World Must Abandon Paper Reserve Currencies Written by Lewis E. Lehrman Monday, September 26, 2011 Federal budget deficits and balance-of-payment deficits have radically increased since World War II. Today s dollar has lost 85% of its value since 1971. Relative to gold the dollar has lost 96% of its purchasing power. But America has experienced sustained inflation and deindustrialization because of the overvalued reserve currency role of the dollar, overvalued relative to other paper currencies, especially the Chinese yuan. While China is an important trading partner of America, it may also be a mortal threat. The Chinese economy is subsidized and sustained by the pegged, undervalued, yuan-dollar exchange rate. Neither the United States nor China seem to grasp the long-term, destructive consequences of the world dollar standard. The Chinese financial system has been corrupted by tyranny, deceit, and reckless expansionism. But, like America, China is destabilized by the perverse workings of the world dollar standard. Only monetary reform, including an end to the reserve currency system, can permanently correct the American, Chinese, and global disequilibrium. Without international monetary reform, the perverse effects of the dollar reserve currency system will continually metastasize into one financial and political crisis after another even on the scale of the Great Recession of 2007 09. Currency wars, protectionism, and social instability will intensify. Currently, China holds more than $3 trillion of official reserves and more than $1 trillion in U.S. government securities. These Chinese dollar reserves, earned by export surpluses, directly finance the American federal budget and balance-of-payments deficits. China has chosen to hold a significant fraction of its export surplus in the form of official dollar reserves. These dollars are promptly re-deposited in the U.S. dollar market, where they are used to finance U.S. budget and balance-of-payments deficits. Read Full Article 1/1