Monday, January 16, 2017

New Articles Suggest Various Threats to US Dollar Global Reserve Status

The current monetary system is based on the US dollar as the global reserve currency. No one really disputes this although many believe there are a variety of threats out there to the US dollar maintaining this status.

Below are excerpts from recent articles that talk about some of these potential threats to the US dollar. We care about this because if the US dollar did lose its status as global reserve currency, it would be the kind of major sea change we watch for here and something else would (of course) have to take over that role. 


Hugo Salinas Price - Argues Trump's Proposed Policies Could Trigger End for the US Dollar

"The president elect of the US, Mr. Trump, does not know what he is doing when he proposes protectionist measures to encourage the reindustrialization of the US and bring home again, the American industry that emigrated to foreign lands.
The US lost their industry as a result of the Bretton Woods Agreements, which were signed (under pressure) by representatives of the allied countries and of the countries conquered by the US in World War II. Those Agreements established the world's monetary system for the post-war world, after the victory of the Allies, which was already in sight in 1944."
. . . . .
"In 1960, the economist Robert Triffin detected the central problem residing in the Bretton Woods Agreements. I detected the same problem without having any knowledge of "Triffin's Paradox", as it has come to be known. Many years ago, sitting in my office smoking my cigar and contemplating the world's financial situation, I came to the same conclusion as Triffin.
In a few words, it turns out that in order for the international monetary system established at BrettonWoods to function, the US is forced to run a permanent trade deficit with the rest of the world. Year after year, the US must purchase more from the rest of the world, than what the US sells to the rest of the world, thus creating a permanent flow of dollars to the rest of the world. This flow makes possible the creation of Monetary Reserves in the Central Banks of the rest of the world.
Without this constant flow of dollars from the US to the International Reserves of the Central Banks of the world, the currencies issued by those Central Banks would cease to exist. If Banco de México, the Mexican Central Bank, does not have dollars in its Reserves, then Mexicans do not have money: without dollar Reserves, the Mexican peso would not be worth peanuts - at least, in international terms."
. . . . 
"If Mr. Trump should attempt to eliminate or reduce the US trade deficit and protect and encourage US reindustrialization by means of tariffs on imports, what he would achieve would be to choke the economies of the rest of the world with a scarcity of dollars obtained - how else? - by exports to the US.
Choking on dollar scarcity, because exports to the US decline or are eliminated, the world will not remain in paralysis. Another alternative to the dollar as the world's currency will be sought, simply because finding an alternative becomes a matter of life or death.
What can take the place of the dollar? . . . . "

"Now is the time to keep your eyes on the monetary endgame. Not the daily mark-to-market in paper gold. This endgame is an all-out attack on the status of the US dollar as the benchmark global reserve currency. Numerous players have an interest in ending the dollar’s role for reasons ranging from climate change (global problems require global money solutions) to geopolitics (Russia and China both have regional hegemonic ambitions in Eastern Europe and East Asia respectively)."
. . . . .
"Currently US dollar-denominated instruments and transactions constitute about 60% of global reserves, and 80% of global payments respectively. The US monopoly of power over dollar payment channels gives the US unrivaled dominance over the international monetary system and the economic well-being of every nation on earth. Adversaries naturally chafe at this immense power especially in light of US imposed sanctions that are considered overbearing and unjustified by the targets. Those adversaries do not issue currencies that are potential alternatives to the dollar because of inadequate rule-of-law, immature bond markets, primitive capital markets infrastructure, or all three. The only feasible alternatives to dollar dominance are special drawing rights (SDRs) issued by the IMF, and gold."
. . . . .
"Indicators all point in the same direction — Treasuries are being dumped, and gold is being acquired by the largest investors in the world. This is being done not as a ‘day trade’, but as a strategic geopolitical move.
This means these trends will continue until the aims of the ‘Axis of Gold’ (China, Russia, Iran, Turkey) have been achieved. Those aims include the overthrow of the US dollar as the benchmark global reserve currency."

My added comments: Just in these two articles we see a number threats to the US dollar as global reserve currency put forward. Proposed Trump policies, Chinese gradual dumping of US Treasuries, US adversaries weary of the current US dollar status working to undermine it, etc. 
One reader here sent me the thoughts below in an email suggesting another potential threat to the US dollar:

"I read your ( unlucky?? ) Friday the 13th post today re: Larry Summers, re: laying blame for the next crisis, perhaps on Trump.  I don’t know if you have followed the history of the “petrodollar” in any detail, but in the event you have not, this article is well worth the few minutes it will take to read it.

The petrodollar was not an arrangement that “evolved”, but rather, one that was dictated by a U.S. Government “perceived necessity” in the aftermath of the closure of the gold window, and the first oil crisis.  One of the connections that perhaps few people make between that shift  (from SETTLING imbalances with gold), versus “dollars needed to purchase oil” (which are then recycled into treasury securities ) is that the switch “enabled” both expanding INTERNAL budget deficits, and external TRADE deficits, which after the early 1980’s grew into large
“labor arbitrage” related deficits, as corporations moved manufacturing  capacity outside the U.S.  That transfer ultimately helped create the Trump presidency.

Without “settlement via debt instrument”, you simply cannot maintain giant trade deficits with the rest of the world. It was the global “necessity of oil”, coupled with U.S. induced GCC “insistence” that it be paid for in dollars, which allowed the system which has continued until now.

So, when looking for a candidate to trigger the next,  larger financial crisis, one good candidate could turn out to be the loss of dollar status in “oil settlement”, particularly as Russia plus Iraq plus Iran become serious rivals to GCC in determining just “what” will be accepted in payment for oil.

Just a thought"

Recently, articles are appearing in mainstream media suggesting that Trump's policies will create a surge in the US dollar and then potentially trigger a new major global crisis as a result later on. (see examples here and here).
Here on this blog, we don't claim to know if this major change in the status of the US dollar as global reserve currency will happen any time soon or not or what might trigger that. What we do believe is that if any of the above potential triggers do take down the US dollar as global reserve currency, something has to eventually replace it. Hugo Salinas Price wants some kind of precious metals backed currency. Jim Rickards proposes that the SDR will be put forward as the replacement (and adds that gold might be involved in the process). Whatever is done if this happens will most certainly have a big impact on all of us, which is why we follow it here.
If this major sea change does take place during Trump's term, we are really flying blind as to how he would deal with it. It was never discussed during the campaign. Trump has some advisers who are known to be strong gold advocates and others who seem to be part of the existing financial establishment. If faced with a huge global crisis where the US dollar lost its status as global reserve currency, I have no idea how Trump would respond. One highly credible source offered me this observation in an email (partial quote):

"Elites might decide to allow a crisis  . . . . .  Where it gets interesting is if Trump acquiesces (as Bush 43 did when Paulson and Bernanke walked into the Oval Office and demanded a bail-out) or whether Trump pushes back with an "America First" reply, in which case the whole thing will be worse than the Great Depression. I'm calling that outcome the Stone Age."

Added note: If this major change never happens, the information on this blog is not really vital to know about. However, if this change does happen, there is a lot of information on the blog that would be important to understand. If the SDR were put forward as a replacement for the US dollar, you can find very good information on that here. There could be other proposals which we mentioned in an earlier blog article here. This information will remain here for anyone who can use it and will continue to be relevant for the most part if we ever do see the major monetary system change we watch for here. The articles in these links contain direct input from some of the leading sources in the world on the topic of potential monetary system change.
Added note 1-17-17: I guess we can add Donald Trump's inclination to offer market commentary to the list of items that can impact the dollar. One comment that the dollar is too high sent the dollar sharply lower and gold sharply higher. Also interesting that Trump offers these comments just as articles are appearing that his policies may cause the dollar to surge higher and trigger a crisis.
Added note 1-19-17: Jim Rickards did an online presentation last night with some significant information and a bold prediction in it. Because it is part of a promotion for one of his newsletters, the rebroadcast of it will only be available until tonight. So, for anyone interested, here is a link to the presentation that will be good for a few hours today only. For me, the key point to take from this is his prediction about the potential for a significant currency event this year related to China. (perhaps soon after Trump takes office)

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