You’ll Know We Are in Decline When…

A few months ago I wrote about America in decline and a couple of ideas that I thought could, if not turn it around, at least keep things getting worse.  However decline is so much easier than, you know, actually doing anything about it.  I think it more likely than not that rather than getting off the couch and doing something about it, we’ll continue our long slide downward, stirring ourselves only occasionally to go to the bathroom or pop another bag of popcorn.

I had hoped that on my deathbed, right before I whispered “rosebud” to my confused yet adoring family, I could die knowing that the country was still a great power and still had a great future.  Instead, I’ll probably end up throwing a snow globe against the wall and saying, “I hope we can stay even with Argentina.”  Then I’ll die and release my bowels.

I think under either scenario at death I end up releasing my bowels, but for some reason that doesn’t fit in to my rosy America-The-Strong scenario.

English: one hundred doller bill colection

English: one hundred doller bill colection (Photo credit: Wikipedia)

But when you are in the midst of a decline it’s sometimes hard to see it.  Your national self image, inherited from a time when your country was worth a damn, will get in the way.

Case in point, France.  Why is France on the UN Security Council again?

But the current world order will give us a big clue as to when our national greatness begins its slide into that good night:  When the dollar loses its world reserve currency status.

Being the world’s reserve currency means that banks and nations all over the world keep a good stash of US dollars on hand and a lot of internationally traded commodities (like oil) are priced in US dollars.  This is great news for us since it means there is always a steady demand of US dollars worldwide to buy things priced in dollars.  This saves us the expenses involved in constantly converting our currency into another currency to buy things on the international market.  Gas prices at the pump would be even higher if we had to convert dollars to another currency, like the Euro, to buy oil.

Dollars make the world economy go round.

But the dollar isn’t what it was, and other countries are starting to tire of their financial fortunes being anchored to a now whimsical US fiscal policy. The International Monetary Fund has called for replacing the US dollar as the world’s reserve currency.  France has made a proposal to replace the dollar with a basket of several currencies.  The BRICS group of nations (Brazil, Russia, India, China, & South Africa) has formally called for revamping the world financial system and replacing the dollar.

The FED has been working overtime via QE2 to devaluate the dollar.  Not good news if you are actually holding dollars.  The longer you hold dollars, the more earnings power you lose.  Domestically we understand that as inflation.  Of course, since the Bureau of Labor Statistics has rigged our inflation counting, we really don’t know what our domestic inflation rate is, only that mysteriously, prices are going up.

Must be speculators!

Since the current FED chief and the current administration seem to have taken a damn the financial system, full steam ahead policy as far as wrecking the dollar’s value, there is little hope for a turnaround of the dollar’s decline in the near term.  I suspect that the dollar would have been dumped by the world by now if it’s nearest rival, the Euro, wasn’t also in deep doo doo.  The Euro Zone, filled with countries that have also sabotaged their own futures by sinking into debt beyond a reasonable means to pay, make the Euro a poor long term prospect since eventually to avoid default or austerity beyond what the Europeans are willing to endure, they will have to either dump the Euro and go back to their national currencies, or inflate the Euro to the point that even the Greeks could afford to pay their debts.  Either option would end the Euro experiment as we know it.   However that’s the short run.  In the long run, the deterioration of the dollar and our own expanded debt will bring us to the options that face the Europeans now; austerity (which doesn’t mean what it’s critics seem to think it means), or to inflate our currency, or as economists like to say, monetize the debt, will force the world to jump ship, if not to another single currency, than to a basket of currencies.

At that point, let the decline begin!

If the dollar is no longer the world reserve currency, the demand for holding dollars drops like a rock.  Who needs them then?  As the world dump the dollar holdings, the dollar will decline even more.  Without the massive buying of US Treasuries by governments and banks around the world, we can’t run up the massive deficits we’ve been getting away with.

And that fair readers, is Bond-Ageddon; what I call that fateful day in the future when the demand for US Treasuries collapses, leaving us no way to finance our deficit or debt.  If you want to know what sort of austerity that would cause in our government, imagine if we were told that we could no longer run a budget deficit, right now.  Immediately the government would have to cut spending.  And considering the size of our deficits, that would mean everything would be sliced, Medicare, defense, roads, pensions, you name it.  There just would be no more money, and no way to borrow enough to cover our bills.  Not just for a few weeks, but for the foreseeable future.  We would become a 2nd world nation.  Mexico will make fun of us.

So there you go, your own little early warning indicator, the demand to replace the dollar as the world’s reserve currency.  It’s not quite Rome being sacked by Vandals, but they’re on the riverbank, gazing at the city.

A version of this post first appeared on Muchedumbre.com on July 2, 2011.

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