Articles

US$ Contracts Should Go The Way Of The Dinosaur.

The United States dollar became the “trading currency of choice” in the era after World War Two that saw the rise of the U.S. middle class turn North America into the highest consumption zone on the planet. As much of the production was heading out of international markets and into the United States and America was helping to ‘re-build the world’, their currency became valuable, stable and the most frequently traded. It was also an era when carrying a single denomination of cash made things easier. It was also in America’s economic interest to very humbly and graciously accept the mantle of foreign trading currency of first choice. But any sovereign currency becoming the global exchange instrument was always deeply flawed – before we even get into the new context that awaits us in the twenty first century.

Henry VIII oversaw the introduction of the first international trading exchange instruments nearly 500 years ago. They were glorified letters of credit – paper certificates – backed by banks, governments and between the two parties to the trade. Many argue for the return of a system that makes the transaction of a similar nature and not open to the mysticism of currency markets.

Russia and China for example have been arguing for the last five years for the establishment of a new international trading instrument under the auspices of the World Bank that is a more elegant version of a funds on deposit or bank guarantee model. Paid in one side in the currency of the buyer and paid out the other side in the currency of the seller.

The United States economy is under intense pressure. According to The Eureka Report, nearly 2 million middle class American families will lose their homes this year alone. A look below the recent U.S. Gross Domestic Product numbers reveals official unemployment struggling to get below 10%, massively escalating debt levels and flat-lining consumption. The GDP increase is almost entirely down to the unemployed American borrowing even more money that they can’t afford to buy a new car.

Their government is printing paper that it has no increased asset backing for. America is losing its position as the World’s largest consumer and economy to China. So does that sound like the international trading currency of choice? China doesn’t want the Yuan in that position either.

Today foreign exchange – including guarantees – is an electronic process that takes seconds.

Transferring into and out of any currency is simple and easy. Stability and risk minimisation is increasingly not about hedging the US$ but in writing contracts in the most appropriate currency for the trade (yours or ours) and hedging that risk – only if necessary. More and more businesses that require frequent international transactions are opting for alternatives to the United States dollar. Because they know that the shortest distance is between two points. Particularly when any third point not only no longer minimises risk, but creates complications and inefficiencies that are no longer relevant.