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Only the US Can Destroy the US Dollar


US Dollar as a reserve asset was the first “flywheel” – and only the US can destroy its own ecosystem.

Being the reserve currency has enormous benefits. And in the entirety of financial history, the US is the first and only fiat reserve currency. Sterling, and any other reserve currencies derived their value from the ability to maintain their value to gold. With the two World Wars, the US came to be seen as the government most able to honour its commitments, and saw huge inflows of gold, but in the 1960s, gold started to flow back to Europe and elsewhere, and in essence, Nixon decided that higher interest rates needed to maintain the link to gold price was not worth the effort, and cut the link to gold price.

Moving from a gold based currency to a fiat currency has had enormous benefits for the US. First of all is that it no longer needs to ever run a current account surplus. That is it never needs to reduce consumption or imports, which is a huge political benefit. The norm since 1980 is for the US to have a current account deficit.

The US also does not need to balance the budget. The budget was balanced in 2000, but this was probably now seen as a tactical error on the part of the Democrats.

What I find most interesting about the transition from gold to US treasury backed financial system is how Asian nations, despite a long history of using gold, accepted this system. China and Japan have some of the largest foreign reserves in the world, but their holdings of gold are limited. Even India holds a relatively small amount of gold as foreign reserves.

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Olduvai IV: Courage
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