Back in 2005, I was convinced that the dollar was toast. Hyperinflation was afoot and precious metals, commodities and ammunition would be the only currency worth anything. The Dollar is Dead!
I was wrong. Long Live the Dollar!
Imagine my surprise at reading another fantastic article from Peter C. Earle. Here he makes the case that de-dollarization has begun. He provides a mountain of examples of countries who no longer settle commodity trades in the US dollar. I’m not surprised that China, Russia and Iran are in cahoots. They never liked us (the U.S) anyway.
But over the last few months, I’m surprised to see France (our oldest ally), Saudi Arabia, India and Brazil join in using other currencies to settle trades. The implications for the US economy are stark and severe. You see, some time ago, Henry Kissinger convinced the OPEC nations to use our currency to settle oil trades. That led to mission creep and now many other types of trade are solely performed in US dollars before being converted into their home currency.
This has allowed the United States to print money ad nauseum, knowing that the excess dollars would be soaked up by the entire global economy as oil in the economic machine. (Let’s pause and appreciate the layers of imagery in that sentence.) It’s worked for a long time. And although we have a 31 trillion dollar debt, my debit card still works at Walmart where I buy cheap junk made in China and fill up my gas tank.
Imagine loaning your friend $100 and he simply pays you back over time with dollars he made on his sophisticated copy machine. That’s essentially how it has worked. So you walk over to his house and demand payment in chocolate candy bars instead and he says no. Unfortunately, you can’t threaten him because he has a Navy that keeps the trade routes safe and the largest economy in the world.
I realize that metaphor fell apart quickly, but you get the drift.
Nonetheless, the intrepid Chinese have brokered peace talks Saudi peace talks with Yemen and Iran. They have hosted the French leader and convinced them to test out some small natural gas trades in yuan. Simultaneously, they have encircled Taiwan in a massive military exercise. There’s more, but let’s just say Brazil, Russia, India and China (BRIC nations) may want to break up with the US. Source: The actual internet.
This has led to talking heads (myself included form time to time) to consider the dollar dead. De-Dollarization has begun and it’s being replaced as the global reserve currency. Bigly.
And while I’m no fan of Federal Reserve or US protectionist fiat policies, I would implore you to pause lest this recency-biased frenzy sweep you away. Here are a few things to consider:
China is a joke. If you dislike the ham-fisted American fiat currency, the yuan and it’s one-leader-for-life Communist Party will really chap your hide. There are documentaries on the economic fraud, intellectual property theft and ghost city economies that have given birth the Chinese economic boom. It's an open secret. Perhaps that’s also why the yuan is used less than the Swiss Franc for trade worldwide. Keep in mind,China has over a billion people and Switzerland has 8 million on a good day.
These colors don’t run. The US military is the fiercest death machine in history. China and Russia know this and will back down from outright conflict. Hence, the US is now flexing hit’s muscles in the Asian theatre. While sanctions don’t work, dictators know that taking a military loss big or small is the end of their regime. Americans tend to believe our military fights for our freedom. It does. Including fighting for our economic freedom to have cheap energy to bake Mom an apple pie.
The American Oil Boom. In a few short years, the previous administration had us shipping oil abroad. We had too much. It can be done. However, domestic environmentalists don’t like that, so the current administration has decided to simply create an oil boom in the other America. South America. Venezuela has the largest oil reserves on the planet. Untapped since 2017 due to sanctions, there are now several western companies allowed to drill. They shall remained unnamed and this does not constitute a stock recommendation. Google it at your own peril. It’s a trial balloon and a threat to the BRICs. If we have lots of oil pumping in the Americas, the price of oil drops. OPEC will be hobbled. Any nation that decided to use their currency will be decimated on every trade due to something called reverse contango or backwardation. Google it or just trust me as I am a smart.
The bully tactics of the US dollar may have caused the beginning of de-dollarization. But to what degree and in what time frame? Perhaps, your best course is to tread lightly.
If you’d like to discuss next steps in this brave new world, click here.