The Clock Is Ticking on This Massive Currency Shift

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Last week I was asked by a Wall Street Insights & Indictments reader about a new challenge to the U.S. role in the global economy that few are considering.

It's a dominant role we've held since the latter part of World War II, and for 70 years it's gone largely unchallenged.

Until now.

The question isn't complicated, but it will be disturbing to some…

The Question No One Has Been Asking

The question was one begging to be asked, and I'm glad one of our WSII readers put it out on the floor. Here it is:

"I have a question which, as far as I know, has never been raised. Perhaps you can offer a viable answer.

In 1944, at the Bretton Woods Conference, the dollar was made the reserve currency for the world. This suggests to me that there are perhaps trillions of dollars floating around out there that are having little or no effect on our economy. I read that China is now trying to install the yuan as the new reserve currency, or at least at some point in the future, international trade will be done with other currencies.

What effect will that have on our dollar? This is something I've been thinking about for the past several months, wondering what we should be doing to prepare for that development. It seems to me that at some time in the future, all of those dollars will be repatriated, and yet no one that I know of has even raised the question.

Does that mean that I have it all wrong, or are people just too afraid to consider the possibility?"

To answer, first let me address what happened at Bretton Woods and what a "reserve" currency is, because understanding how a currency war will play out requires a look at past efforts to avoid one.

How the Dollar Became King

In July 1944, with World War II still raging, but with an end to the devastation in sight, the 44 Allied nations, led by the United States, met in Bretton Woods, New Hampshire. They planned to hammer out a policy to "govern monetary relations among independent nation-states."

The allies needed a financing mechanism to rebuild their countries and economies. And they needed a stable "global currency" to take the place of different currency regimes prone to competitive devaluations leading to economic disruptions.

Although John Maynard Keynes, a vocal and influential British economist at the time, proposed the "bancor" as a new world currency unit, the United States prevailed. The dollar became the "anchor" currency around which fixed exchange rates would be established.

The U.S. prevailed not only because it was by far the strongest ally. It also had the only viable economy paired with the means to help finance recovery. By that time the dollar was also the only currency still backed by gold.

Because the dollar was "reserved" by gold, the term "reserve currency" came into existence.  But reserve currency means more than backed by gold, which is important to understand since Richard Nixon ended the dollar's convertibility into gold on August 15, 1971.

A reserve currency is first and foremost a currency that has the full faith and backing of its issuing government.

Join the conversation. Click here to jump to comments…

About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Prakash Aswani | April 1, 2014

    Is China hoarding Gold for that eventuality?

  2. Ed the Grocer | April 1, 2014

    If the Pentagon can misplace a few trillion dollars, we should understand that all currency is babble. What most countries are looking for is trading stability and they thought that what the so called US dollar was. What the world received was a greedy Federal Reserve. We are waiting for and will likely get open market trading that will include gold. If all countries are smart, they will constantly move around the currency market in order to slightly reduce corrupt traders. We must remember that no currency should be given priority and allow production and the means of production to rule.

    • Wiganunda | April 1, 2014

      Spoken like a true communist/socialist, since the name of your real game is to create a complex way which is beyond the thinking of common people as to how to legally steal from those who keep a positive cash flow into thier country by proper management and give it to those who like yourself spend thier time figuring out just to how to con that surplus out of the hands of those who have it and put it into the hands of those who would rather sit on their arzzes and suck off others, while breeding like rabbits without a care as to they are going to feed them and after starvation sets in, they cry, like the helpless babies they keep creating, for more free food, shelter, healthcare, 30 hour work weeks and 6 week vacations as long as there are fools to keep giving it to them.
      Can you blame them or should the hard workers and savers balme themselves?

      • don | April 7, 2014

        Yours is a simplistic response; but one that is often echoed by RW Extremists. Capitalism has become Predatory; and, Rent-Seeking; Rigging Markets is the new modus operendi (sp?) "If U ain't doing some one – – some one is doing U!" To Wit: The Four Horsemen of America's Economic Apocalypse are: Nation's entire Financial Sector; the MIC, the Health Care Industry; and, sorry to say; the Institution of Higher Education. Classic Capitalism and the Idea of Free Markets are a Ruse – – a National Myth, by any standard, today. Your babble about Welfare – – which, makes it convenient to pile on those less fortunate; masks your smugness and selfishness. Welfare Costs pale in comparison to the costs for Social Security, Medicare, Medicare, Part D; and Medicaid. And, you don't want to get me started on Corporate Welfare ($100 Billion a year); nor, the unfathomable amount of waste in the Pentagon. Example: Cost of the F-35 Boondoggle approaching $1.5 Trillion – – twice – – the estimated cost seven years ago. The real tragedy is that the Plane is dangerous, under-performs; and not one Branch of the Military wants the damn thing! And, trust me; you don't want to hear about the 1991, Abram Tanks still scheduled for production in 2016! And, oh, Pal; there is so much more!

        Many of the Nation's, so-called Entitlements; are under-funded Liabilities – – promises (even Contracts if you will), with the American People. Work Hard, and get your just return, in your retirement years. What a Kroc! Crony Politicians from Both Parties have been raiding the Funds for old age, for years; and, kicked their Funding Obligation down the Street – – like they have been doing for years – – with everything else! That's one of the Reasons our accumulated, National Debt is now un-payable; and, that a Collapse is looming. Your GOP Friends haven't supported a Tax Increase in 25 years; yet, they crammed the cost of their Three Wars, into the National Debt – – which is a total abomination!

        I got to stop this S . . . ! Each key stroke brings other Sins of the GOP to mind; and, this ole' somewhat, savvy Dude has other Fish to Fry.

  3. Timothy | April 1, 2014

    Surely the answer to your reserve currency question is perfectly obvious

    The dollar will cease to be the reserve currency due to total fiscal irresponsibility by the USA.

  4. Ray Southwell | April 1, 2014

    China has been hoarding gold for years now. They last announced their gold holding in 2009 and moved into sixth place in world. They are expected to announce their updated gold holdings this month. What would happen if China backed their Yuan/Renminbi with gold?

    Since Nixon took the world off a gold backed dollar in 1971, the world started to question the dollar's standing. In 1973 Saudi Arabia would only accept the dollar for their oil. The petrodollar was born. A few years later all OPEC nations would only take dollars for their oil. Our dollar went from being backed by gold to being backed by oil. When Saudi Arabia and OPEC stop taking only dollars for their oil, our dollar will die. It is in the process of change. Will those in control of our government allow the dollars death without a fight? I see a World War in our future.

  5. William | April 1, 2014

    I believe the question the fellow asked about the the dollar as the reserve currency that foreign central banks are now holding (which are many) for the buying of commodities such as oil were to come back to the states because of the establishment of another world currency or a conglomeration of currencies not including the dollar what will happen to the dollars we hold here? There are now several countries not using the dollar as a trading currency to buy but are trading in there own currencies as of now. I believe we are in the same situation the pound was in 1944.

  6. Josephus | April 1, 2014

    I see a transfer of power. The US knows that their time is ending, but need to allow the transition to be relatively peaceful. A war is the last thing the US needs. Remember what happened to Britain in WW2 ? It lost its financial power and the US became the credit holder. Now that the tables have turned, China will eventually try to become that power, but there will be Russia and India in the churn. Hopefully, all nations will take note that war is futile.

  7. hamblin59316 | April 1, 2014

    Thats the closest I have come to understanding currency reserve, but it is still difficult – too difficult for the average Joe, and too complicated for international trade – in my view.
    Apart from National pride and the transitional difficulty, would it not be far better to have a one only world currency. Straight forward, understood by everyone, usable by everyone. If a country wanted to sell more of its goods on the international scene, the individual producers would have to lower their prices. That would force their suppliers to lower THEIR prices down the line. The nett result would be a huge benefit to developing countries and their people, but that means a big loss to those who profit from using those low wage countries.
    I hope Shah will provide some insight on such a setup.
    Allan

    • HerpDerp | April 5, 2014

      The obvious problem with a one-world fiat currency is it eliminates competition not only nationwide but worldwide. Putting all your eggs in one basket is a bad idea even if the basket seems trustworthy, but in this case the corrupting incentives for the entity issuing a worldwide fiat currency would be unprecedented…perhaps an order of magnitude worse than with the Fed, which has already shown once again how central banks inevitably destroy currencies. The effects of an international monopoly on currency would be almost incomprehensibly devastating.

      Don't get me wrong: International bankers and elites are bound to try your suggestion, precisely because it benefits them and the governments that align with them. They've been trying for generations, and they just might get their wish in our lifetimes. If they do, international trade will become simpler, worldwide confidence and stability will likely improve for a time, and we'll kick the can further down the road. Over time though – perhaps a generation later, or perhaps a century later – we'll see the same problems we're seeing today with crippling sovereign debt, exaggerated business cycles, inflation driving up real prices faster than wages, and inflation eroding existing savings (unless you invest correctly or time the bubbles right). The difference is, there won't be a single creditor nation in the world (if nations even exist at the point…and if they don't, watch out for the Über-Stalin), the bubbles and debt burdens will be even bigger, the wealth will be even more concentrated, and there will be nowhere in the world you can go or put your assets to escape the crash to end all crashes. (You could perhaps buy gold and silver if they're available, but that depends on the laws of the time – probably awful ones – and it doesn't say much when the best you can do is preserve some purchasing power while the world heads into long-term ruin.) You can argue that today's markets are already globalized, and a recession or crash will already hurt the entire world, but the emerging markets and creditor nations will weather the storm and come out strong in the long-term once the upcoming realignment occurs, whereas the US is going into long-term decline. After a truly international fiat currency fails, it will instead be the entire world going into long-term decline, and God knows what kind of tyrannical measures the international cartel will take at that point to maintain their stranglehold over currency and power. I'd rather the world takes a different direction, instead of implementing one of the worst ideas ever conceived.

      The only way we're ever likely to see a long-term successful international trade currency is if it has the following qualities:
      *It must be truly and transparently backed by physical gold.
      *Units of measure must be transparently denominated in obvious weights of gold (ounces, grams, milligrams, etc.) rather than units with a mutable or ambiguous definition (e.g. "dollars").
      *Any issuing "central bank" must transparently maintain paper certificates and "central bank credit" (monetary base essentially) equal to physical gold held by the issuer, and it must also allow redemption.
      *A clear distinction must remain between cash and "central bank" credit (with a 1:1 ratio of paper or electronic proxies and physical gold held by the issuer) and commercial bank deposits (IOU's) used for fractional reserve banking.
      *Competing private entities must be allowed to issue their own competing currencies.
      A failure in any one of those areas could lead to de facto fiat money resulting in exploitation and collapse. Ideally the paper certificates from various issuers would be considered interchangeable, and a single one might be used by consensus for international trade, but free competition is a necessary check against corruption, counterfeiting, and vault security lapse (i.e. thefts or a Goldfinger scenario leading to sudden monetary deflation). Anything less than a gold-backed currency is just begging for the age-old inflationary problems and exacerbated bubbles over and over and over again. (Why gold and not something else? Its properties lend toward a more stable and limited supply than any other known commodity. It's imperfect, but it sucks less than any other option, which is why the central banks in emerging countries are getting wise and hoarding it, while western bankers are throwing everything they have at shorting the paper markets.)

      You won't hear any Keynesians agreeing with this idea though, because they hold dear their power to play God with the money supply and fuel government spending to "stimulate aggregate demand." I mean, combined with the Keynesian-assumed time preference of zero, a stable money supply allowing for 1-3% annual price deflation (from economic growth) would undoubtedly create the mythical deflationary spiral, and nobody would ever buy anything, so the economy would starve. (Or at least that's what the geniuses type on the new tech gadgets they just bought despite the prices going down by something like 30-50% a year.)

      • hamblin59316 | April 7, 2014

        HerpDerp, you present a wide ranging responce to the idea. I would like to see presented the presumed steps leading to what you forecast, but for now how about explaining why; "it eliminates competition not only nationwide but worldwide". Give me a scenario first for nationwide – two entities normally competetive, but no longer competetive. Then nation A losing competitivness with Nation B.

        Why must competing private enteties be allowed to issue their own competing currency? A scenario if you would.

        That will do for now.

    • ronald | April 8, 2014

      I think you should look at Europe, or cant you see that far.ron

  8. 000057794747 | April 3, 2014

    One world currency, 666 and the Antichrist? The whole world isn´t able to agree on anything. Does that mean that we need a world dictatorship?

    • mmmm, think again... | April 3, 2014

      Well, friend, don't worry about that happening because it already happened…..please study the entire works of Josephus, the original author and eye-witness to the accounts of the Fall of Jerusalem in A.D 70. Ceasar Nero was the "Number of a man, 666; the Man of Lawlessness", literally, the antichrist of whom you are referring to in error.

      So sad, the brainwashing of Christ's Church to believe the lies of the enemy spoon-fed to us by Evangelical teachers who don't know that they themselves are being manipulated into the plan of the devil. Rapture teaching is the "Doctrine of Demons".

      Please research and don't just believe everything you're being taught in church because everything about "end-times" is ALL WRONG!! Satan has been defeated by the cross therefore Jesus Christ has won the Victory already!!!!

      How could we ever impute to the Holy Spirit that He is not capable of saving the entire world?

  9. Efrain | April 5, 2014

    What will the liberals do when they can no longer print money, borrow and spend and take from hard working people to give to the fat lazy pork programs and sedentary entitled snobs? What will high spending Democrats and some Republicans do? Hmmm!

    • Robert in Vancouver | April 5, 2014

      They'll have looted enough of your money before the crunch comes so they can carry on living like royalty, like they do now.

      For everyone else, it's going to be rough.

  10. therooster | April 6, 2014

    Gold will emerge as a reserve currency in due time. I'm referring to gold with free floating value and where the denomination is sovereign weight. I am not referring to a gold backed FIXED & pegged currency/gold relationship such as what we saw in Bretton Woods. Gold weight as real-time currency is only possible because gold was set free from the example of pegged FIXING that we saw back in the BW days and beforehand. Historically, this is what has led to the hoarding of gold when applied to the market as a currency. The problem wasn't bullion. The problem was the FIXED peg that gave people the incentive to hold on for a better trade. Gold has historically been under-valued when looked upon as a currency. The counter-intuitive irony is the best part. When debt-free assets (or fully backed weighted derivatives) circulate as currency, they support the greasing of the economic wheels. As such, this new debt-free liquidity allows for debt based liquidity (fiat currency) to be drained off and removed from circulation by conventional debt servicing means (loan repayment). Condensing this reveals that bullion in circulation actually purges debt ! Adding bullion becomes a symbiotoc hybrid relationship with debt currency, much like a Yin-Yang dance of co-operation. Put that in your 21st century pipe and smoke it. The hallucination is mighty powerful. :-)

    • hamblin59316 | April 7, 2014

      It seems to me that Gold is a commodity. Like other commodities, its valu is variable, based on supply and demand. It has had a long historical demand because of: 1. Its glitter. 2. Its relative scarceness, 3. Its physical durability. It has always had valu as a means of exchange because of those attributes. Silver is similar. But is it the only means of exchange? Not unless we make it so. Can something replace it? Yes. One example – Wheat exchange for oil. Huge warehouses storing surplus materials, to be exchanged for what – not gold, paper money!

      I think the first systemic problem is fractional banking. Then the buying and selling of mortgages etc, it goes on and on. Both require an expanding economy to survive. Wow I am not going to change anything so I'l stop!!!

  11. Gene | April 6, 2014

    The supposition here is that China will continue to be strong and grow enough to establish the renminbi (yuan) as the world's reserve currency. I can think of two issues that might counter that supposition. The first is that there are already signs of gross government mismanagement of their economy which could weaken their future play for the renminbi. Second, the Western power brokers quietly hold a racial bias and fear of the Far East, the Chinese in particular, that could weaken China's moves outside of the BRIC nations and their poorer allies. If indeed the Petrodollar ceases to be and another currency takes its place, my bet is that we will see a new trade currency come into being, just as Keynes promoted in 1944.

  12. Goldy | April 6, 2014

    Therooster………So this the reason why the German Gold has been missappropriated 3400 tons
    of it by the Fed. Res.? Or whats happened there?

  13. James | April 9, 2014

    WHEN? … NOT FOR A LONG TIME.

    By the time we have a major currency shift, most of us will be dead.

    China has a long way to go to establish itself as another new world currency reserve.

    U.S. GDP dwarfs China by a 14:1 ratio (according to what I read)

    U.S. is still the dominant economic power in the world and will retain its major world reserve currency position for some time to come. U.S is looked up to by most countries. As for China?

    The clock is ticking … slowly. China is not a threat …. yet.

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