The Weakening Dollar

If you took a snapshot of the way the dollar is right now, the title of this post, “The Weakening Dollar,” may sound faintly ridiculous.  After all, the dollar is running pretty high compared to the Euro and Pound.  If the FED stays committed to its current high interest rate policy, it may go higher still.  But that’s what’s happening on top.  Underneath, in the scaffolding, there is a lot going on.

Since one of the major focuses of this blog is American decline, a Democratic administration offers lots of fodder.  Mostly unintentional, but that just makes it sadder.  I’m specifically talking about the Biden Administration’s indifference to the US dollar’s status as the world’s reserve currency.  Why that’s important I explained in a previous post, but in short, to quote myself:

Being the world’s reserve currency means that banks and nations all over the world keep a good stash of US dollars on hand and a lot of internationally traded commodities (like oil) are priced in US dollars.  This is great news for us since it means there is always a steady demand of US dollars worldwide to buy things priced in dollars.  This saves us the expenses involved in constantly converting our currency into another currency to buy things on the international market.  Gas prices at the pump would be even higher if we had to convert dollars to another currency, like the Euro, to buy oil.

But the dollar isn’t what it was, and other countries are starting to tire of their financial fortunes being anchored to a now whimsical US fiscal policy. The International Monetary Fund has called for replacing the US dollar as the world’s reserve currency.  France has made a proposal to replace the dollar with a basket of several currencies.  The BRICS group of nations (Brazil, Russia, India, China, & South Africa) has formally called for revamping the world financial system and replacing the dollar.

That was 10 years ago.  Today?

Russia and China are brewing up a challenge to dollar dominance by creating a new reserve currency

Russia is ready to develop a new global reserve currency alongside China and other BRICS nations, in a potential challenge to the dominance of the US dollar.

President Vladimir Putin signaled the new reserve currency would be based on a basket of currencies from the group’s members: Brazil, Russia, India, China, and South Africa.

“The matter of creating the international reserve currency based on the basket of currencies of our countries is under review,” Putin told the BRICS Business Forum on Wednesday, according to a TASS report. “We are ready to openly work with all fair partners.”

The dollar has long been seen as the world’s reserve currency, but its dominance in share of international currency reserves is waning. Central banks are looking to diversify their holdings into currencies like the yuan, as well as into non-traditional areas like the the Swedish krona and the South Korean won, according to the International Monetary Fund.

“This is a move to address the perceived US-hegemony of the IMF,” ING’s global head of markets Chris Turner said in a note. “It will allow BRICS to build their own sphere of influence and unit of currency within that sphere.”

Indeed.

There is more than one way to look at this of course.  One way is, “they are still trying to dethrone the dollar?  Losers!  We’re number one!  We’re number one”

That seems to be the establishment view.  The dollar is forever and nothing will ever, ever change.  The “one the other hand” perspective is that this is still a goal for a large, maybe the largest part of the globe.  What they lack, besides the obvious opportunity like a major worldwide financial crisis would provide, is a suitable substitute reserve currency.  Not surprisingly the Ukraine sanctions have lighted a new fire under the Russians to dump the dollar:

“Russian Finance Minister Anatoly Siluanov said on Saturday that the five BRICS countries could mitigate the backlash of Western sanctions against Russia on their economies by pooling their efforts and using a range of financial instruments at their disposal.

“The current crisis is man-made and BRICS countries have all the instruments necessary to mitigate its consequences for the national and global economies,” Siluanov was cited as saying by the Russian Finance Ministry. The minister blamed economic sanctions on Russia for “destroying the foundation of the existing international monetary and financial system based on the US dollar” and urged BRICS to rely more on their national currencies in foreign trade, integrate payment systems and create an alternative to the SWIFT payment messaging platform.

Central banks of BRICS countries — Brazil, Russia, India, China and South Africa — have already agreed to conduct the fifth test of a banking mechanism that will allow them to jointly pool “alternative currency” reserves to shield their economies from outside shocks, the ministry said.”

And what will be the end result?  Again, quoting me:

“If the dollar is no longer the world reserve currency, the demand for holding dollars drops like a rock.  Who needs them then?  As the world dump the dollar holdings, the dollar will decline even more.  Without the massive buying of US Treasuries by governments and banks around the world, we can’t run up the massive deficits we’ve been getting away with.

And that, fair readers, is Bond-Ageddon; what I call that fateful day in the future when the demand for US Treasuries collapses, leaving us no way to finance our deficit or debt.  If you want to know what sort of austerity that would cause in our government, imagine if we were told that we could no longer run a budget deficit, right now.  Immediately the government would have to cut spending.  And considering the size of our deficits, that would mean everything would be sliced, Medicare, defense, roads, pensions, you name it.  There just would be no more money, and no way to borrow enough to cover our bills.  Not just for a few weeks, but for the foreseeable future. “

It would be a semi-permanent Greek crisis.

No need to panic, at least not yet.  The dollar has weathered financial crisis before, such as the 2008 Financial crisis, by being the least bad of a lot of bad options.  That’s still true today, even with most of the world under the scaffolding, sawing away at the supports.  They’re not through yet, so we think we’re superdollar, but If you think about it, in the 21st Century the US only has one real export, the US dollar.  What happens when the world is no longer interested in our only export?

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