When a Wheel-barrow was Needed to Buy a Loaf of Bread.

What does the Chinese Central Bank, the Russian Federation and the United Nations have in common? Answer: They are actively considering dumping the U.S. Dollar as the foreign reserve currency.

Why do they want to do this? What does it mean for us?

Their financial brainiacs are probably looking at grainy pictures of despondent and depressed Germans taking sacks of money to the grocery store to bring home a sack or two of groceries. Pictures that were taken in the 1920's and 1930's.

Since 1945, the United States has taken progressively more drastic steps to decouple our currency to anything of "real" value. Not because of any financial crisis, but because in order to create consumer spending, we first had to create consumer wealth.

Step 1: Right after World War II, the world's leading financial countries decided that they would fix the price of gold at US$35 an ounce. That meant that every dollar printed in the U.S. could buy one dollar's worth of gold (or 35 dollars to the ounce), even if we didn't have enough gold in the treasury at any given time to redeem all of the money we printed. This was because the likelihood was very low that everybody that had a "gold certificate" dollar (remember those?) would want to redeem their cash for gold at the same time.

Step 2: However, during the late 1960's we ran into a real problem. In order to fund the Vietnam War and the many government-run social engineering projects that were collectively known as the "Great Society", we had to accumulate more gold at Fort Knox. A LOT more gold. So in 1971 the U.S. decided to let the price of an ounce of gold to be set by it's market value. Gold suddenly and rapidly became a LOT more valuable, which meant that we could now print more dollars. Get it?

Keep in mind that from the 1940's through about 2005, the U.S. Dollar has been used as a "reserve" currency. In other words, other nations use the dollar the way we used to use gold. If a country accumulates a large quantity of very stable U.S. Dollars that have a good value against other financial instruments, then that country can leverage those dollars to buy things that they can't buy with their own currency. They use those U.S. Dollars just like gold. But part of the reason that these nations were willing to do this is because we essentially made a promise that we would never intentionally debase our currency.

Step 3: Now here we are in 2007-2008-2009 in the midst of a pretty serious financial crisis. Banks and investment firms bought into highly lucrative but also very fragile "mortgage-backed securities", and worse yet, DERIVATIVES of those securities. This was all fine and dandy as long as real estate values kept going up and up and up. In order to keep those home-builders busy, we had to start selling more and more houses to people who were on the edge of qualifying, or worse yet, people who really didn't qualify. But that was OK. We changed the rules to allow them to buy houses anyway. Well, at some point, some of those folks were going to start defaulting. That began the cascade slide: More homes vs. less demand equals falling real estate values, which caused more people to become "upside down" on the mortgages, causing more defaults. At that point, the wheels came off and we started tumbling down the cliff.

In order to kick-start the economy the way it used to be, people have got to start spending money again. So, here's what our govenment has decided to do. Let's just "borrow" against ourselves and print more money. Two Trillion Dollars Worth. The problem is that this solution has been tried before. Just for fun, look up how in the 1920's Germany's Mark (their "dollar") pretty much crumbled and rampant runaway inflation took the country into a dismal financial period. Since neither we (or they) didn't correspondingly create all that wealth what really happened is that all dollars, everywhere, are suddenly worth less. A LOT less.

So now countries that have a LOT of our dollars now have a LOT LESS wealth in their vaults than a few days ago because we just devalued our dollar in the vain hope that by putting more dollars on the market we can get people to start spending. Oh, incidentally, while this makes the dollar less valuable against other currencies, it also makes things manufactured in the U.S. (do we manufacture in the U.S. anymore?) less costly to foreign purchasers. This makes American goods more attractive to foreign buyers because they can buy more of an American product with less of their native currency.

But if WE can see that side-effect benefit, you can darn well bet that the Russian, Chinese and UN financial brainiacs can as well. Which means this: They are positioning themselves to begin to divest themselves of their stockpiles of U.S. dollars. Now, with the dollar not being backed up by something tangible, like a precious metal in a secure vault somewhere, this also means that the dollar is subject to the same market forces that effect all other consumer goods. In this case, as demand for the U.S. Dollar drops, so does it's value unless we reduce the supply. Which means that if the biggest holders of the U.S. Dollar were to 'dump' their holdings this could cause a severe spiral where the dollar becomes like the peso or the yen; nearly worthless on the world market.

And then instead of looking at grainy black and white pictures of despondent and depressed Germans taking sacks of money to buy a couple of meals at the grocery store, we will instead be looking at gorgeous 16 million color digital pix of despondent and depressed Americans taking sacks of money to buy a couple of meals at the grocery store.

Write your congressman. Write your senator. Write your President. Tell them to cutback on government spending. Tell them to stop with the stimulus bills. Tell them to let the free market system work. Failing companies should fail. Companies that are tough, lean and mean will survive. Let's hit bottom and then rebuild. But it will be easier, a LOT easier to do if our U.S. Dollar still has some value to it. It's not only better for us but for the U.S. and the world.