Even the eventual loss of the US dollar being the dominant global reserve currency of the world.
Of course, currently the US dollar still currently reigns over the world’s financial plumbing and official reserve holdings (accounting for just over 60%, of which about 50% is held by dollar deleveraging China).
But alas, change is afoot.
If you perused the 21st Century Gold Rush guide, you too have been diligently…
Studying current and ongoing trends, the United States is now nearing a crossroads from being an essentially unipolar power in the later 20th Century to one amongst many others in the 21st Century.
Picture a more multipolar power sharing world amongst other emerging and developed economies like China, Russia, India, the EU, etc.
Case in point, I visited one of my favorite central bank ‘think tank’ websites yesterday. To my surprise was an article title and context that looked like it belonged on a Silver Doctors or a ZeroHedge prop or not website.
Yet is was there, published on a website that central bank and top financial plumbing partners frequent.
OMFIF: “USD crisis on the horizon”. Latest in a line of “serious people” noting a move towards multi-polar system which will “redistribute global wealth” & “reduce seignorage harvested by the US as the world’s banker.” via @jameshenryand https://t.co/edy13GSfkO
— Luke Gromen (@LukeGromen) June 12, 2018
The contributor’s short article is below.
It cuts right to the heart of the monetary matter.
Authored by Danish futurist and former State Secretary of Foreign Affairs, Joergen Oerstroem Moeller.
Rabbit hole links have been added for further background info.
Dollar crisis on the horizon
Washington will adjust to new multicurrency order
by Joergen Oerstroem Moeller in Singapore
Wednesday – June 6, 2018
When a reserve currency is overstretched, creditors demand a rise in the country’s bond yields. When that proves insufficient, they ask the government to make it cheaper to buy the reserve country’s goods. This is what happened in the US in the 1970s and preceded its abandonment of the gold standard. There is a considerable risk that, under President Donald Trump, this will happen to the dollar. Creditors may hold dollars for a while, but are likely to engineer a fall in the real effective exchange rate.
In the short term, this does not mean much for the future of the dollar as a reserve currency. There is a lack of a genuine alternative. In the medium and long term, the analysis is less comfortable for the US.
Countries hold currency so that they can purchase goods and services and invest in foreign corporations, real estate or financial assets. Logic dictates they choose the currency of the largest and strongest economy that offers the most valuable goods, services and assets. The conclusion is straightforward: the propensity to hold another nation’s currency in reserve is almost directly proportional to that nation’s share of global GDP. In relation to banking, a global reserve currency’s collateral is its share of global GDP. The smaller the outstanding amount of dollars compared to its share of global GDP, the more secure it is to keep dollars in reserve.
The outstanding amount of dollars that are claims on future US production is rising. The US’s capability to deliver the products that the rest of the world is interested in buying is falling. When these two trends intersect, there will be a dollar crisis.
This process is already underway. Gazprom Neft, Russia’s third largest oil producer, has for three years settled its crude sales to China in renminbi. In March 2018 news broke that Beijing is planning a pilot project for the second half of the year to pay for imported crude oil with renminbi instead of dollars. The two countries allegedly selected for the pilot are Russia and Angola, with rumours that Saudi Arabia and the United Arab Emirates may become involved. If this venture is successful, it will act as a spur to similar schemes for other imports and primary products.
China needs primary products, while exporters of such products need capital goods for domestic investment. China offers those goods – the US also does, but to a lesser extent. So why should these trades continue to be made in dollars? Furthermore, a system where money can be printed without restrictions, as has been the case in the US since it renounced the gold standard in the 1970s, has not instilled confidence in politicians and central bankers. Some commentators have proposed reintroducing a link to a fixed asset; this time not gold, but minerals or other primary products.
The emergence of a multicurrency or multi-asset international payments system will take time. It doesn’t portend a collapse of the global payments system, but does point to a redistribution of global wealth. The seigniorage harvested by the US as the world’s banker will gradually fall, narrowing the room for manoeuvre in US economic policy, which for the last 70 years has had the greatest influence on markets globally. As the power of the dollar wanes, the US will be pressured to adjust to a world economy vastly changed since 1945.
Joergen Oerstroem Moeller is Senior Research Fellow, ISEAS Yusof Ishak Institute, and a former State Secretary at the Danish foreign ministry. This is the second of two articles on the future of the dollar. The first was published on 5 June.
Putting our monetary futurist glasses on, we can both look backwards and forwards, knowing not much changes under stars who originally supernovae’d the stuff easterners increasingly save.
About the Author
James Anderson has a BA in finance from Loyola University New Orleans. He has both worked and invested in the physical investment grade bullion markets prior to the 2008 global financial crisis.