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US Dollar as a reserve asset was the first “flywheel” – and only the US can destroy its own ecosystem.

Being the reserve currency has enormous benefits. And in the entirety of financial history, the US is the first and only fiat reserve currency. Sterling, and any other reserve currencies derived their value from the ability to maintain their value to gold. With the two World Wars, the US came to be seen as the government most able to honour its commitments, and saw huge inflows of gold, but in the 1960s, gold started to flow back to Europe and elsewhere, and in essence, Nixon decided that higher interest rates needed to maintain the link to gold price was not worth the effort, and cut the link to gold price.

Moving from a gold based currency to a fiat currency has had enormous benefits for the US. First of all is that it no longer needs to ever run a current account surplus. That is it never needs to reduce consumption or imports, which is a huge political benefit. The norm since 1980 is for the US to have a current account deficit.

The US also does not need to balance the budget. The budget was balanced in 2000, but this was probably now seen as a tactical error on the part of the Democrats.

What I find most interesting about the transition from gold to US treasury backed financial system is how Asian nations, despite a long history of using gold, accepted this system. China and Japan have some of the largest foreign reserves in the world, but their holdings of gold are limited. Even India holds a relatively small amount of gold as foreign reserves.

…click on the above link to read the rest…

What Are the BRICS Planning With the August 22nd Durban Accords?

August 14, 2023

What Are the BRICS Planning With the August 22nd Durban Accords?

What are BRICS planning with the Durban Accords?

Photo by Khashayar Kouchpeydeh

In my first explainer about the BRICS nations, you met the players and you know why their decisions affect the global economy. But why do their decisions affect us?

You need to understand that first – before the August 22nd Durban Accords will make any sense. (But once you do understand, you’ll be astonished…)

Professor Reagan’s class is now in session!

Global trade runs on U.S. dollars

Since World War II, the U.S. dollar has enjoyed the role of global reserve currency. You may have heard those words before – here’s what they mean…

Worldwide, when companies or nations transacting with one another don’t share a common currency, they use U.S. dollars. When a Chilean copper mine sells tons of raw ore to a Canadian refiner, they invoice (and get paid) in U.S. dollars.

Obviously, most nations don’t have a common currency (the exception is the Euro zone). So the use of dollars for international trade is simply huge, approximately 85% of the global total.

So the world relies on dollars to do business. That’s a great deal for us! That means, for example, that deficit spending and newly-printed money always have a home somewhere in the world. Simply because the world has to have dollars.

Like I said, that’s a great deal for the nation that exports dollars. It’s not such a great deal for everyone else…

“It’s our currency, but it’s your problem”

In 1971, President Nixon ended the convertibility of dollars to gold.

The rest of the world, to put it mildly, went nuts. The gold standard was supposed to prevent inflation – but it hadn’t (primarily because American citizens weren’t allowed to swap dollars for gold since 1933).

…click on the above link to read the rest…

Fed Defending Dollar No Matter What Crashes – Catherine Austin Fitts

October 16, 2022

Fed Defending Dollar No Matter What Crashes – Catherine Austin Fitts

Catherine Austin Fitts (CAF), Publisher of The Solari Report and former Assistant Secretary of Housing (Bush 41 Admin.), says what is coming for the economy is pain–and lots of it. CAF explains, “We are either in a major correction or we are going to go into a bear (market), and a lot of it depends on many different politics. If you look at the money being pumped out . . . on climate change, on green energy, environment and all these different new sort of scams, it depends on how they inject money. It’s either a major correction or it could turn into a bear (market). There is no way to tell because it is purely political.”

Various Fed presidents are repeatedly saying the central bank is going to continue raising interest rates. Why? CAF says, “I think they are going to keep raising interest rates. If you are Federal Reserve, you are playing a global game, and what you have to do is protect the reserve currency status. It looks like to me they have decided that all the BIS (Bank of International Settlements) members need to be in the dollar channel. They are doing everything they can to collapse the market share of the euro and then move that into the dollar syndicate. I think they have to keep driving the dollar up. The U.S dollar index is up to 113, and at one point, it was at 114. One analyst said it was going to 120. They have the entire frontier market and the emerging markets in a bear trap, and that is very significant power. If you are going to go into the woods and shoot the bear, you can’t wound the bear, you have to kill the bear…

…click on the above link to read the rest…

Russia And China Officially Announce A “New Global Reserve Currency”

July 24, 2022

Russia And China Officially Announce A “New Global Reserve Currency”

And once again, as happens often with consequential news in the United States and the West, no one has noticed and no one seems to care.

If you’ve blinked over the last month, you may have missed it…

China and Russia are taking their shot at the U.S. dollar. And as often happens with consequential news in the United States and the West, no one seems to notice or even care.

Since the beginning of the year, I have been writing about the possibility of Russia and China challenging the US dollar’s global reserve status. Now, it’s happening.

It shouldn’t be any surprise to those paying attention that Russia and China are strengthening their economic ties amidst continued Western sanctions on Russia as a result of the country’s war in Ukraine.

What may surprise some people, however, is that Russia and the BRICS countries, including Brazil, Russia, India, China, and South Africa, are officially working on their own “new global reserve currency,” RT reported in late June. Nobody even seemed to notice.

“The issue of creating an international reserve currency based on a basket of currencies of our countries is being worked out,” Vladimir Putin said at the BRICS business forum last month.

And of course, as Russia has been cut off from the SWIFT system, it is also pairing with China and the BRIC nations to develop “reliable alternative mechanisms for international payments” in order to “cut reliance on the Western financial system.”

In the meantime, Russia is also taking other steps to strengthen the alliance between BRIC nations, including re-routing trade to China and India, according to CNN:

President Vladimir Putin said Wednesday that Russia is rerouting trade to “reliable international partners” such as Brazil, India, China and South Africa as the West attempts to sever economic ties.

…click on the above link to read the rest of the article…

The Dollar Dethroned: We Have Reached The End Of Monetary Policy As We All Once Knew It

April 5, 2022

The Dollar Dethroned: We Have Reached The End Of Monetary Policy As We All Once Knew It

And the world hasn’t even noticed yet.

People who speak out openly with concern about the potential death of the U.S. dollar have been written off as conspiracy theorists for the better part of the last few decades.

But looking back, unfortunately, I’m sure history is going to be kind to these people and their prognostications. They will have been the ones who sounded the alarm in a relatively short amount of time before ultimately being proven right.

I don’t say this to brag or boast in advance in any way, I say it because I truly believe we are at the “beginning of the end” of the Keynesian economic experiment.

Less than two weeks ago, I wrote an article proclaiming that Russia would back the ruble with gold as a way to fight back against Western economic sanctions. I also made similar predictions about the new digital Chinese currency last summer when I first started Fringe Finance.

To me, since I began piecing together my understanding of macroeconomics and the global economy about a decade ago, it had become painfully obvious that the fiat system the U.S. plays by, which hinges on the dollar being the global reserve currency, had its days numbered.

The catalyst that is helping hurl us toward our monetary rude awakening faster than ever has been the war in Ukraine. Actually, it hasn’t been the war so much as it has been the West’s reaction to the war. As only blindly arrogant believers in the Keynesian dog-and-pony show could do, we rushed to cut Russia off the SWIFT system, limited investing in Russia companies and sanctioned the country’s oligarchs.

To which Russia basically replied, “OK. We still have the oil.”

…click on the above link to read the rest of the article…

Perversity: Thy Name is Dollar

November 17, 2021

Perversity: Thy Name is Dollar

If you ask most people, “what is money?” they will answer that money is the generally accepted medium of exchange. If you ask Google Images, it will show you many pictures of green pieces of paper. Virtually everyone agrees that money means the dollar.

Image credit: Cildo Meireles

Breaking Down the Dollar Monetary System

What does it mean to have a dollar? If you hold a piece of paper with green ink on it, which says “ONE DOLLAR”, you may notice that it also says, at the top, “FEDERAL RESERVE NOTE”. Note is a word for credit. The dollar bill (bill is also a word for a credit instrument) is a credit of some kind, the credit of the Federal Reserve. The paper itself has no value, apart from that it is the obligation of a party whose full faith and credit is beyond question. It would be something like the fallacy of reification, to confuse the green piece of paper with the monetary value it represents.

Banking, Lending and the Fed

Most holders of dollars do not hold them in the form of actual pieces of paper. For reasons of convenience, and safety and security, people deposit them in a bank. That is, they may think of it as having dollars in a bank (just as they think of the paper as the money). But let’s drill down into that. Most people know that the bank does not just put all the green pieces of paper into a vault. The bank holds a small amount of paper cash, based on what it expects to pay during the business day. The rest, well, the bank does something–or–other with them…

…click on the above link to read the rest of the article…

US Dollar as “Global Reserve Currency” amid Fed’s QE and US Government Deficits: Dollar Hegemony in Decline

January 2, 2021

US Dollar as “Global Reserve Currency” amid Fed’s QE and US Government Deficits: Dollar Hegemony in Decline

Other options also shaky. Central banks leery of Chinese RMB, its share still irrelevant. Euro’s share is stuck. But the yen’s share has been rising.

The US dollar’s position as the dominant global reserve currency is an immensely important factor in supporting the ballooning US government debt, the Fed’s drunken money-printing, and Corporate America’s ambition to offshore production to cheap countries, thereby creating huge and ever-growing trade deficits. They all have become dependent on the willingness of other central banks to hold large amounts of dollar-denominated paper. But from the looks of things, those central banks might be getting a little nervous.

The global share of US-dollar-denominated exchange reserves – US Treasury securities, US corporate bonds, US mortgage-backed securities, etc. held by foreign central banks – fell to 60.5% in the third quarter, according to the IMF’s COFER data release. This is the lowest since 1995. Over the past six years, the dollar’s share has been dropping at a rate of about 1 percentage point per year:

The dollar’s 20-year decline.

Dollar-denominated global foreign exchange reserves do not include the Fed’s own holdings of dollar-denominated assets that it bought as part of its QE, such as its $4.6 trillion in US Treasury securities and $2.1 trillion in US mortgage-backed securities.

The decline in the dollar’s share began 20 years ago when the euro assumed the place of the predecessor currencies, including the Deutsche mark, that used to be in the basket of foreign exchange reserves. But that 20-year 10-percentage-point decline pales compared to the near 40-point plunge in the dollar’s share from 1977 (85%) to 1991 (46%), which was followed by the 25-point surge till 2000.

For now, the motto among these central banks, jointly, seems to be: easy does it. No one wants to trigger a sudden crisis (2020 = Q3):

…click on the above link to read the rest of the article…

What? Default? Where? Dollar?

July 27, 2020

What? Default? Where? Dollar?

It won’t come as a surprise to anyone that the first half of 2020 has brought, among many other things, renewed calls for the demise of the US dollar. It’s been pretty much a non-stop call for over a decade now, and longer. But this time, like all previous ones, I’m thinking: I don’t see it. I guess my first question is always: please explain why the dollar would collapse before the euro does.

For one thing, the dollar would have to collapse/default against one or more “entities”. The dollar is not like one of those highrises that collapse upon themselves. It will have to default or collapse against something(s) else. Since it is the world reserve currency, that means there would have to be a replacement reserve currency. Yes, that could also be for example gold or SDR’s, or even a basket of currencies, and something like that may happen eventually, but it doesn’t appear in the cards in the short run.

There are really only two candidates for the role, and neither looks at all fit to play it. The euro may have some ambitions in that direction, but it has far too many problems still. The yuan/renminbi certainly has such ambitions, but the Communist party refuses to let it get on stage to show what it’s got. As I recently wrote:

The main sticking point for Beijing is a conundrum it cannot solve. The CCP wants to have BOTH a global currency AND total control over that currency. It will have to choose between the two, and cannot make up its mind. So it pretends it doesn’t have to choose.

…click on the above link to read the rest of the article…

Peter Schiff Doubles Down on the Dollar

February 24, 2020

Peter Schiff Doubles Down on the Dollar

Last year at the Vancouver Resource Investment Conference, Peter Schiff bet Brent Johnson a gold coin that the Fed’s next move would be a rate cut. At this year’s conference, Peter collected his gold coin.

Brent and Peter went on to debate the future of the US dollar. Brent says the dollar will go up this year. Peter thinks it’s going down. Peter put his money where is mouth is and went double or nothing against the dollar.

Peter’s Highlights from the Discussion

“The central bankers are going to continue pursuing this policy as long as they can do it without some type of a crisis that intervenes. But the problem is the longer they do it the worse it’s going to be.”

“I don’t think it can go on that much longer. Decades – no way! I mean, can it go on four more years. Sure.”

“The US market has never been this overvalued, overpriced as far as I’m concerned. You know, people were optimistic in 2000.”

“The market is very, very dangerous. It can easily go down. Trump will tweet as much as he can to try to prop it up. But whether that and the Fed’s printing press is going to be enough, we’ll see.”

“I think the whole fiat system that we have is nearing the end of its life. And the fact that were at these zero percent rates or negative rates, and all the stuff that’s going on is the death knell of this system, which was doomed from the start.”

“I think gold is going to reassert itself as the primary reserve monetary asset in the world for central banks and that threatens the dollar.”

…click on the above link to read the rest of the article…

The Next Pearl Harbour? China’s Gold-Backed Crypto Currency Will Blindside US Dollar

December 9, 2019

The Next Pearl Harbour? China’s Gold-Backed Crypto Currency Will Blindside US Dollar

“A date which will live in infamy.”

Indeed, this weekend marks the 78th anniversary of the attack on Pearl Harbor in Hawaii, which opened the door for the United States to enter World War II. Turn on your TV and you will see military mavens rambling on, pontificating about ‘the defense of the realm’, all the while completely aloof and unaware of the American empire’s real Achilles heel.

Recent, financial pundit and TV host Max Keiser outlined such a scenario, and warned that the US will be blind-sided the day that China introduces its gold-backed crypto currency – an absolute game changer which would create a “catastrophic trapdoor opening underneath the US economy,” said Keiser.

Not surprisingly, very few mainstream financial pundits in the West are willing to admit that China possesses gold reserves in excess of 20,000 tons, and by introducing a gold-backed cryptocurrency, it has the ability to “kill the US dollar deader than a door nail …. a new Pearl Harbor-type event and it’s coming in the next six to nine months.”

Watch:

Source: 21stCenturyWire.com

In Unprecedented, Shocking Proposal, BOE’s Mark Carney Urges Replacing Dollar With Libra-Like Reserve Currency

August 24, 2019

In Unprecedented, Shocking Proposal, BOE’s Mark Carney Urges Replacing Dollar With Libra-Like Reserve Currency

After Jerome Powell’s neutral-to-slightly-dovish-but-mostly-boring speech on Friday morning, investors could be forgiven for suspecting that this year’s Fed-sponsored gathering in Jackson Hole might be disappointingly dull (especially with all that’s going on in Trump’s twitter feed, the escalating trade war and escalating geopolitical unrest).

Then along came former Goldman banker and current (outgoing) BOE governor, Mark Carney, who in his lunchtime address laid out a shocking, radical proposal – perhaps the most stunning thing to ever be unveiled at Jackson Hole – urging to replace the US Dollar with a “Libra-like” reserve currency in a dramatic revamp of the global monetary, financial and economic order.

While it was unclear if Carney was focusing on Libra as the new reserve currency, or simply was hoping to find something against which the dollar could be devalued, the proposal was clearly shocking as it suggests that the central bank quiet acceptance of cryptocurrencies (especially in Japan) has been what many have speculated all along: a “currency” against which fiat money can be devalued in hopes of sparking fiat hyperinflation that inflates away record amounts of fiat debt.

Of course, such a new system would bring about the end of US hegemony, and effectively end the dollar-based global financial system, dramatically scaling back the US’s influence in the global economy, and making rising powers like China and Russia critical players an increasingly multipolar world…. especially if they propose a gold-backed dollar alternative to the world. That this would quickly emerge as the new reserve currency – together with whatever stablecoin/crypto central bankers deign to be the dollar’s replacement – goes without saying.

…click on the above link to read the rest of the article…

How Iran Will Determine If The US Dollar Remains The World’s Reserve Currency

July 5, 2019

How Iran Will Determine If The US Dollar Remains The World’s Reserve Currency

For almost two centuries, Sterling reigned supreme as the world’s reserve currency, propping up the vast British Empire which was the world’s superpower during the 19th century and the early 20th. Then, in the span of just a few months, everything changed and the US Dollar took over after a series of dramatic events.

For those unfamiliar with this historic transformation, Clarmond’s Mustafa Zaidi and Chris Andrew describe the series of events in which Iran and its oil reserves proved to be the final nail in the coffin of sterling and the British Empire. However, what is far more interesting, is their suggestion that the current tensions between Washington and Tehran, and what happens to Iranian gas, could also be the event that results in the end of the dollar’s own reserve status.

Why? Read on in Clarmond’s observation on “Self Deception and Pride.”

Wilting in the muggy summer of 1945 in Washington DC, an ailing Lord Keynes messaged London – his mission to procure a $5b grant to avoid a ‘financial Dunkirk’ had failed.

Instead the Americans had offered a $3.5b loan loaded high with conditions. “We are in Shylock’s hands” muttered Ernie Bevin, the Labour Foreign Minister. The American demands were put forward by a former cotton king (Will Clayton) a future Chief Justice (Fred Vinson) and crafted by the President of Chase Bank (Winthrop Aldrich). There were three immovable requirements for the loan. First an end to Imperial Preference in trade, secondly the floatation of Sterling within a year, and thirdly Britain signing up to the Bretton Woods system.

The American objective was to put American industry and finance at the centre of the world. This meant dismantling the sterling free-trade market and destroying sterling’s status as a settlement and reserve currency.

…click on the above link to read the rest of the article…

The Dying Days Of An Empire

June 27, 2019

The Dying Days Of An Empire

Caravaggio **Conversion on the way to Damascus** 1600-01

Something’s been nagging me for the past few days, and I’m not sure I’ve figured out why yet. It started when Donald Trump first called off the alleged planned strikes on targets in Iran because they would have cost 150 lives, and then the next day said the US would do sanctions instead. As they did on Monday, even directly targeting Trump’s equal, the “Supreme Leader Khameini”.

When Trump announced the sanctions, I thought: wait a minute, by presenting this the way you did, you effectively turned economic sanctions into a military tool: we chose not to do bombs but sanctions. Sounds the same as not doing a naval invasion but going for air attacks instead. The kind of decisions that were made in Vietnam a thousand times.

However, Vietnam was all out war (well, invasion is a better term). Which shamed the US, killed and maimed the sweet Lord only knows how many promising young Americans as well as millions of Vietnamese, and ended in humiliating defeat. But the US is not in an all out war in Iran, at least not yet. And if they would ever try to be, the outcome would be Vietnam squared.

Still, that’s not really my point here. It’s simply about the use of having the world reserve currency as a military weapon instead of an economic one. And I think that is highly significant. As well as an enormous threat to the US. The issue at hand is overreach.

While you could still argue that economic sanctions on North Korea, Venezuela and Russia are just that, economic and/or political ones, the way Trump phrased it, comparing sanctions one on one with military strikes, no longer leaves that opening when it comes to Iran.

…click on the above link to read the rest of the article…

June 19, 2019

“The Dollar Is Becoming Toxic” – Russian Intel Chief Slams “Aggressive, Unpredictable” US Behavior

With the latest TIC data showing China following Russia’s lead and reducing its US Treasury exposure (to two-year lows), as it increases its gold reserves (for six straight months), the unipolar US hegemon faces an ugly trend among the ‘rest of the world’ attempting to de-dollarize, as Sergey Naryshkin, director of the Russian Foreign Intelligence Service, calls the US dollar is an anachronism of the modern world economy.

Countries across the globe, including Russia, China, India, and others, have been working to diversify their foreign reserves away from the greenback.

Kyle Bass Sees Hong Kong Politics ‘Speeding Up’ Pressure on Dollar Peg

And, as RT reports, the head of the Russian intelligence service has now voiced those concerns clearly – that the use of the dollar presents risks and more nations are looking into finding alternative tools for doing business.

“It seems abnormal that the United States, behaving so aggressively and unpredictably, continues to be the holder of the main reserve currency.”
“Due to the objective strengthening of multipolarity, the monopoly position of the dollar in international economic relations becomes anachronistic. Gradually, the dollar is becoming toxic.”

And it’s not just talk, as RT notes, Russia has taken concrete steps towards de-dollarizing the economy. So far, Moscow has managed to partially phase out the dollar from its exports, signing currency-swap agreements with a number of countries, including China, India, and Iran. Russia has recently proposed using the euro instead of the US dollar in trade with the European Union.

This comes on the heels of Malaysian Prime Minister Dr. Mahathir Mohamad proposing a gold-backed currency as a unit of account for trade between East Asian nations.

Infinite growth on a finite planet, what could possibly go wrong?

Why Dollar Dominance Drops to Lowest Mark Since 2013

April 8, 2019

Why Dollar Dominance Drops to Lowest Mark Since 2013

According to the IMF, the U.S. dollar is known as the “Global Reserve Currency”. There are a number of reasons for this, but mainly because it’s backed by the U.S. economy.

That economy is fraught with uncertainty at the moment. But that isn’t the only issue plaguing the U.S. dollar’s dominance in the global markets.

Wolf Richter writes that the U.S. dollar’s status as reserve currency is dipping to levels not seen since 2013:

But the amount of USD-denominated exchange reserves ticked down to $6.62 trillion, and the dollar’s share of global foreign exchanges reserves dropped to 61.7%, the lowest since 2013.

This is not good. Last year, pressure on the dollar as global reserve currency was threatened by both Russia and China in “petro-currency” wars. Even smaller countries were attempting to apply pressure on the dollar, including Germany.

As you can see from the chart below, the U.S. dollar may have been slowly losing steam since 2001 with the arrival of the euro (source):

But perhaps more alarming is the dollar seems to be slipping down towards 1991 levels, where according to the same chart, it accounted for only 46% of the global reserve.

If the dollar keeps dropping, that could severely impact purchasing power and, under current market tensions, possibly drive inflation out of control.

The Dollar’s “Doldrums” Could Trigger Even More Uncertainty

The Balance explained in a recent article how a decline in the U.S. dollar typically happens:

The U.S. dollar declines when the dollar’s value is lower compared to other currencies in the foreign exchange market. It means the dollar index falls.

But the dollar index (DXY) isn’t declining, at least for the moment. It has remained fairly steady since June 2018 after recovering from a loss of over 4% in January.

…click on the above link to read the rest of the article…

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