Why is America so Prosperous? The most fundamental answer to that question is that we have a tradition of Liberty and individual responsibility. In a culture of freedom and liberty, the outcome of people's lives lies in their own hands. They are inherently rewarded for things that create prosperity (creativity, hard work, innovation, education) and inherently suffer the consequences for things that don't (laziness, foolishness, irresponsibility, dishonesty). As millions of people individually go through this process, it begins to snowball and create enormous prosperity for that culture and nation. But, this article is not about that. This article is about how the United States government is now undermining some more specific situations that have helped America's prosperity over the last century, and it's the first in a small series of on America's prosperity and the ways that we are losing it.
One of those specific situations that is adding to American prosperity is the fact that the dollar is the world reserve currency and the world currency for international trade. This has effectively been the case for the better part of 70 years, ever since the Bretton Woods Conference in July of 1944. Coming out of World War II, America was the only first world economy relatively intact. This gave America the power and ability to position the dollar as the world reserve currency. America was able to gain this status for the dollar on the condition that dollars could be exchangeable for gold at a fixed rate of $35 per ounce.
This worked out for awhile but in the 60's, due to President Johnson's fiscal irresponsibility in initiating his " Great Society" initiative by creating massive welfare entitlements but not paying for them, the real world value of the dollar was slipping compared to gold. By 1971 this situation had become completely untenable. There was simply not enough gold to effectively back the dollar at $35 an ounce. On August 15, 1971 President Nixon, in a sudden action, untethered the Dollar from gold, effectively making it a free floating fiat currency. What resulted from this was a loss of credibility of the dollar internationally and the severe economic recession and massive inflation of the early 1970's.
What happened next however was one of the most brilliant geopolitical and economic maneuvers ever conducted. Secretary of State Henry Kissinger made a deal with Saudi Arabia. In exchange for US military protection of the Saudi oil fields, the Saudis agreed to conduct oil transactions using US Dollars only and to subsequently invest their excess profits into US Treasury bonds. This became known as the petrodollar system and by 1975 all of the other OPEC nations had jumped on board as well. This effectively restored and cemented the US dollar's position as the world reserve and trading currency (as all transactions for oil were now conducted in dollars).
Having the dollar as the world reserve and trade currency brings significant economic advantages to the US over other nations. One, it somewhat stabilizes and shores up the value of the dollar as it is backed not only by the US economy but, in some ways, by the entire world economy as well. It creates an artificial demand for dollars and, in the petrodollar system, creates an artificial demand for US government debt and treasury bonds as well. This creates fierce competition amongst the rest of the world to export to America in order to obtain the dollars needed to conduct international trade and, specifically, to buy oil. Thus, the rest of the world creates quality products at very cheap prices to sale in the United States which allows Americans a significant increase in quality of life that they otherwise would not have without the dollar's status of world reserve currency.
Interestingly, in creating artificial demand for US Government debt, this same petrodollar system is what is enabling Obama and the liberal progressives to conduct the extreme fiscal foolishness that will ultimately undermine it and bring it to an end. It is the nanny welfare state, the core agenda of liberal progressive ideology, and the massive government debt being created to pay for it, that is ultimately undermining the value of the dollar and weakening America enough to the point that she can no longer perpetuate this petrodollar system and maintain the dollar's status as world reserve currency.
Americans have no idea how much they stand to lose. Even those who are considered poor in America live an opulent lifestyle by world standards. Yet we don't realize it. We don't compare ourselves to the world. We compare ourselves to what we see around us and, even worse, to the outrageous lifestyle that we see portrayed on TV. If you made $5000 last year then you are in the top 15% of income earners worldwide. Just $5000! The poverty line in America is more than 200% of that amount. If you're an American, you likely don't realize just how wealthy you are. To all the idiot Occupy Wall Street protesters, with your ipads, your touch screen smartphones, your caramel French vanilla lattes: "The wealthy.....are you, you fools!".
Currently there are Trillions of dollars being held in foreign reserve banks and nationalities for the purpose of conducting international trade. If the dollar were to become usurped as the world reserve and trade currency, however, these nations and banks will no longer need those trillions of dollars and will start dumping them on the world market for whatever they can get for them. This will set off a cascade of events in America that will result in hyperinflation, an economic depression that will rival that of the 1930's, and a government debt and funding crisis. Imagine what would happen to your life if the purchasing power of your income was cut by 50-90% and simultaneously the US government were to collapse in a funding crisis. Imagine what would happen to you if you lost your job amidst an economic calamity where real unemployment jumped to 25-50%. This is the future that Obama and the liberal progressives are bringing to you with their foolishness.
For some time I've thought that the first domino to fall would be a Greek like government debt and funding crisis stemming from our own massive government debt. After all, Greece hit that cliff when their debt to GDP ratio was 115%. The US is approaching that level of debt/GDP ratio and our debt grows by $4 Billion every passing day. However, Japan's debt to GDP ratio is around 230% yet Japan is not having any trouble finding buyers of its government debt and is still keeping that ship afloat. Also, with QE3 and QE4, the Fed and Ben Bernanke have displayed a willingness to be the buyer of last resort of US government debt with the Fed simply printing money out of thin air to fund the government. Effectively that becomes an indirect loan from you, the American citizens, through the dilution of value of the dollars already in your bank account and in your future paychecks.
The difference between Greece and Japan or the US is trust. Both Japan and the US are large enough economies that people trust that they will get their house in order and thus they are able to keep interest rates on their debt at low and manageable levels. That trust will not last forever though and will eventually run dry. Also Greece, by not being in control of the Euro, didn't have the option that Japan or America does to simply print more currency to fund itself and its debt.
Given all this, I now consider it quite possible that the first domino to drop will be the breakdown of the petrodollar system and the loss of the dollar's status as world reserve currency, with a government debt and funding crisis being a subsequent domino to fall instead of the initiating event. Whichever shoe drops first, these events are likely happen in close proximity to each other, simply because either one will trigger the other, and the combined effects will be devastating.
One of the reasons this hasn't happened yet is that no single currency is large enough or healthy enough to take the place of the dollar as the world reserve currency. The Euro is in even worse shape than the dollar because the Eurozone is plagued to an even greater extent by the same liberal progressive welfare nanny state foolishness that is causing America so many problems. China, despite its economic strength and size, is plagued by the corruption and inefficiency that is inherent with communist regimes. Japan's national debt remains staggering, and no other nation's currency or economy is large enough to consider trying it. It's quite likely that when it happens, there will not be a single world reserve currency at all. That will not diminish the devastating effect on the US economy or the dollar that will result from losing world reserve currency status, however.
The other reason this hasn't happened yet is that the economic devastation to the United States would undoubtedly spread like contagion to the rest of the world, plunging the entire globe into economic depression (although to lesser severity than in the US). Currently the risks are too great to all nations involved and so the status quo remains for now, but that balance may someday change. The cracks are already starting to show. In late 2010, Russia and China announced that they were abandoning the dollar in bilateral trade between the two nations.
This petrodollar system, that perpetuates the dollar's status as world reserve and trading currency, could have easily been maintained if we'd had even a little bit of fiscal common sense by our government. The fundamental idea of liberal progressives, in thinking that rewarding people not to work and not to realize their potential is a good thing is patently foolish. But, when you accumulate trillions of dollars of debt (now over $16 trillion) to pay for that foolishness, the end effect on the economy becomes truly catastrophic.
When this economic calamity occurs, know that it was Obama and the liberal progressives who did this to you. When it is all said and done the amount of devastation to America that will have been caused by Obama and the liberal progressives will be nearly incomprehensible.