Submitted by The Pragmatic Capitalist

There is, perhaps, no greater symbol of the slow decline of the United States, than the money we carry in our wallets. Of course, the United States isn’t the first nation to suffer similar currency problems. The parallels between the modern day United States and 19th century Britain are striking. Great Britain suffered from a similar currency decline as the world’s most powerful economy began to decay.

The British Pound was the world’s reserve currency for much of the 19th century until their economic power declined and the world lost faith in their ability to responsibly manage the currency. Ironically, it was the Seven Years war (or The French Indian war) which began this precipitous decline. The British doubled the national debt as they battled for the colonies and borrowed massively from European bankers. This borrowing ultimately resulted in higher tariffs/taxes and led to the American Revolution.

Expensive wars and expansionism resulted in massive debts that ultimately sapped the country of their economic prowess. At the time the United States was a robust, up and coming emerging market that was viewed as the wave of the future (this sounds all too familiar doesn’t it?). As the power shifted so too did the confidence. This change in confidence compounded the problems in Britain as investors began to shift their money from Britain to the United States. The following chart display’s Britain’s severe financial problems that resulted from the wars and a failed attempt to print their way out of their problems. The British Empire’s reliance on debt and bankers ultimately crushed them. The British Empire never recovered. The bankers, however, prospered.

Having the reserve currency comes with a great deal of responsibility. Over the course of the last 15 years the United States has abused this power with reckless spending, wars abroad and a printing press that just won’t quit. As I mentioned many times during the financial crisis last fall, the dollar as a reserve currency likely saved our skin. Being the reserve currency made the dollar the obvious safehaven currency. The world was too dependent on the well-being of the dollar for it to implode. If it hadn’t been the reserve currency we probably would have faced a much more harmful crisis. But now the world is tired of seeing us abuse this privilege just as they grew tired of Britain’s abuse of the reserve currency.

There is now a massive change occurring in the international financial markets. Capital once flowed into the United States because we were the responsible high growth nation. But Americans grew to take this for granted. Saving money and balancing check books became unnecessary because there was over $2 billion in foreign funds pouring into the United States on a daily basis. But now, nations are diversifying out of the United States.

Yesterday, Bloomberg reported the massive shift in reserves out of the dollar:

Central banks have been shifting their record reserves into the euro at the expense of the U.S. dollar. Investors may not follow, with America’s saving rate and trade balance data back at levels that prevailed when the European currency was unveiled in 1999.The CHART OF THE DAY shows the percentage of allocated world currency reserves in dollars has fallen as holdings in euros increased in the past decade, according to quarterly data compiled by the International Monetary Fund. Also tracked are the U.S. personal-saving rate and trade balance as a percentage of gross domestic product.

A second chart shows the Intercontinental Exchange Inc.’s Dollar Index setting lows around the times Bear Stearns Cos. collapsed and Lehman Brothers Holdings Inc. went bankrupt. Short-term interest rate differentials favor the euro over the dollar, though only by 0.75 percentage point, the data show.

The dollar’s position as the world reserve currency has been called into question since reaching an almost three-year high in March. The currency has been under siege as the Treasury sells a record amount of debt to finance a budget deficit that totaled $1.4 trillion in fiscal 2009 ended Sept. 30.

If foreigners continue to view America as a reckless guardian of the reserve currency they will slowly stop pouring money into the United States. This will ultimately destroy the great nation we built as the negative feedback loop feeds on itself and the lack of funding inhibits domestic growth while the debts gnaw at the Treasury’s leg.

The secular damage is most evident in the crashing trade weighted dollar. Investors cheer the recent rally in stocks despite the fact that the currency in their pockets is down 25% from its peak while the S&P 500 also remains over 25% from its peak.

In a recent story I quoted a piece by Ron Paul:

An audit would expose the Fed as a massive fraud perpetrated on this country, enriching a privileged few bankers at the top of our economic food chain, and leaving the rest of us with massively devalued dollars which we are forced to use by law. An audit would make people realize that, while Bernie Madoff defrauded a lot of investors for a lot of money, the Fed has defrauded every one of us by destroying the value of our money. An honest and full accounting of how the money system really works in this country would mean there is not much of a chance the American people would stand for it anymore.

He could not be more correct. The government has grown accustomed to borrowing their way out of their mistakes, but as citizens we need to hold our government accountable for their mistakes. For too long we have allowed the Federal Reserve to devalue our money as the U.S. government runs up debts they can’t properly manage. The world is tired of it. The U.S. citizens should be furious about this. We should audit the Fed, reduce our dependency on reckless banks, and we should hold our government accountable and force them to do what every responsible American is currently in the process of doing – managing their checkbooks responsibly. If we do not, I can guarantee you that the America we have grown accustomed to will be a chapter in the Chinese history books.