If the Iranian bourse becomes a reality, guess what will happen. First of all, billions and billions of our dollars will become unwanted on virtually every corner of the globe. That means there will be a surplus of our currency. Thus, when there’s too much money in circulation, what occurs? Answer: prices rise. That’s called inflation.

Look at it this way. In pre-WW II Germany, hyper-inflation was so out-of-control that people needed wheelbarrows full of cash to simply buy bread and milk. In this sense, inflation is a hidden tax which saps our true purchasing power.

Understandably, if our currency becomes less desirous around the world, the value of our “real” money will drop significantly. And, considering that real wages haven’t risen in quite some time, what does that do to your standard of living? It causes it to drop.

In a January 23, 2006 article for Op-Ed News entitled Iran’s Oil Exchange Threatens the Greenback, Mike Whitney quotes former Federal Reserve chairman Paul Volcker as saying there is a “75% chance of a dollar crash in the next five years.”

If such a statement doesn’t fill you with dread, you better check your pulse. To make matters worse, new Fed chairman Ben “Shalom” Bernanke is of the philosophy that we can simply print more money. In fact, during a November 21, 2002 speech at the National Economists Club in Washington D.C., he said, “The U.S. government has a technology called a printing press that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

As I’ve already pointed out in previous articles, the only variable keeping the U.S. afloat is foreign nations buying our debt, or being required to stockpile our currency to purchase oil. This phenomenon is called ‘dollar supremacy.’ But the U.S. can’t keep expanding its credit with more T-bills forever. Plus, if the bourse takes hold, fewer nations will hold our dollars in preference for the euro. Even more dramatic is the fact that U.S. companies won’t be able to capitalize on this new stock exchange because of our longstanding trade embargo with Iran. We are, quite literally, being left to stand-out in the cold.

If the dollar does become devalued after the bourse is introduced, foreign investors will withdraw even more money, which will do what? The answer is provided by The Foundation for the Economics of Sustainability (November 15, 2004): “Countries switching to euro reserves from dollar reserves would bring down the value of U.S. currency. Imports would start to cost Americans a lot more.” They continue, “The U.S. property and stock market bubbles would, without a doubt, burst.”

But these areas won’t be the only ones affected. Since the U.S. debt puts us in such a precarious position, and if billions of unwanted dollars flood back into our country (causing inflation), banks will be forced to raise interest rates to tighten the money supply. So, if foreign entities sell their dollar reserves, here’s what would result:

          1) the dollar’s value drops
          2) import prices will rise
          3) inflation will rise
          4) interest rates will rise
          5) housing prices will rise

Also affected will be taxes, our federal debt, our energy policies, and the trade deficit. In addition, since foreign products will now cost more, we’ll have to lower imports. But this scenario too poses a problem because America doesn’t manufacture any more --- we don’t make things! Moreover, if Americans have less disposable income (i.e. a lower standard of living), it will flatten the revenues of our domestic corporations, leading to layoffs, downsizing, etc.

The worst case scenario, of course, would be an economic collapse (ala the 1929 Great Depression), so to combat (at least temporarily) this scenario, Shalom Bernanke may try to pull a “Weimar Solution” by simply printing more money. Naturally, hyperinflation would eventually rear its ugly fangs; but for the time being the Fed will try to hide what they’re doing on a day-to-day basis by attempting to salvage our last growth industry (albeit an artificial one) – the housing market.

Wednesday: – part eight – The Federal Reserve and M3 Money Supply