This Simple Strategy Is the Key to Surviving a Post-Dollar World
As I wrote two weeks ago, there are a few key reasons why the U.S. Dollar (USD) is the undisputed and only reserve currency in the world.
In 1944, the Bretton Woods Agreement pegged the USD directly to gold. The dollar has been widely considered a store of value on account of America’s huge tax base supporting government borrowing. The U.S. has long had a reputation for free markets and a lack of capital controls. Oil and most commodities are priced in dollars. And last but certainly not least, dollars have been used in global trade for more than 100 years.
But all that’s changing.
The Bretton Woods Agreement is a relic of World War II and now openly derided as a self-serving American construct. Dollar convertibility into gold ended in 1971.
The United States’ national debt is approaching $32 trillion. The potential for default if the debt ceiling isn’t raised, as well as a diminishing tax base due to changing demographics and the hollowing out of the country’s middle class, puts the whole dollar as a “store of value” concept into questionable territory.
America’s markets aren’t free anymore. They’re increasingly manipulated by the country’s privately-owned central bank, the Federal Reserve System, and regulatory regimes controlled by administrations, Congress, and politicians serving the oligarchy of bankers and corporate officers who run the country.
As far as capital controls, what the U.S. has been doing to foreign individuals, corporations, and governments by confiscating their assets without due process, under the guise of sanctions, makes what any other country that tries to control capital flows look like child’s play.
The biggest oil importers in the world outside of the U.S. are all trying to make deals to buy oil in their own currencies, not with dollars. Commodity exporters are increasingly accepting payment in dollar-alt (alternative) currencies. And as far as total global trade in dollars, its falling, and increasingly being replaced by new arrangements using new systems set up by some of America’s biggest trading bloc partners.
We’ve reached a point where the hegemony of the dollar is a problem – not just for us, but for the countries now banding together to take it down.
And the most dangerous thing is that investors like you aren’t being told how close we are to the dollar’s fall. Until now.
So here’s what you need to know and how your strategy needs to shift in a post-dollar world.
Foreign Currency Reserves Are Already Declining
Because the dollar has been the currency of choice for global transactions since at least the end of World War II, foreign countries’ banks (and more importantly their central banks) end up holding dollar reserves.
In the mid-1970s, US dollars made up 80% of all global reserves.
By the end of 1999, the U.S. dollar’s share of foreign central bank global forex (or FX) reserves dropped to 70%, according to IMF data.
At the end of Q4 2022, IMF COFER data (Currency Composition of Official Foreign Exchange Reserves) showed U.S. dollars accounted for 58.38% of global FX reserves, topping $7 trillion according to gross figures calculated by the Bank for International Settlements (BIS).
The euro was the second most widely held currency at 20.47%. The Japanese yen stood at 5.5%, British pounds sterling at 4.94%, and Chinese yuan at 2.69%.
BIS data shows the dollar is used in 40.4% of all international payments and the common denominator in 88.3% of all forex transactions.
And while the Economist says half of all cross-border debt is denominated in dollars, the BIS calculates 45.1% of international bond notes are denominated in dollars.
Either way, global use of dollars, whether in the form of offshore debt or to purchase U.S. Treasuries, is staggering. That more than $7 trillion or almost 60% of global FX reserves are in dollars, which are mostly used to buy U.S. Treasuries (banks don’t own dollars that don’t yield anything, they use those dollars to buy Treasuries) means that about one quarter of all U.S. government debt outstanding is owed to foreign countries.
That’s a problem for the U.S. if de-dollarization reduces foreign appetite for dollars and Treasuries… and it’s already started.
China, the second largest holder of US Treasuries after Japan, has been steadily reducing its hoard of U.S. bills, notes, and bonds. In 2013, China held $1.32 trillion worth of Treasuries, that’s now down to $849 billion as of the end of February 2023 – a 35% selloff and a 12-year low.
Japan and China reduced their total Treasury holdings by $400 billion at the end of 2022, the same year US deficit reached $1.38 trillion for the year.
Saudi Arabia has sold $62 billion of Treasuries since 2020, reducing their holdings by 35%.
Brazil’s dollar reserves are down 5.69% from 2021 to 2022, to 80.34% of their reserve holdings. Meanwhile, like a lot of other countries Brazil’s been raising its Chinese yuan reserves, taking the total they hold from 1.21% to 4.99%.
Why the sudden selloff by so many of our trading partners? Well, it has a lot to do with sanctions.
How Sanctions Have Turned the World Against the Dollar
When Russia annexed Crimea in 2014 the U.S. responded by imposing sanctions on Russia. That’s when Russia openly prioritized de-dollarization and sought to enlist the rest of the world.
That effort picked up steam when Russia invaded Ukraine in February 2022, and the U.S., at Ukraine’s urging, immediately cut Russia off from the SWIFT system, the Society for Worldwide Interbank Financial Telecommunications.
Banks and governments, in fact more than 11,000 financial institutions across the globe, rely on the SWIFT network, which is run through the U.S. Federal Reserve’s Clearing House Interbank Payment Services and uses its Fedwire Funds Service, to connect and transact with each other globally.
The U.S. government’s freezing of more than $300 billion of Russian foreign reserves and financial assets, as well as freezing finances and confiscating assets of Russian oligarchs and companies, further solidified global pushback on the dollar and what several countries call economic coercion and long-arm jurisdiction.
After the 2014 US sanctions, Russia created its own System for Transfer of Financial Messages (SPFS). Though originally designed for domestic users, it has attracted central banks from Asia, China, India, and Iran.
In 2015, China created its own Cross-Border Interbank Payment System (CIPS), run by the People’s Bank of China, which is gradually being used by other central banks.
But it’s not just countries subject to U.S. sanctions that are worried about America’s weaponization of its dollar reserve status, or how dollar-denominated trading and banking systems are being used as instruments of economic statecraft.
Even countries friendly with the U.S. are afraid of doing business with counterparties for fear of being targeted by secondary sanctions, or what the U.S. might do. French president Emmanuel Macron last month called on the European Union to reduce reliance on the dollar in order, he said, to “avoid becoming vassals of the U.S.”
Countries and national leaders are asking themselves, “Why send money to the U.S. when it can be used against you, and how can a supposedly free-market democracy seize private and government assets without due process?”
The reality for the rest of the world now is foreign state assets are no longer inviolable and the US dollar can no longer be relied upon as a risk-free asset. Or as one observer put it, “Logic and functioning of global financial markets no longer follow the principle of neutrality.”
Even U.S. Secretary of the Treasury and the former Chairperson of the Federal Reserve, Janet Yellen, in April admitted publicly, “So there is a risk when we use financial sanctions that are linked to the role of the dollar that over time it could undermine the hegemony of the dollar.”
So the writing is on the wall. And that means your strategy needs to shift now to keep pace with a changing world.
The One Crucial Perspective Shift You Should Make Now
At the end of the day, the USD is just a currency, a medium of exchange that we use to trade things. But regardless of what currency we use, the things that have value in our modern society are not changing anytime soon. Commodities and hard assets, like gold and other precious metals, are going to remain valuable no matter what eventually replaces the dollar.
So one key way to avoid getting crushed by a weak USD is to make sure you have as much direct exposure to those things as possible.
Oil, especially, is going to retain its value under pretty much any circumstances. The world runs on it, after all. My colleague, Garrett Baldwin, has been keeping a close watch on what may be the biggest energy opportunity of the last 17 years – a buyout boom as major energy companies seek new land in the U.S. for drilling rights.
He’s got the inside scoop on all the movers and shakers in this land rush, and he’s identified the five candidates with the biggest potential to be targets for a takeover, with the chance to double or triple your money in a month if you get in on the ground floor.
But you have to act fast if you don’t want Wall Street to beat you to the punch. Get all the details here…
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