IOUs in the Grand Bazaar

OPINION/ANALYSIS:

I step out of a cab in front of the Majestic Hotel in Saigon and hand the driver an IOU as payment. I buy lunch in the Grand Bazaar in Istanbul and give the waiters an IOU; they thank me. I bargain for a $500 lacquer painting in Moscow, and the merchant insists that I pay with an IOU, not with rubles. People keep the IOUs in cash boxes and under mattresses, and trade them among themselves. Each one is redeemable on demand. The merchants count on it.

These IOUs are called U.S. dollars, and as many as one half-trillion - that’s with a “t” - of these IOUs in the form of physical dollar bills are in foreign hands, from street sellers to five-star hotels. But that amount is small when compared to the “electronic dollars” held by governments and large financial institutions.

When any transaction takes place between two countries, it’s conducted in U.S. dollars for two reasons. The world depends on the U.S. to honor its IOUs - whether in dollars or in U.S. government bonds. As the international medium of exchange, the dollar is the global standard for valuing all goods and services bought and sold between countries.

The magic of this for America is that the U.S. dollar can only be printed by the U.S. government. No one else in the world has the right to print U.S. dollars. So, when either of these IOUs is presented to be redeemed by the holders, the U.S. can just print more dollars to pay them.

So far so good. It’s like the world’s largest interest-free consumer loan to the U.S. And, so long as the loan is “called” only by a few of the lenders, printing more has little impact on their trading value. If, however, large numbers of lenders, from governments down to the merchants in the Grand Bazaar, were suddenly to feel that the value of the IOU (the dollar) is going down, or if people holding dollars think they may not be able to redeem their other IOUs (U.S. Treasury bonds), there inevitably would be a disastrous “run on the bank.” This is simple self-interest.

Uncertainty is the giant fire in the theater of commerce: it unleashes immediate terror causing the merchants in this Grandest Bazaar of All to rush for the exit - a stampede that would leave millions trampled underfoot and financially dead. No one waits politely for the next person to exit; everyone wants out first at whatever cost to others. There is no loyalty in the marketplace. It is survival of the fittest.

So, what happens now that the U.S.-China partnership (whereby they make the goods, we buy the goods, and they buy our government bonds with the money) is fracturing? And what if Beijing should follow through with (1) refusing payment in dollars; (2) starting to sell their U.S. bond holdings; and, (3) continuing to manipulate their currency exchange rate, further devaluing the dollar?

Because this coincides with China’s determination to replace the dollar as the medium of exchange, the U.S. government cannot simply print more dollars to get us out of this mess. The hidden hand of the self-regulating marketplace will turn into an iron fist that knocks our economy for a loop. The dollar itself has no intrinsic value - it’s not potatoes one can eat or land for growing them. The greenback’s value is derived solely from the faith of the holder in the U.S. government to redeem it.

In practical terms, this means the average American family will pay more - a lot more - for clothes, toys, cars, appliances, iPhones, furniture and anything else made overseas. This means skyrocketing gasoline prices as the international oil market converts out of dollars, further raising the price of everything transported by trains, planes and automobiles.

When the dollar is no longer the international currency, panic dollar-selling will drop its exchange value like a stone, and we will have lost forever our global economic advantage.

It will be the neutron bomb of economics: it will vaporize the American family pocketbook while leaving us bewildered Yankees standing and wondering what happened.

• Larry L. Eastland is a bishop in the Church of Jesus Christ of Latter-day Saints and a member of the board of the American Conservative Union.