We have written extensively on the topic of Forex and even published an in-depth book about key points "Splitting Pennies - Understanding Forex" - and in the process we've learned what investors don't know about Forex and how it fuels market fears. So now we'd like to elaborate on the MOST IMPORTANT FACT INVESTORS NEED TO KNOW ABOUT FOREX, and to a lesser extent the markets in general.
America has in its possession A BIG RED FOREX BUTTON that can shut down US Dollar connected payment systems with one press. This button can halt stock markets, futures exchanges, money markets, all with one simple push. Probably, it looks something like this: STOP
This button will probably never be used, it was developed in case of financial emergency. But it's there - and the fact that it exists, makes a few bank managers and government workers sleep well at night. Such systems are developed 'just in case' - just like the missile defense system, a complete waste of taxpayer dollars, built to ensure that if nuclear missiles are launched on America, America can save 10% of cities and wipe out the majority of the attacker based on the neo-con 'mutually assured destruction' MAD policy. This button serves the same purpose, although financial. Pressing this button would bring all economic activity in economies that utilize the US Dollar to a complete standstill.
Lazy government workers
To understand why and how this button was built, we must first understand a little about how the US Government works. The US Government is the largest employer of any kind in the world. We need to understand the differences between private employment, and government employment (because this big red button was built by government workers in collaboration with private workers). Private employment operates on a simple market based approach - good workers are rewarded usually with higher pay, more job security, and more benefits. If a worker for a private company makes his company a fortune, he'll be rewarded with a big bonus, big desk with accompanying window, and an office plant, maybe a fern. If the worker in a private company is a bad worker, lazy, incompetent, or just difficult - he will be fired. Government is the opposite. There's a mantra in government work - what do you do with a problem employee? Promote them! Because then they are out of your hair, and if you fire them, well you may end up in front of a senate hearing explaining why, or you may end up being sued, or you may end up with a number of special interest groups heckling you about the rights of people with Narcolepsy.
The government approaches work in an entirely different way than in private enterprise. Healthcare.gov - the world's first billion dollar website, is another great example. Now imagine the task the Department of Defense is given; protect America from external threats. Their first step, to identify threats. In the military, this is done by agencies such as the CIA and the NRO. Actually if the CIA operated according to its public mission, it would be an analyst agency not much different than those seen on Wall St. - providing information to their DOD bosses who act on it. Since 911, the potential for financial terrorism has been considered a national security issue. It's in the laws, it's in the regulations, it's serious. What if the Saudis flood the market with US Dollars? What if the Chinese dump treasuries crashing the US Dollar? What if hackers take control of the NYSE and flood the market with sell orders, causing a crash? These are all extremely improbably events, so rare there is a higher chance of a giant meteor striking Manhatten this year. The probability is so low it's difficult to calculate. But just like the false threat of Russian's launching nukes, billions of dollars have been spent building a Big Red Button to press in case it happens.
It's because government workers have one thing in mind; protect themselves. Avoid a potential disaster. The last thing any government worker wants is to be in charge of security on a day like 911, even if the threat is financial. Although the debate rages about TARP and government actions during the weekend of the Bear Stearns collapse - the financial system was saved. They pressed the button. But this wasn't the Forex button.
Although the Federal Reserve is a private bank, the US Dollar exists because of the US Government. Like with many government projects, they outsource. More than 60% of CIA operations are currently outsourced. It's good business - America has always been like that. The only role the US Government plays in the US Dollar, is providing regulations & oversight with the OCC (Office of the Comptroller of the Currency), and printing physical currency with the US Mint. But the US Mint is just a printing service, if you look on US bills you'll see "Federal Reserve Note."
The Big Red Forex Button
We've known for a long time about the infamous "Plunge Protection Team" designed to prop stock markets in the event of a 1987 style crash. They even have entities in the Caymans funded by the Fed ready and waiting - they'll start with buying futures on the S&P, then options, then if that fails, they'll just go into the market directly. Anyway, technically speaking, DTCC owns 99% of US securities being the only custodian for investors. Why should it be surprising that the Fed operates a Cayman based hedge fund specifically designed to prop the markets in the event of a crash?
And you know it's really ironic, it's PEAK HYPOCRISY - on the one hand, these right wing flag waving jingoists love the idea that we have a system in place to prevent a market crash by 100%, but on the other hand, they love to talk about how America has 'freedom' and 'free markets' and markets are not manipulated! Well we can't have our protection and free markets together. But probably, stock investors would agree, in the event of a big market crash it's probably best to have such systems in place, like we do for the military, and other critical infrastructure.
Does the PPT intervene in the markets on a daily, or regular basis? That's another question, probably, they do.. but we can say for sure they are there to soften the blow of a deep fall. Maybe they've done it more than once in the last 10 years, which is why the market is continually at nose bleed levels even though the real economy is in the toilet.
The Big Red Forex Button is more simple than the PPT, and similar organizations. That's because ALL US DOLLARS IN THE WORLD are created and processed by the Federal Reserve Bank! Except if you withdraw and deal with physical cash, the Fed has electronic tags and knows where each US Dollar in the world is. That's just how the system is setup, by design, by coincidence, it's just like that. The reason for the war on cash, it's really the only part of the US Dollar system that isn't 100% completely controlled and manipulated. But at the end of the day, with less than $1 Trillion in physical US Dollars in the world, it's not really significant. The Fed processes wire payments, ACH payments, clears checks, and provides US Dollars to central banks in the form of swaps. The Fed can press the Big Red Forex Button and halt all US Dollar transactions - period. So with a halt on all US Dollar transactions, how would China destroy the value of the US Dollar, as some have proposed? How would US Dollar debt holders repay their debt, without access to US Dollars? Everyone would default? The financial system would implode? No, they would just wait, for a Fed action. The Fed controls 100% of US Dollar transactions, globally. There's no where on this small planet Earth to 'hide' US Dollars.
The US Treasury has a similar tool, the US Treasury has a big red tbill button. They can immediately recall or issue trillions of US debt in one click. As far as the external threat supposedly posed by foreign holders of US debt, if this really was a threat, the treasury can call their friends at the Fed, and in one click - the Fed can pay off all US debt. The Fed would be happy to do so, thus gaining free interest from US taxpayers (which is a HUGE percent of the Federal Budget) and it wouldn't cost the Fed anything to create the $100 Trillion or whatever necessary to do it.
Practically, there is no competition for America, and there will not likely be any in the forseeable future. Just imagine if 10% of US Dollar assets were sold, and transferred to another currency, or another system. What would that currency be? It is a real problem. In order to entertain real scenarios of a 'US Dollar Collapse' we would need to see an alternative system, one which operates globally and completely without the US Dollar and it's institutions, such as the BIS, IMF, the Fed, ECB, SWIFT, such as Bitcoin.
But just to keep the size of the US Dollar in perspective, let's look at a real alternative - the New Zealand Dollar. Anyone with a Forex account can trade NZD/USD (when you trade a Forex pair, you're really betting on a rate change, not sending money to New Zealand, so trading Forex is a derivative). The GDP of New Zealand is about $185 Billion. There simply aren't enough investment options in New Zealand NZD based assets to facilitate any significant move into NZD from USD. In fact, NZD has been inflated by US and Chinese interests in the last 10 years, to the point that their GDP has nearly quadrupled since 2000.
Also remember that most currencies are backed by the US Dollar, so the only 'real' alternative to the US Dollar is not other currencies, but alternative systems such as Bitcoin.
One last correction about China - recently China has implemented a Gold fix denominated in Yuan. Also Hungary has issued $154 Million in Yuan bonds. These are both wonderful baby steps toward realizing the final goal of being a modern, dynamic, free market based economy. The Yuan IS NOT BACKED BY GOLD. China implemented a YUAN BASED GOLD MARKET, copied and pasted from the Rothschild-London dominated system for the last hundreds of years. The Gold price is set in Yuan, as it used to be in Great British Pounds. Separately, China is hoarding physical gold. These 3 facts do not mean that the Yuan is backed by Gold. Capital Controls are in place, the Yuan is manipulated by the central bank. It's not possible to do business with China via the Yuan like it is with G8 countries. Americans can visit and do business in hundreds of countries with ease, China is not one of them. China employs internet police, who will literally arrest you potentially for life if you are found violating their firewall policies. This is not a country which will soon compete with America, England, Switzerland, and the rest of the G8. India, possibly another story, but they have no plans to improve their Forex system or to be a global reserve currency.
Conclusion
The Federal Reserve controls all US Dollars created and transacted in the world, in collaboration with the US Government. The value of the US Dollar will fluctuate as interest rates change, and real money flows around the world affect supply and demand of the USD, but within a trading range. Forex markets are 100% controlled. At any point, Central Banks can intervene in Forex markets. We've never seen a collaborated intervention, but that's a possibility too. Because they all rely on each other, it's in their interest to see boring, non-volatile markets. They are all part of the same system, which is supported by America and the US Dollar.
If the Fiat central bank system would be to collapse, there would have to be an alternative system for the world's business to transition to. Currently, there is no alternative system in place. Many alternative systems are in the works, but they are decades from being complete. But in the meantime, there's a number of ways to profit in the Forex market, or protect yourself from market risks. To learn more, checkout Splitting Pennies - Understanding Forex.