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Things Here in The US Are About to Get Very Expensive Very Soon

Permalink 02/14/11 16:30, by OGRE / (Jeff), Categories: Welcome, News, Background, In real life, On the web, History, Politics, G-20, Stimulus Spending, U.S. Economy, Financial Reform Legislation

Another G20 country is coming out publicly in support of a new global currency to replace the US dollar or (USD).

France, as current head of the Group of 20 countries, will help the transition to a global financial system based on 'several international currencies', French Economy Minister Christine Lagarde said today.

Lagarde, speaking ahead of a G20 finance ministers meeting in Paris on Friday and Saturday, said the world had to move on from the 'non-monetary system' it now has to one 'based on several international currencies'.

China is also behind the move to "get off the dollar" so to speak. I chronicled this some time back. Since my last post on global currency issues; China has become the second largest economy in the world.

Japan’s gross domestic product fell less than estimated in the fourth quarter in a pullback that may prove temporary as overseas demand revives production after the nation fell behind China as the world’s second-largest economy.

This means that the country who has for the longest time been calling for a new world currency, China, now has an even better platform for their argument.

Currently the US enjoys some special perks having the USD as the world's reserve currency; because of this the US can never literally go broke. US dollars are needed to trade on the world market so the dollar's value is intrinsically protected against other currencies. That is why the rest of the world is getting so angry about QE2 or the second round of Quantitative Easing. Without getting into the specifics of QE2 the end result is a devaluing of the USD.

Let's say that you are a French company. You have just converted a large sum of French currency to the US dollars for trading on the world market. If the US government makes economic decisions which devalue the USD by 5% you immediately loose 5% of the money you have just converted. Or consider you are a nation whose currency already trades at a loss in relation to the dollar (the dollar is a stronger currency). If the USD drops in value on the world market your already weak currency becomes even weaker because your currency might be priced against the USD at the same rate as before the dollar value drop. This is in part why so many countries are getting angry about how our government is handling our economy. The USD effects the global markets. Foreign interests are at risk when they move assets to the USD, so it is more likely that they will go with another currency which has fewer fluctuations in value.

Historically the USD has been very safe because the US government has NOT played such a central role in the valuing of the dollar; the global markets have. Never before has the US government taken on such large debt and attempted to directly effect the economy the way it is doing right now.

In other words foreign interests are less willing to exchange their money for US dollars; to see the US government make arbitrary non-market-driven decisions and pull the value out from under the dollar.

If the world's reserve currency shifts from the dollar the price of everything will go up greatly here in the US. If a company in the US wants to purchase something overseas they will first have to convert their US dollars to the new world currency before purchasing on the global market. This will put the US at an immediate disadvantage. Oil will no longer be priced in US dollars. The US will effectively loose the ability to control its currency in relation to the rest of the world. There will be immediate cost increases in every sector of the economy. When energy prices go up everything else goes up.

Just pay close attention to what happens in the near future. The US might be in for a really wild ride while our economy adjusts to these changes.

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