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One Monetary Policy Fits All – Part II

One Monetary Policy Fits All – Part II

In Part one of this series, Our Currency The World’s Problem, we discuss the vital role the U.S. dollar plays in the global economy. With an understanding of the dollar’s role as the world’s reserve currency, it’s time to discuss how the Federal Reserve’s monetary policy machinations influence the dollar and, therefore, the global economy and financial markets.

Given the Fed’s recent extreme monetary policy actions, which haven’t been seen in over 40 years, it is more important now than ever to appreciate the potential global consequences of the Fed’s stern fight against inflation.

Triffin’s Paradox

In Part 1, we highlight the following two lines, which help describe Triffin’s paradox.

“To supply the world with dollars, the United States must consistently run a trade deficit. Running persistent deficits, the United States would become a debtor nation.”

“Simply the growing divergence between debt and the ability to pay for it, GDP, is unsustainable.”

Increasingly borrowing without the means to pay it off is unsustainable. The terms zombie company or Ponzi Scheme come to mind when considering such a system. That said, because the printer of the currency and taxer of its citizens is in charge, we can only ask how long the status quo can continue.

The answer is partially up to the Fed. The Fed can use QE and low-interest rates to delay the inevitable. As we now see, the problem is that those tools are detrimental when there is high inflation. Fighting inflation requires higher interest rates and QT, both of which are problematic for high debt levels.

Financial Tremors

The Bank of England is bailing out U.K. pension funds. The Bank of Japan uses excessive monetary policy to protect its currency and cap interest rates…

…click on the above link to read the rest…

“Don’t Be Fooled By Recent Strength… A Post-Dollar World Is Coming”

“Don’t Be Fooled By Recent Strength… A Post-Dollar World Is Coming”

The currency may look strong but its weaknesses are mounting…

This month, as the dollar surged to levels last seen nearly 20 years ago, analysts invoked the old Tina (there is no alternative) argument to predict more gains ahead for the mighty greenback.

What happened two decades ago suggests the dollar is closer to peaking than rallying further. Even as US stocks fell in the dotcom bust, the dollar continued rising, before entering a decline that started in 2002 and lasted six years. A similar turning point may be near. And this time, the US currency’s decline could last even longer.

Adjusted for inflation or not, the value of the dollar against other major currencies is now 20 per cent above its long-term trend, and above the peak reached in 2001. Since the 1970s, the typical upswing in a dollar cycle has lasted about seven years; the current upswing is in its 11th year. Moreover, fundamental imbalances bode ill for the dollar.

When a current account deficit runs persistently above 5 per cent of gross domestic product, it is a reliable signal of financial trouble to come. That is most true in developed countries, where these episodes are rare, and concentrated in crisis-prone nations such as Spain, Portugal and Ireland. The US current account deficit is now close to that 5 per cent threshold, which it has broken only once since 1960. That was during the dollar’s downswing after 2001.

Nations see their currencies weaken when the rest of the world no longer trusts that they can pay their bills. The US currently owes the world a net $18tn, or 73 per cent of US GDP, far beyond the 50 per cent threshold that has often foretold past currency crises.

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

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

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…

Running on Empty, Part V

Running on Empty, Part V

When the Dollar is Broken, What Does One Do to Not Go Broke? (Guest Post)

Gary Brode of Deep Knowledge Investing was kind enough to share my series Running on Empty with his readers. This afternoon I’ve invited him to offer his thoughts for my readers, focusing on the implications that Running on Empty has for investments in the years ahead. After you’ve finished here, be sure to check out Gary’s own Deep Knowledge Investing for more insight.

Overview

Contemplations on the Tree of Woe wrote Running on Empty, a three-part analysis of the petrodollar system that was so full of woe that it ran a full four parts.  That’s 33% more woe than had been promised.  Because we thought the series represented the kind of deep-dive analysis that we admire, we asked the Tree if we could print Part I as a guest post.  You can find that piece along with links to parts II, III, and IV here.

Part I of the series explained the origins of the petrodollar system, and noted that it’s the first reserve currency not backed by gold or other precious metals.  We’ve made similar comments about the disaster started when US banks in conjunction with the government created the Federal Reserve, and then took the US off the gold standard in 1971.

Part II of the series explained how the system enabled the Federal Reserve to print increasing amounts of currency and enabled Congress to run increasing deficits.  Because the US could print dollars for free, we did so and sent them overseas in exchange for foreign goods.  This hollowed out the manufacturing base of the US and led to a decline in living standards for many Americans at the same time that the people decrying inequality were pursuing policies that led to more of it.

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

Running on Empty, Part IV

Running on Empty, Part IV

How the War between Russia and Ukraine is Destroying the Petrodollar System

Welcome to Part IV of Running on Empty, my four-part analysis of the Petrodollar system.

Part I of this series explained that the US dollar is the world’s first reserve currency that is not backed by precious metals. Instead it is backed by other people’s oil. Because of a secret treaty between the US and Saudi Arabia, petroleum can only be purchased with dollars. Every country needs oil, so everyone country needs dollars and sells imports to the US to get them. Demand for dollars has made the USD the primary American export, allowing the US to deindustrialize and financialize its economy.

Part II explained how the petrodollar has grossly enriched American asset holders (stocks, bonds, and real estate) and painfully impoverished American wage earners. Under the petrodollar system, dollars are created by private banks for profit. These dollars are recycled into the economy by OPEC nations, causing stocks, bonds, and real estate to rise. This profitable exchange is enforced by American military might, which punishes any country that seeks to exit the petrodollar system.

Part III explained that for the petrodollar system to function, America needs to be able to project power worldwide to secure international trade and enforce the system. America secures global commerce and projects military power by commanding the World Ocean, by which 90% of all goods are trafficked. To overcome America’s naval supremacy, both Russia and China have sought to establish control of the World Island, the Eurasian supercontinent that houses most of the world’s population and resources. The Russo-Ukraine War is a proxy war between the uncontested master of the World Ocean (America) and the would-be masters of the World Island (China and Russa).

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

Putin Says US Decision To Print Money Is Behind Soaring Food Prices

Putin Says US Decision To Print Money Is Behind Soaring Food Prices

Earlier, we reported on the deranged, confused, false ramblings of a senile old man who is so out of his depth in running the world’s biggest economy, the catastrophic results will soon be obvious to even his most die-hard fans. Now, it’s time for his nemesis on the world scene, Russia’s Vladimir Putin to respond.

Speaking in a TV interview on Friday evening, following a meeting with African leaders in Sochi, Putin accused Western leaders of trying “to shift the responsibility for what is happening in the world food market” and said that “restrictions imposed by the US and its allies against Russia and Belarus will only exacerbate the looming global food crisis by affecting fertilizer trade and sending the food prices further up.”

Instead of looking toward Russian, Putin said that the root causes of the crisis lie with the US decision to print record amounts of money which led to an increase in global food prices, as well as Europe’s over-reliance on renewables and short-term gas contracts, which have led to price hikes and rising inflation.

“It began to take shape as early as February 2020 in the process of combating the consequences of the coronavirus pandemic,” he added.

High gas prices, the direct result of Europe’s catastrophic green/ESG policies which as we warned one year ago would spawn energy hyperinflation, resulting in under-investment in the traditional energy sector, have forced many fertilizer producers to shut down their businesses because of unprofitability; such developments have shrunk the fertilizer supply, which, in turn, has sent the food prices up, he added. This is another topic we have discussed extensively in the past (see our Oct 2021 article “Fertilizer Prices Hit Record Highs, May Pressure Food Inflation Even Higher“), and yes, Putin is correct again.

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

Hedges: No Way Out but War

Hedges: No Way Out but War

Permanent war has cannibalized the country. It has created a social, political, and economic morass. Each new military debacle is another nail in the coffin of Pax Americana.
Original Illustration by Mr. Fish — “No Guts No Glory”

The United States, as the near unanimous vote to provide nearly $40 billion in aid to Ukraine illustrates, is trapped in the death spiral of unchecked militarism. No high speed trains. No universal health care. No viable Covid relief program. No respite from 8.3 percent inflation. No infrastructure programs to repair decaying roads and bridges, which require $41.8 billion to fix the 43,586 structurally deficient bridges, on average 68 years old. No forgiveness of $1.7 trillion in student debt. No addressing income inequality. No program to feed the 17 million children who go to bed each night hungry. No rational gun control or curbing of the epidemic of nihilistic violence and mass shootings. No help for the 100,000 Americans who die each year of drug overdoses. No minimum wage of $15 an hour to counter 44 years of wage stagnation. No respite from gas prices that are projected to hit $6 a gallon.

The permanent war economy, implanted since the end of World War II, has destroyed the private economy, bankrupted the nation, and squandered trillions of dollars of taxpayer money. The monopolization of capital by the military has driven the US debt to $30 trillion, $ 6 trillion more than the US GDP of $ 24 trillion. Servicing this debt costs $300 billion a year. We spent more on the military, $ 813 billion for fiscal year 2023, than the next nine countries, including China and Russia, combined.

We are paying a heavy social, political, and economic cost for our militarism…

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

World War III Has Already Started, and It’s an Economic War

World War III Has Already Started, and It Is an Economic War

Image © Chekov_UA. All rights reserved.

In an article I published in April of 2018, World War III Will Be An Economic War, I outlined a number of factors that portend a large scale conflict between East and West and why this war would be mainly economic in nature. I investigated how this conflict would actually benefit globalists and globalist institutions seeking to bring down multiple nations’ economies while hiding the engineered crisis behind a wall of geopolitical chaos and noise.

The goal? To convince the masses that national sovereignty was a plague that only leads to mass death, and that the “solution” is a one-world system – conveniently managed by the globalists, of course.

One issue which I used to get a lot of arguments over was the idea that countries like Russia and China would end up so closely aligned. People claimed there were too many disparities and that the countries would ultimately turn on each other in the middle of a financial crisis.

Well, it’s four years later and now we’re going to see if that is true or not. So far, it looks like I was correct.

My position has long been that certain nations have been preparing for a collapse of the U.S. dollar as the world reserve currency (the primary currency used in the majority of trade around the world). My belief is that America’s top economic position is actually an incredible weakness; the dollar’s hegemony is not a strength, but an Achilles heel. If the dollar was to lose reserve status, the whole of the U.S. economy and parts of the global economy would implode, leaving behind only those who prepared – those who saw the writing on the wall and planned ahead.

The dollar crash coalition

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The American Empire Self-Destructs, But Nobody Thought That It Would Happen This Fast

The American Empire Self-Destructs, But Nobody Thought That It Would Happen This Fast

Photograph Source: Phil Dolby – CC BY 2.0

Empires often follow the course of a Greek tragedy, bringing about precisely the fate that they sought to avoid. That certainly is the case with the American Empire as it dismantles itself in not-so-slow motion.

The basic assumption of economic and diplomatic forecasting is that every country will act in its own self-interest. Such reasoning is of no help in today’s world. Observers across the political spectrum are using phrases like “shooting themselves in their own foot” to describe U.S. diplomatic confrontation with Russia and allies alike. But nobody thought that The American Empire would self-destruct this fast.

For more than a generation the most prominent U.S. diplomats have warned about what they thought would represent the ultimate external threat: an alliance of Russia and China dominating Eurasia. America’s economic sanctions and military confrontation have driven these two countries  together, and are driving other countries into their emerging Eurasian orbit.

American economic and financial power was expected to avert this fate. During the half-century since the United States went off gold in 1971, the world’s central banks have operated on the Dollar Standard, holding their international monetary reserves in the form of U.S. Treasury securities, U.S. bank deposits and U.S. stocks and bonds. The resulting Treasury-bill Standard has enabled America to finance its foreign military spending and investment takeover of other countries simply by creating dollar IOUs. U.S. balance-of-payments deficits end up in the central banks of payments-surplus countries as their reserves, while Global South debtors need dollars to pay their bondholders and conduct their foreign trade.

This monetary privilege – dollar seignorage – has enabled U.S. diplomacy to impose neoliberal policies on the rest of the world, without having to use much military force of its own except to grab Near Eastern oil.

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

Zoltan Pozsar Warns Russian Sanctions Threaten Dollar’s Reserve Status

Zoltan Pozsar Warns Russian Sanctions Threaten Dollar’s Reserve Status

Over the weekend, the world gasped in shock when Western powers announced that the nuclear option would be used against Russia in retaliation for its invasion of Ukraine – sanctions against the country’s central bank and targeted expulsions of key banks from SWIFT, a move which has effectively locked Russia out of the western financial system and left its vast oil export industry – a key lifeline for the Putin regime – in limbo. But the real reason for the shock is that this was the first time the global reserve currency was weaponized against a G20 economy, setting a clear precedent for how the west would and could respond to any other nation that followed in Russia’s footsteps (something which China is clearly contemplating vis-a-vis Taiwan, and is carefully studying just how the west responds to Moscow),

As a result, and following this week’s dramatic freeze of the Russian central bank overseas assets, has prompted some to question just why countries build foreign currency reserves at all and, more broadly, whether the unprecedented western response to Russia hasn’t jeopardized the dollar’s reserve status.

In what one Washington lawyer described to Reuters as the “biggest hammer in the toolshed”, the G7 and European Union governments blocked certain Russian banks’ access to the SWIFT international payment system and also went a step further than many expected by paralyzing about half the Russian central bank’s $630 billion worth of foreign currency and gold reserves. In doing so, the west has undermined Moscow’s ability to defend the ruble – which has lost up to a quarter of its value since Friday alone – and recapitalize sanctioned banks as they face nascent bank runs. In fact, as some admitted, it was the explicit intention of the west to spark bank runs and to crash the Russian financial system from within.

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

US Dollar’s Status as Dominant “Global Reserve Currency” at 25-Year Low. And USD Exchange Rates?

US Dollar’s Status as Dominant “Global Reserve Currency” at 25-Year Low. And USD Exchange Rates?

Euro’s 20th birthday after dreams of “Dollar Parity” put on ice during Euro Debt Crisis. Central banks still leery of Chinese renminbi.

The global share of US-dollar-denominated exchange reserves declined to 59.15% in the third quarter, from 59.23% in the second quarter, hobbling along a 26-year low for the past four quarters, according to the IMF’s COFER data released today. Dollar-denominated foreign exchange reserves are Treasury securities, US corporate bonds, US mortgage-backed securities, and other USD-denominated assets that are held by foreign central banks.

In 2001 – the moment just before the euro officially arrived as bank notes and coins – the dollar’s share was 71.5%. Since then, it has dropped by 12.3 percentage points.

In 1977, when inflation was raging in the US, the dollar’s share was 85%. And when it looked like the Fed wasn’t doing anything about inflation that was threatening to spiral out of control, foreign central banks began dumping USD-denominated assets, and the dollar’s share collapsed.

The plunge of the dollar’s share bottomed out in 1991, after the inflation crackdown in the early 1980s caused inflation to abate. As confidence grew that the Fed would keep inflation more or less under control, the dollar’s share then surged by 25 percentage points until 2000 when the euro arrived.

Since then, over those 20 years, other central banks have been gradually diversifying away from US dollar holdings (year-end data, except for 2021 = Q3):

Not included in global foreign exchange reserves are the assets held by a central bank in its own currency, such as the Fed’s holdings of dollar-denominated assets, the ECB’s holdings of euro-denominated assets, or the Bank of Japan’s holdings of yen-denominated assets.

Impact of exchange rates on exchange reserves.

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When The Global Monetary Reset Happens, Don’t You Dare Forget Who To Blame

When The Global Monetary Reset Happens, Don’t You Dare Forget Who To Blame

Submitted by QTR’s Fringe Finance

“What you know you can’t explain, but you feel it. You’ve felt it your entire life, that there’s something wrong with the world. You don’t know what it is, but it’s there, like a splinter in your mind, driving you mad. It is this feeling that has brought you to me. Do you know what I’m talking about?”

-Morpheus, The Matrix

Many of these people, myself included, know deep down that something went horribly askew when we were taken off the gold standard in 1971.

And today, many people witnessing soaring inflation are starting to feel their spider senses tingle even more: something is definitely wrong with “the system”.

But not everybody can put their finger on exactly what is wrong. This is what makes our system so nefarious to begin with: its complexity. It’s also why I try to explain these feelings for people in podcasts like my most recent one discussing why now must be the time we start to discuss inflation seriously.

Source: Forbes

Left unchecked by gold, it took us less than half a century to destroy our currency, run production out of the U.S., become reliant on importing almost everything we use on a daily basis, turn the country into a third world country and run up a nearly $30 trillion national tab, all while the Fed has stacked almost $10 trillion in subprime crap onto its balance sheet.

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

How long will the US dollar’s dominance last?

301 AD was a big year for the Roman Empire.

That was the year that, amid spiraling inflation, Emperor Diocletian issued his Edict on Maximum Prices, essentially fixing prices of just about everything across the Roman Empire.

The price of wheat, a day labor’s wages, a quart of olive oil, transportation rates– everything was established by the Emperor’s edict, and enforced under penalty of death.

Diocletian’s edict infamously didn’t work, and the empire plunged into even more severe inflation.

The other big event of 301 AD was the introduction of the solidus gold coin, roughly 4.5 grams of nearly pure gold.

And while the Romans had a history of debasing their other coins, like the silver denarius and sesterce, the government actually did a pretty good job maintaining the value and purity of the gold solidus.

Even hundreds of years later, after the western empire in Rome had fallen to the barbarians, and imperial power was concentrated in Byzantium, the gold solidus was still approximately as pure as it was in the early 300s.

That’s an extraordinary track record for currency stability. Confidence in the gold solidus was so high, in fact, that various tribes and kingdoms around the world used the coin for trade and savings.

This became a source of pride for the Byzantine Empire; Justinian I, who ruled in the mid 500s, stated that the solidus was “accepted everywhere from end to end of the Earth,” and that it was “admired by all men in all kingdoms, because no kingdom has a currency that can be compared to it.”

It wasn’t until the mid 11th century, more than seven centuries after the introduction of the solidus, that an Emperor began to debase the currency.

Just like Hemingway described going bankrupt, the debasement of the solidus was gradual… then sudden.

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

The Real Russian Threat

The Real Russian Threat

I’ve written for years about different nations’ persistent efforts to dethrone the U.S. dollar as the leading global reserve currency and the main medium of exchange.

At the same time, I’ve said that such processes don’t happen overnight;  instead, they happen slowly and incrementally over decades.

The dollar displaced sterling as the leading reserve currency in the twentieth century, but it took thirty years, from 1914 to 1944, to happen. The decline started with the outbreak of World War I and the UK’s liquidation of assets and money printing to finance the war.

It ended with the Bretton Woods agreement in 1944 that cemented the dollar’s link to gold as the new global standard.

Even after the gold link was broken in 1971, the dollar standard remained because there was no good alternative. Then the 1974 deal with Saudi Arabia (along with other OPEC cartel members) to price oil in dollars created increased global demand for the dollar.

Because of the deal, dollars would be deposited with U.S. banks, so they could be loaned to developing economies, who could then buy U.S. manufactured goods and agricultural products.

This would help the global economy and allow the U.S. to maintain price stability. The Saudis would get more customers and a stable dollar, and the U.S. would force the world to accept dollars because everyone would need dollars to buy oil.

By the way, behind this “deal” was a not so subtle threat to invade Saudi Arabia and take the oil by force.

I personally discussed these invasion plans in the White House with Henry Kissinger’s deputy, Helmut Sonnenfeldt, at the time. But the Petro-Dollar plan worked brilliantly, and the invasion never happened.

Despite all this, nearly 50 years later, the erosion of the dollar’s role has begun and is visible in many metrics.

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

US Dollar’s Status as Dominant “Global Reserve Currency” Drops to 25-Year Low

US Dollar’s Status as Dominant “Global Reserve Currency” Drops to 25-Year Low

Central banks getting nervous about the Fed’s drunken Money Printing and the US Government’s gigantic debt? But still leery of the Chinese renminbi.

The global share of US-dollar-denominated exchange reserves dropped to 59.0% in the fourth quarter, according to the IMF’s COFER data released today. This matched the 25-year low of 1995. These foreign exchange reserves are Treasury securities, US corporate bonds, US mortgage-backed securities, US Commercial Mortgage Backed Securities, etc. held by foreign central banks.

Since 2014, the dollar’s share has dropped by 7 full percentage points, from 66% to 59%, on average 1 percentage point per year. At this rate, the dollar’s share would fall below 50% over the next decade:

Not included in global foreign exchange reserves are the Fed’s own holdings of dollar-denominated assets, its $4.9 trillion in Treasury securities and $2.2 trillion in mortgage-backed securities, that it amassed as part of its QE.

The US dollar’s status as the dominant global reserve currency is a crucial enabler for the US government to keep ballooning its public debt, and for Corporate America’s relentless efforts to create the vast trade deficits by offshoring production to cheap countries, most prominently China and Mexico. They’re all counting on the willingness of other central banks to hold large amounts of dollar-denominated debt.

But it seems, central banks have been getting just a tad nervous and want to diversify their holdings – but ever so slowly, and not all of a sudden, given the magnitude of this thing, which, if mishandled, could blow over everyone’s house of cards.

20 years of decline.

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

wolfstreet, wolf richter, us dollar, world reserve currency, central banks, money printing, fed, us federal reserve, money, us debt, debt, united states

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