the future of the DOLLAR(part one)(blog 7)

(First, I should make it clear that I am not a guy who is obsessed with studying anything; but I have some temporary interests in many areas. Second, the dollar here is not a simple currency in America but functioning as international currency and even perceived as a kind equivalent that stores value. Third, given that theories in this area are anything but simple/easy to understand, I have to tell you that my opinions are just some personal interpretation of the future of the dollar and there is a high chance that I may draw incorrect/wrong conclusions. So your comments will be appreciated a lot to enhance my humble ideas.)

At the very beginning of my article here, I will clarify my overall opinion towards this serious problem: the Dollar will definitely "die" in the future as a kind of international currency--it will be replaced by others, or we simply do not need such kind silly but essential (currently) medium in international trade. But I cannot figure out the specific time; the Dollar may even become part of history--here I mean it even lose the function of legal currency in USA. In the following paragraphs, I will try to explain my idea with reference to Currency War (Song Hongbing),The future of the Dollar (Eric Helleiner, Jonathan Krishner) and some articles on the Internet.

So the first factor that comes into our view is that the massive debt of USA. In fact, this is the main reason that many scholars have doubts about the future of the Dollar. In 2011,the public debt of USA has already exceed 15,000,000,000,000 dollars, counting more than 103% of the gross domestic product of USA. This proportion is already higher than the recommended proportion --60%(wikipedia). Another statistic indicate that the increasing rate of the public debt of America is much larger than that of GDP(2%--6%).If these two speed can keep stable, the America will pay 30% plus of its GDP to pay for the interest of these debt. And before 2040, USA will never pay off even the interest!!!!!!!!!!!!!!!!

However, unlike Greece or Spain, America can simply increase its limitation of public debt to solve this problem because the dollar is the international currency. So honestly speaking, there is indeed no risk in holding American debt in terms of national bankruptcy. Then an excessive amount of foreign investment enter America to only seek for security, which is against one famous economic theory--investments often go to less developed area where they can make more profits. This trend has prominently support market's confidence of the dollar and the confidence in return boost the investment on the dollar. Although this iteration is not so stable, at least currently this is not going to terminate soon.

Another reason why America has the ability to increase its debt is a little complex. At the very beginning, some basic knowledge of how the Federal Reserve works. The federal government only has the right to issue public debt.(attention here is needed desperately!!! the American government can never issue money directly in this monetary system) Then part of these debt will become the guaranty for the Federal Reserve to issue those green paper which is believed by us to have magical power in trading and purchasing. Quantitative easing may help the economy of USA(although it is definitely negative to global economy), but the Federal Reserve only put the tax from all the Americans in the future(because it was "debt" in 2009 but theoretically all the American tax payers have to pay for it) to some industries which are believed to be crucial to the recovery of US economy. In this saying, once American economy has stagnant period, the Federal Reserve has to issue more money to spur the economy, in the cost of a steep increase of American debt.

Nevertheless, no monetary system can run in present American way before the breakdown of the Bretton Woods exchange rate system in 1970s. But things have totally change after that momentous event--the convertibility between the dollar and the gold does not exist any longer--the only HARD　LIMITATION　of the amount of the dollar disappears forever (I mean in the current monetary system). Once the legal tender is not closely related to gold, the only limitation of its amount will just be people's ambition. Although the confidence in the dollar has been declining steeply and the public debt of America has been increasing in a beyond-imagination speed, the importance of the connection between the dollar and gold is not highlighted enough among the public and even among scholars.

Although I am not a conspiracy theorist, I do believe something behind the dollar is uncovered. Otherwise, we will never explain some strange phenomena. Just one example will be put down here: the sale of UK gold reserves can never be understood by common people--it sold so much gold to make the bear market of gold even worse. What make it more confusing is that right after this period of time is the increase of gold price. However, UK gold reserve did not sell (or buy) gold in large amount like what it had done in 1999-2002.  1999-2002, when all know it is a good time to restore gold to make profit, is actually the time when gold price is lowest in history and we can never expect those economists in UK gold reserve to be as silly as this.   So in this way, maybe we can understand one probable conspiracy beneath the steep increase of USA public debt--iff(this means if and only if) there is a mass of debt ,the Federal Reserve can issue dollars and make profits. And more surprisingly, the Federal Reserve is private rather than public from it was set up in 1920s.So it is easy now for us to understand the strange behaviors--the Federal Reserve is for its bosses rather than those Americans......