"Demise or Not…the Dollar is Vulnerable” - October 6, 2009

A report out of the UK means that the phrase “the new world order” is happening faster than anticipated. The Independent newspaper is reporting a “game changer” – many Arab states along with China, Russia, Japan, France, and Brazil are planning to phase out the dollar as a basis for oil trading over the next 9 years.

The plan would be to replace the dollar with a basket of at least 5 currencies: (1) the Japanese yen, (2) the Chinese yuan, (3) the euro, (4) gold, and (5) a new unified currency for the major Middle East Gulf States.

This would be a serious departure from the present architecture of the modern international financial system that was put together after World War II – the Bretton Woods accords.

This is happening for a couple of reasons:

(1) Changing economic power in the world, particularly China’s extraordinary new financial power; and

(2) Anger over the crisis the United States caused in world financial markets in the past couple of years.

Two near-term implications are obvious:

(1) Gold will become very attractive in the near term, and
(2) Inflation of imported goods…including oil…will continue to occur as the dollar continues to weaken.
What’s important to note about “game changers” like this in capitalism, is not so much to worry about the new rules, but to understand them so that you can play by them and not be held hostage by the hope that it ain’t so.