Did you ever wonder how the United States can be the world’s largest debtor nation and still get away with having one of the world’s highest per capita standards of living? Levels of debt that would have long ago crippled the economies of other nations have not crippled the United States yet because the American dollar has been the world’s reserve currency. As long as nations keep their monetary reserves in American dollars, there will always be a demand for the dollar, and the American economy will stay afloat.

But America’s monopoly on the world’s reserve currency may soon end.

According to a recent Merrill Lynch & Co. report, the U.S. Treasury Department has effectively given Gulf Arab oil producers the green light to break their currency peg to the dollar and instead rely on a currency basket for their financial stability. This report reveals that the Treasury Department issued its own report to Congress admitting that the record inflation rates among Gulf Cooperation Council (gcc) states were, at least partially, because of their currencies’ peg to the dollar. The Treasury also stated that the U.S. government now believes the dollar is strong enough to thrive without the support of the Gulf states. But this green light may well be a harbinger of a massive stampede away from the dollar to other currencies like the euro or yen.

Merrill Lynch & Co. says that both the United Arab Emirates and Qatar will probably break their dollar peg and move to a currency basket within the next few months. Kuwait already enacted both of these measures over a year ago, and Saudi Arabia may do the same before the end of next year.

The reason behind all this speculation concerning breaking dollar pegs across the Persian Gulf region is skyrocketing American inflation. America’s mortgage and credit crises have left the economy in a slump, and the Federal Reserve Bank’s response of opening wide the money-printing spigots to stimulate the economy has caused the dollar’s value to plunge. The dollar is now a deadweight anchor for all the currencies pegged to it, dragging their values down to artificially low levels, and thus fueling inflation in those economies. Even former Federal Reserve Chairman Alan Greenspan told the Saudis in February that ditching their dollar peg would ease their inflation problem.

Economists have been expecting for months that the Gulf states may eventually abandon their dollar peg. Because of this fact, it is quite unlikely that such abandonment would have any significant immediate effect on the value of the dollar—as central banks would likely work in tandem to make sure a dollar crisis does not occur. To the contrary, rising gcc currencies coupled with the money that Gulf states may save by unpegging their currencies from the dollar, might actually provide funds to purchase American companies or other assets, thus providing a temporary boost to the American economy.

The long-term prospect is much bleaker.

Gulf state initiatives to diversify their foreign exchange holdings amount to a vote of “no confidence” in the dollar. In effect, this will signal the last days of the dollar’s reign as the world’s reserve currency. Gulf states would stop buying U.S. treasury bonds as a means of regulating their own currencies and instead may even start selling their current dollar holdings. Over the long-term, the breaking of the petrol-dollar peg would mean reduced global demand for dollars, and thus the long-term value of the dollar would likely be biased to the downside. However, if other countries with large dollar reserves, like China and Japan, were to try and offload some of their dollar holdings before the dollar further devalues, a dollar crisis could develop and then the immediate consequences for the American economy would be disastrous.

Without its global status as the keeper of the world’s reserve currency, the effects of decades a debt and fiscal mismanagement will suddenly catch up with Americans—likely leaving the euro as the next reserve currency.

The Trumpet and its predecessor, the Plain Truth, have predicted for years that America is headed toward another Great Depression. To understand why this financial crisis must come about and what you can do, read The United States and Britain in Prophecy by Herbert W. Armstrong.