THE "SPLENDOUR AND MISERY" OF THE AMERICAN DOLLAR

Every cloud has a silver lining. It was after the Second World War that the United States gained the status of superpower in the political, economic and military spheres. Today, this country produces about 20-22 per cent of world GDP and controls 55 per cent of world market capitalization, 20 per cent of world exports of high technology products and half the world's grain exports. Unchallenged leadership in the global economy determines the leading role of the United States in international politics. Events in the US economy, the priorities and forecasts for the development of the US economy are projected onto the world economy and international relations. Unfortunately, the financial crisis that started in 2008 in the US went beyond US borders and spread to the rest of the world. We would like to dwell on one aspect of the modern financial crisis - the US dollar.

It took nearly half a century for the dollar to become the national currency of the United States. The transformation of the dollar into world currency number one took a further century.

Before the First World War, the status of world currency belonged to the British pound. Before the Second World War, the title of the world's main currency was claimed by the French franc, the US dollar, the British pound and, in the early 1930s, this race was joined by the German mark. But then everything changed. First, the Second World War destroyed the mark. Britain and France, countries that won the war, nevertheless, found themselves in a precarious situation: their economies were destroyed, while their vast colonial possessions threatened to start many wars for independence. Only the US - the sole superpower - emerged from the war stronger than it was before the start. Being the world's largest creditor, the US economy comprised half of the world's economy. It held three-quarters of all the gold in the safes of state-owned banks around the world. As a result, the dollar replaced gold as the main international currency and gained a leading role in world trade and investment. It all started in 1944 at a conference of 44 countries in the town of Bretton Woods, where the world's powers agreed to make the dollar the basis of the post-war monetary system. The United States promised to introduce a fixed exchange rate of the dollar for gold - $35 per troy ounce (31.1 g). All countries pledged to maintain a steady rate of their currency against the dollar. The dollar became the basis of currency parities and the dominant means of international payments, currency intervention and reserve assets. The IMF and IBRD - international monetary and financial institutions, whose task was to regulate financial relations between member countries of the new system - were created. The Bretton Woods agreement limited the permitted volume of paper money and states were supposed to manage their own currency or devalue it. Full convertibility of the dollar into gold protected America against the temptation to print too much money.

After the Second World War, American money started to flow into war-ravaged Europe. The economies of European countries, weakened by the war, could not resist the expansion of the US currency. The dollar occupied more space in the gold and currency reserves of central banks - because they thought that they would always be able to exchange US currency for gold at a fixed rate.

From the middle of the 1960s, the volume of dollars owned by US creditors exceeded the gold reserves of the Federal Reserve System. By some estimates, the country had so many paper dollars that gold reserves covered only 22 per cent of the total mass. At the same time, French President Charles de Gaulle, changing state policy, turned to US gold reserves instead of the peg to the dollar. On seeing that other countries might take similar measures, US President Richard Nixon closed the "golden window" in 1971, by prohibiting foreigners from exchanging their dollars for gold.

But by the time the exchange of dollars for gold was banned, the dollar enjoyed the confidence of most of the Earth's population. The dollar, which is not now supported materially, still has privileged status. Under the Jamaica Agreement of 1976, member countries of the IMF reached agreement on the basic principles of forming a new world monetary system. Since then, the exchange rate has been determined by the interaction of supply and demand, that is, by the market.

In essence, this system is less stable than the previous one. Since the US dollar is no longer convertible into gold, there is no theoretical limit to the growth of money supply, of which the US took full advantage.

A major milestone for the dollar was the Plaza Accord, signed by the G-5 nations in 1985. At that time, the US dollar was at a record high post-war level against European currencies and the Japanese yen. American exporters were at a disadvantage because of the high prices of their products on international markets. As a way of levelling the trade imbalance, they chose to devalue the dollar, which was done by corresponding changes in interest rates. Over two years, the dollar fell in price by 50 per cent relative to the German mark, the pound and the Japanese yen. The result was that the volume of American exports increased by 22.2 per cent over the same period.

But no economy or currency can be stable forever. Now the dollar is in decline, while previously there was a rise - in the 1990s the dollar increased by 28 per cent, relative to 34 major foreign currencies and, from May 1995 to February 2002, the purchasing power of the dollar increased by 50 per cent.

The fall in the rate of the dollar benefits the US economy. This allows them to raise the competitiveness of American companies. Even before the fall of the dollar, most American companies began organizational reforms. The general economic recession, corporate scandals, terrorist attacks and the collapse of global stock markets taught American businessmen to conduct their business more effectively.

But the softening of the dollar's position also has a negative impact on the American economy. For a long period, inflation in the USA was virtually zero. If you put one dollar in a bank in 1800, one hundred years later, the money accumulated in the bank could buy the same amount of goods. But in 1913 everything changed, and the US dollar embarked on a long, steady path towards devaluation. According to official information from the US government, today you need $2,000 to purchase goods that would have cost $100 in 1913.

The main cause of the fall in the rate of the dollar is the steady growth in money supply in the United States. Every day, the US produces about 35 million notes of various denominations, totalling approximately $635 million. About 95 per cent of the banknotes printed each year, are used to replace worn-out money. From one third to one half of the dollars printed in the United States go outside the country. There is so much paper money that only the erstwhile reputation of the dollar as reserve currency, as well as the patience of US trading partners, prevented the complete collapse of the American currency. But this support is, unfortunately, not reliable. At one time, 86 per cent of global transactions were conducted in US dollars. Many countries needed to keep huge amounts of US currency, which was a huge plus for the dollar.

The status of the dollar as a reserve currency is now being challenged. In 2005, the percentage of reserves in dollar assets was 76 per cent; by 2007 it had dropped to 65 per cent - a gradual decrease in the role of the US dollar in global reserves. Some shift from the dollar to the euro is already evident. This applies to the private sector, monetary authorities and central banks. Last year, the central banks of Russia, Sweden, UAE, Qatar and Syria announced their intention to diversify their reserves into other currencies. China and other Asian countries are discussing the possibility of giving up the peg to the dollar. In recent years, the central banks of China, Japan, Taiwan, South Korea and Hong Kong have spent hundreds of billions purchasing US government bonds to prop up the dollar and stimulate the purchase of Asian goods by US consumers. Recent trends show that Asian countries are gradually leaving the American market. Consumer demand is growing in China and other Asian countries, as is demand for Asian goods in Europe. As Asian-American trade fizzles, Asian countries no longer need to support the dollar and use it as a reserve currency.

Lenders to America from Asian countries have come to the conclusion that it is not so safe to keep most of their foreign currency reserves in US dollars. But the question is not that Asian banks will dump the dollar. The question is how correct and significant the devaluation of the dollar will be.

Before the crisis, US GDP approached $14 trillion, while total debt exceeded $50 trillion. The US has already rejected the idea of paying its debts, and it is necessary to refinance the debts and to re-borrow, that is to say to make a commitment to pay interest rates. According to the discount rate of the Federal Reserve System, which recently reached 5 per cent, the total cost of servicing the whole debt amounted to $2.5 trillion, or one-fifth of US GDP. No economy can stand such expense. Hence, the US must increase its debt. Its growth rate is about 10 per cent per year, which is 2.5 times higher than the growth rate of the US economy. Economists estimate that over the last two years, the country's external debt has been increasing by $3.83 billion every day. If we divide the amount of the debt by the entire population of America, it turns out that each US citizen owes about $39,000.

Here, it is appropriate to cite a popular statement by the former US President Ronald Reagan: "Government is not the solution to our problem, government is the problem."

US borrowing began to rise dramatically 20 years ago. At that time, the American company Durst Organization installed an electronic national debt meter for all to see in the centre of New York. Last year, they had to create a calculator with more digits, as the old one was designed to work with twelve digits.

It is clear that the current global financial crisis has more compelling causes than incorrect action by the US administration in its financial and monetary policy. They involve both a quantitative and qualitative mismatch between the volume and structure of production and consumption. While the US contribution to world GDP is 20-22 per cent, of global consumption their share is about 40 per cent. The high level of consumption in the United States was generated purposefully in the 20th century, in order to demonstrate the advantage of capitalism over socialism. Today the United States lives on credit, and their creditors are those who have US dollars. The well-known Serbian writer on international affairs, D. Kalajic, rightly pointed out: "Dollars are only scraps of paper bearing the marks of idle promises of payment. However, the manufacturers of these papers and debt traders still enjoy the free resources, services and labour of mankind which is forced to obey the great bluff."

Military spending, which constitutes about a third of the US state budget and exceeds the consolidated military spending of all other countries in the world, had a detrimental impact on the economic situation in the US. Total US spending on military operations in Iraq and Afghanistan is currently about $1.5 trillion.

Of course, turmoil in the US economy forces the American financial elite to engage in an information and psychological campaign against their opponents and adversaries of the global dominance of "His Excellency the Dollar."

In the 21st century, a geostrategic information and psychological struggle is unfolding between leading world powers for dominance in the information environment of the global financial system. The media play a key role in shaping public opinion. About 70 per cent of all communicators in the world are American. That is why the world media is the main target for American public information structures and the information-psychological units of the notorious George Soros, the chief financial "terminator" of all time.

In conclusion, I would like to note: despite such a long history for the US currency and its recognition as international currency, we can rightly say today that the time when the dollar was the sole world currency is, alas, over. The world financial system entered the 21st century with three world currencies - the dollar, the euro and the yen, which may lead to significant changes in global financial markets in the long term. At one time, the US secretary of the treasury under President Nixon, John Connally, told the Europeans that the dollar "is our currency but your problem". It is for this very reason that, recently, French President Nicolas Sarkozy said sadly that "the dollar cannot remain someone else's problem."

The dollar's decline poses a headache for everyone who relies on the currency. Countries have collected huge reserves of dollar assets, which are losing their value today. Savings in US currency are becoming a costly proposition. People do not want to keep their savings in a currency that cannot retain its value, while companies do not want to supply goods on the basis of a monetary unit that is unstable and constantly fluctuating. The world should learn a lesson, which is that a country's gold reserves need to be diversified on the basis of gold and a basket of currencies, while the long-term goal should be to create an alternative global currency.