As citizens of the American Empire, we enjoy all sorts of benefits that other countries just don't have. George W. Bush could let the Chinese pay for the Iraq War, as their holdings of Treasuries were effectively a credit card for his little military adventure. But other things fall our way because the dollar is the effective world currency.
It's estimated that a full 85% of all foreign exchange currency transactions are from one national currency or another being changed into greenbacks. The US Treasury and Federal Reserve Board (as well as our banks) benefit from this fact. Since commodities are priced in dollars, and countries that produce them are dependent on the price they get for them, -- commodities are played like a violin in the USA. A perk that the 1% has in this country is to manipulate the price of oil, wheat, and other commodities on Wall Street, the Chicago Board of Trade, etc. Remember when oil was $144 a barrel, or when corn was over $7 a bushel? Well, the speculators sure do. And our speculation makes the whole world dance to our tune.
I know. Your eyes glaze over when someone gives a lecture on the variabilities in the pricing of commodities from the persectives of different national currencies. But there's a wake up call coming, and it's coming from the way the price of oil will be priced in the next nine years. Imagine what would happen one day if the price of everything in Wal Mart was suddenly 20-40% more expensive, along with the price of gasoline and anything else that needs to be imported into the USA. That's exactly what would happen if the dollar were no longer the standard currency immediately, and the world was suddenly operating on a market basket of a number of currencies instead.
Of course, this would be disastrous both for China and the US. Because of this, any change away from the system established by the original Bretton Woods agreement will have to be introduced very slowly over a nine year time period. One pressure point for change will be the International Monetary Fund, where an over-reliance on the dollar will be lessened over time with other currencies. A critical component will be China's plans to internationalize the yuan. Once the yuan becomes more convertible, it can more easily go into the IMF mix.
Robert Fisk wrote a piece called The Demise of the Dollar in The Independent in October, 2009. He talked about how Russia, China, Japan, France, Saudi Arabia, and some of the smaller Persian Gulf Arab states had been conferring on moving the world pricing of oil towards a currency basket that included the dollar with the euro, Japanese yen, Chinese yuan, and gold. The finance ministers of Russia, China, Japan, and Brazil met at the London G-20 meetings to discuss how this would be implemented, and India was expressing interest in the scheme as well.
I scanned some of the G-20 material since then, and found that they have been moving cautiously but steadily in the direction towards implementing the move away from the dollar. The material for the June meeting of the G-20 is in Cabo San Lucas indicates that once again, movement on the market basket of currencies for oil is a priority item, more on the front burner than the back.
It will be important to look through the official communiques from Cabo to see how the market basket evolves. To be sure, these things are influenced by the ups and downs of the economy, and admittedly the euro and Chinese yuan are having their own concerns now. But we can be certain that over the long term, as the dollar depreciates the momentum towards moving towards a completely different approach than the old Bretton Woods agreement will accelerate.
And that's how the world works.