This blog post was featured in the Huffington Post on December 06, 2017.
It used to be that paper money was backed by gold. It was the gold that was in limited quantity that gave value to the paper. Then the gold was taken away, and now the transactions are done only with paper money backed by nothing but trust.
What is the paper worth? The trust people place in it. I trust that if I sell you my cow for a piece of paper, I will be able to use this paper to buy a horse.
If people had no trust, they would not take the paper in exchange for giving up a hard asset.
Since trust is essential to make monetary transactions happen, anything that undermines trust is forbidden by law. It is forbidden to burn or mutilate paper money, for instance.
On one hand, that is strange. It is my money, so if I want to burn it, tear it to pieces, no one has the right to intervene. It is MY money. But the government does. It prohibits any act, even symbolic, that undermines trust.
But what is happening now? It is the United States government that is undermining, subconsciously, unintentionally, the trust people have in the dollar.
DId you know that you cannot change dollars in Mexican banks for pesos? Same in Norway. People shun the dollar.
My client in one country is a bank. As a bank, it exchanges foreign currency for the local currency. It has accumulated one billion dollars in cash it cannot get rid of. No American bank will take it so they can get credit. My client is willing to pay a commission to any bank that will take its money and deposit it for credit. No takers. Why?
To control money laundering, the United States government established some draconian control systems. A bank in the USA will not take one billion dollars from a foreign bank, although it is all legal and fully documented who exchanged the money, the person’s name, address, passport number, etc., so there is no doubt that it is all legal. Still, no American bank, and I tried to help with Turkish, Bahraini, Russian, Montenegrin, and Israeli banks, no one will touch this money with a ten-foot poll. But it is all legal. Proven legal. No drug money. No money laundering…good commission to make the transaction…still no takers…
They will not take it because they will be audited. And the cost of auditing is so prohibitive in time and cost that it is much more than the commission they would get. Even if the cost were lower, they would rather not do it. NO one wants to deal with the United States’ governmental bureaucracy.
So banks refuse to take dollars. And stores refuse to take dollars because banks will not take their dollars.
People are avoiding the dollar.
I suggest what is going on is impacting the trust people have in the dollar. People would rather have other monetary vehicles.
As people shy away from the dollar, it will impact the value of the dollar.
We are shooting ourselves in the foot.
Ichak Kalderon Adizes