Every era has a reserve currency. This reserve currency is the currency all trading partners accept as payment. The state that produces the reserve currency is said to possess seignorage. This is the profit associated with the ability to buy real things with money that was created out of nothing.
What happens if an empire loses the possession of seignorage?
The US Dollar empire
Between say 1713 and 1929 the Pound Sterling was the reserve currency. After 1945 the US Dollar was the global reserve currency, backed up by the vast productive power of US industry. The US Dollar had been pegged to gold at 35 US Dollar an ounce between 1934 and 1972. After 1972 the US Dollar along with all currencies in use were backed by trade flows. Currencies were floating up and down. Money could be created by central banks by expanding credit.
But the position of the US Dollar had weakened by unpegging it from gold. More and more international trades were done in currencies like the Deutschmark and the Yen. Despite the weakening position of the US Dollar commodities like oil, rubber, coffee and goods like airplanes and arms continued to be traded in US Dollars. A problem of an international trading system with floating currencies is the inherent insecurity of international merchants and traders. They never know what their returns will be, which hinders trade. This also disrupts the taxes that are levied on their trade, which fill the coffers of states that manage the international order.
The US milked the US Dollar for what it was worth, recklessly expanding the money supply with cheap credit. This way the elites could keep expanding an intrusive managerial state and a international empire with roughly 800 Army, Navy and Airforce bases around the world.
The beginning of the end of the US Dollar as a reserve currency
But expanding the money supply by easy credit led to a succession of boom bust cycles in the 1990ies and thereafter. After every bust the US flogged the economy back to life again by expanding credit. The biggest bust came in 2007. The political and monetary elites reacted by giving the same treatment again. The FED created the biggest expansion of credit thus far, to prop up their hollowed out financial institutions, vastly expanding government debt, adding to the household debt and showing up in a unbalanced trade balance with Asia.
The American public is eyeing the new debts warily. And the international trading partners of the US are increasingly wondering about the worth of the currency that is created so recklessly. The trading partners must worry about the ability of the US taxpayer to service the government debt burden in addition to their private debt burdens. Not to mention that the interest on the debts are choking off buying power of US households. Unless said households increase the rate at which they take on new debts, which they prudently seem unwilling to do.
What is the alternative?
There is no currency to take the place of the US Dollar in international trade. To set prices, act as a medium of exchange and a reliable unit of value. Now however a new currency is being worked on behind the scenes.
In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oilNo Dollars for oil, because the US Dollar is an increasingly unreliably unit of value.
moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currencyThis would provide a solution for the unit of value, pricing and exchange medium challenges a new currency would face. The Middle East, Russia as suppliers of raw materials plus Asia and Europe as suppliers of finished goods would possibly be able to manage their trade flows in this way.
When will the new currency come about? It will take 9 years.
The current deadline for the currency transition is 2018In the mean time gold will be used as a stop gap to fill the place of the US Dollar. Expect the gold price to rise against the US Dollar. It is now at more than 900 US Dollars for an ounce, up from 35 US Dollars per ounce between 1934 and 1972.
The consequenses for the US
If oil would be traded in a new currency, it would be a big hit for the US. The US Dollar would lose reserve currency status. The demand for US Dollars would fall and the exchange rate would fall. The central government of the US would lose the profits of seignorage. Prosperity for US citizens would drop as import prices rise. In the short term the shock to the US political and social system would be sharp. On the other hand US made goods would become cheaper and manufacturing and employment in the US would actually increase in the MEDIUM TERM at the expense of Europe and Asia.
Collapse of the Empire
Political conflict in the US will intensify if the government will not be able to create money at no cost. Politicians will have to cut budgets. This would break up the internal or external empire of the US. Possibly both.
The internal empire
The internal empire is the empire which the US proper has become. The territory of the US now contains in addition to the White core nation plus Blacks millions of Asians and dozens of millions of Mexicans plus significant numbers of other unimportant minorities. Without cheap money to pay for an expanding military, bureaucracies and welfare millions would be without jobs, status, income and access to healthcare in addition to the number who are already there. Politically it would cause all these groups to become more confrontational and to view politics like a zero sum game, a game were one party´s loss is the other parties gain. Especially the Mexicans and Whites are likely to collide over the possession of some of the Southern states of the US.
And this coincides with the rule of the nation´s first non-white President.
The external empire
The external empire are the network of military bases the US maintains around the globe, dominating the world militarily and politically. Without cheap funding the political elites could decide to withdraw in the manner of the Soviet Union withdrawing from Central Asia and Eastern Europe in 1989.
Withdrawing from the external empire would cause wars breaking out accross the globe, in Africa, the Middle East and Central Asia. Conflict which were hitherto surpressed by the US would come to the fore. Getting the situation under control requires a new empire or several new empires.
People will be nostalgic for the lost US empire, in the way they are nostalgic for the Soviet Union of the Yugoslav Federation.