For those who are worried about the collapse of Western civilisation and the collapse of the US Dollar, chill out. For those who think the world is going to become a multipolar world order of different currencies, sorry to break it to you but it’s not going to happen. There is a higher probability that China will collapse into a massive economic and political meltdown than becoming the biggest and the world’s superpower.
This is the second article in a series about economic history in relation to monetary, financial and economic issues being discussed today. Admittedly this could be extended but my time is limited.
Why the US Dollar is King.
The US Dollar flipped the Pound Sterling at the end of the 1920s in terms of the total global-denominated debt, but the path to its dominance started after the First World War and consolidated its dominance at the start of the Second World War. There are many reasons why this process took place: monetary, fiscal and economic, but historically, the most common reason provided is that Britain’s power was reduced with two consecutive world wars that depleted its ability to be the world’s creditor. And basically, being the world’s creditor makes your currency the king among currencies.
The US Dollar could serve as the world’s creditor because it was the biggest economy and it could issue debt based on its economic strength. The fact that there is trust and confidence that the US economy will keep growing sustains its constant issuing of debt which is also bought by nation-states that need exposure to the US Dollar. This trust and confidence however exist because the US economy exists under a rule-of-law framework whereby you are guaranteed rights by law and these guarantees will be kept. Russia is arguing that this trust and confidence has been lost because its reserves in foreign banks and institutions were frozen when it invaded Ukraine, but it is in fact, this power of the US government over the US Dollar and its global financial system which enables it to keep in check the bellicose imperialism of Russia and China. If Russia and China become more independent from the US Dollar, they will be more empowered to wage wars on their neighbours with impunity.
So, will China succeed in toppling the US Dollar as the world’s global reserve currency?
The Chinese Yuan Myth
So, currently, China and Russia are in overdrive with a propaganda campaign against the US Dollar where they are feeding gullible press outlets the idea that the US Dollar is losing its global reserve currency status and BRICS will be using the Chinese Yuan instead of the US Dollar. There has been a barrage of comments made by a number of different people saying the Yuan is rising, the petro-Dollar will be no more, and Donald Trump even said that the US Dollar risks losing its global currency reserve status. Meanwhile, Emmanuel Macron is saying that we need to reduce our dependency on the US Dollar and the President of the European Council, Charles Michel says he agrees. Brazillian President Lula da Silva has even been welcomed by Xi Jinping in China and said that Brazil will replace the US Dollar with the Yuan. Incredible turn of events for the US Dollar, so it seems. What’s really going on?
In reality, there are no fundamental changes to the global currency system. No one is dumping US Dollars for the Chinese Yuan and no one is replacing US Dollars with the Chinese Yuan in trading except for Russia which has to do this because it has no other choice. And even if Saudi Arabia starts selling some of its oil to China in Yuan, it still won’t make any difference and markets are saying that everything has remained the same in the global currency system. In reality, what’s happening mostly is a propaganda show of insignificant events. China and Brazil have signed an MOU whereby a Brazilian bank will open a clearance facility with a Chinese bank for Yuan payments. It takes much more than a clearing facility to convince Brazilian traders to ditch their Dollars for Yuan.
The Chinese Yuan can’t be the global reserve currency simply because the Yuan is a tightly controlled currency which is not floated in the foreign markets. China also has strict capital controls making capital outflows from China difficult, and China’s ability to be the world’s creditor based on its economy is dubious at best. Despite China’s dramatic growth of its economy, China is still a developing economy with tightly controlled markets, and above all China does not have rule of law making it by default much less attractive as a place to invest. Large companies are desperate to take a share of the Chinese market and there is a firm belief that this market will keep growing, but China is not alone in having a billion-people population. India too has as much growth prospects as China if you consider social and demographic metrics. Indeed, India and other neighbouring countries like Vietnam pose more of a competitor to China than China poses as a competitor to the US. And so far, the US is hands down, still the favourite country for foreign investors to put their money in, even if China’s reception of foreign direct investment has been growing. The US stock market dwarfs the Chinese, but most importantly, the US Dollar acts in money markets like a huge black hole of gravitational energy compared to the insignificant share of China’s Yuan. And as you can see in the composition of global currency reserves, the Yuan is all too insignificant apart from the fact that it is also showing a decline in use.
Here’s a simple reality. The Yuan is not going to be the world’s reserve currency and probably won’t ever be at least for the next hundred years. The process of changing the world’s global reserve currency is a long historical process which involves the global restructuring of capital flows – that is not happening right now. If anything, there is a consolidation of the current global system whereby the majority of countries and people in the world rush to the Dollar and those who abjectly resist this system are forced to stay on the sidelines and in poverty – yet in reality, no one wants to stay out of this system, not even its biggest detractors. North Korea which is the world’s prime example of a Mafia State led by a brutal dictator supposedly prides itself on being self-sufficient only that it isn’t: North Korea strives to get its Dollars by covert and criminal means since it can not do so legally and legitimately. And even if it does get Yuan by trading with China, they are indirectly buying Dollars.
Most of the world’s currencies are US Dollar derivatives and their value is measured in Dollars, including the Yuan. China’s Central Bank has to calibrate the value of the Yuan by raising interest rates according to the circumstances provided by the Dollar. If China deems it a priority to sell its products abroad it will strive to keep the price of Yuan low and if it prioritises a consumer economy it needs the Yuan to appreciate, but it can only attempt these variations against the marked value of the Dollar. There is nothing so far that fundamentally indicates that the Yuan is going to compete in some way or another against the US Dollar.
Then why is gold going up?
Gold they say can be a hedge against inflation and store of value. Supposedly, as the popular theory goes according to gold bugs, the value of gold will keep up with inflation in the long term as paper money is devalued with its ever-increasing proliferation. Eventually, bitcoin entered this conversation on what’s a potential store of value with some saying that bitcoin is even better than gold at storing value given its limited supply and digital fungibility.
Within the gold and precious metals investor community, and for many years, we have often heard not only reasonable arguments about what is a store of value and currency debasement, but also apocalyptic theories that the US Dollar was going to crash and gold to skyrocket in price. However, this theory was always restricted in the gold investment community to a small niche of people with major industry professionals like Jeffrey Christian, constantly reiterating that the theory does not make any sense.
In fact, these kinds of apocalyptic theories have been more popular within the retail investor community than with large and institutional investors, and have mostly been framed into a sales pitch to lure retail investors into precious metals. In other terms, smart money never bought into this narrative, and when retail swallowed this narrative, many poor folks ended up buying the top as in reality the theory of the US Dollar crash never worked out. For example, in 2021, a popular group on Reddit with tens of thousands of members (at one point even exceeding 100,000 memberS) attempted to short squeeze the price of silver because they believed that the US Dollar was hyperinflationary and silver was to skyrocket in price. The result was that gold and silver crashed along the second half of the year. The group’s members eventually gave up and the page was depleted of its members.
However, this year-round, gold went back again to $2,000, coincidentally, during the same time when China and Russia are out on an international campaign to troll the US Dollar. Did the Credit Suisse investment banker Zoltan Poszar get it right when he said that the US Dollar was going to be replaced by a gold-backed BRICS currency alternative? It was just last year when he published his note stamping the seal of approval of what used to be (supposedly) a prominent institution on a conspiracy theory backed with no evidence at all. The US Dollar didn’t crash but Credit Suisse did, yet I asked whether the fact that gold is doing well right now has anything to do with the US Dollar not remaining the world’s global reserve currency. And when I actually asked a gold industry professional this question he told me “No, despite gold going up the US Dollar is as much of the world’s reserve currency as ever.”
Keith Weiner, Founder and CEO of Monetary Metals told me that Dollar alternatives are not only lower quality, but they are also Dollar-derivatives, describing other currencies as simply “coal mining company town scrips”. Weiner says that the current rise in the price of gold is due to an “incipient financial system crisis”, however, he claims that “unlike in 2008 when people knew that if they sold assets, the cash was safe in the bank this time it may not be.” So for Weiner, gold’s success is mostly for the fact that it doesn’t have any counterparty risk, which in times of a banking or a financial crisis, is something sought for. This however has got nothing to do with the US Dollar not remaining the world’s global reserve currency.
The ridiculous idea that bitcoin is going to $1 million because the US Dollar is going to crash
I wouldn’t mind if bitcoin went to $1 million, but if it does, it wouldn’t be because the US Dollar would have crashed. Even if so, ironically, those who think that the US Dollar is going to crash are still pricing their bitcoin exit in Dollars and not in Yuan or in any other currency. Bitcoin and crypto have so far served as popular and ungovernable methods for access to Dollars. It is incredibly ironic to listen to economists who prophetise about bitcoin’s virtues as a global reserve currency, when in reality, bitcoin has, is and will be, only a means for access to US Dollars, either by casino effect (gambling or speculation) or by literally accessing US Dollars through the bitcoin and crypto markets due to capital controls, government oppression or even crime and money laundering. At the end of every economic and financial system, everything is measured in US Dollars.
It is no coincidence that as we go through another global process of currency unification, crypto is booming. Crypto is in fact, accelerating the global pace towards more currency unification where small currencies are gobbled up by the US Dollar. Even El Salvador can’t exit this conundrum as its President bets the future of the country on bitcoin. Nayib Bukele, despite his frivolous anti-American talk, is not exiting the US Dollar system, he is simply accessing it through more ungovernable means rather than by going through the legally and internationally established International Monetary Fund. El Salvador is not going to sell its bitcoin for Yuan, it’s going to sell it for US Dollars.
In every single country where there is a monetary crisis, its people turned to crypto for access to US Dollars: Venezuela, Argentina, Zimbabwe, Turkey, and now, even Ghana and Sri Lanka. Bitcoin soared in price when Russia invaded Ukraine as Russians who had Roubles chased the Dollar. At the end of the day, everyone turns towards the US Dollar.
The US Dollar is only going to get better
By historical standards, the US Dollar is here to stay and judging by a brief history of modern history, the US Dollar is only going to get better as the number of democracies in the world keeps increasing. This is simply statistics and not speculation. China’s threat to invade Taiwan does not come during a time when old empires are returning, on the contrary, old empires are decaying and that is why Russia and China feel compelled to go to war. They can’t win an economic war, or a currency war, so their only alternative is old-style colonialism and this comes at a huge, potentially existential cost. China may very well be able to invade Taiwan and occupy it, but the end result won’t be a traditional imperial conquest as Xi Jinping is imagining it’s going to be. The result can backfire badly as it did with Russia’s invasion of Ukraine: an increasingly militarised consolidation of national sovereign states with an increasing turn towards national democracy. Ukraine is not looking to chase Chinese funny money after the war is over and neither are all the previous Soviet republics. China’s neighbours face the same choice and the US Dollar is the undeniable favourite. Lula can play theatre on the international stage to rekindle his socialist nostalgia for ideologies long gone, but at the end of the day, the Brazilian trader, from the poor vegetable seller to the multinational bank, prefers the Washington Green to Mao’s Blood Red any time, and any day.