Are Ya Ready For De-Dollarization Anon?
The net producers are done accepting paper promises for their scarce resources.
Superpowers have been trying to get off the dollar for decades, so I understand where resistance to the de-dollarization narrative comes from.
But these processes take time. Most disagreements I observe are in relation to timeline, not necessary the trend itself.
It is likely that nothing will replace the dollar as the “global reserve currency” in our increasingly de-globalized world.
Perhaps the days of a single global reserve currency are over.
Perhaps the net producers accepting paper promises for their scarce resources are over.
Perhaps more regional spheres of influence emerge in this next chapter of geopolitical order — one that is multipolar instead of unipolar.
As superpowers like China and Russia continue to de-dollarize, and continue to purchase less (if any) new U.S. sovereign debt issuance, the dollar/UST as the U.S.’s geopolitical weapon of choice loses its effectiveness.
The implications of this are unknown. One thing is for certain: As organic foreign demand for U.S. debt stagnates and decreases, the Federal Reserve will be forced to monetize a larger percentage of the U.S.’s debt.
Which means more money printing is inevitable. For reference, the Fed held around 4% of the U.S. debt in 2009; that percentage climbed to 19% in 2021.
What will it be in 2025? 2040? My guess is higher than 19%.
As that number continues to increase, and the costs to continue to borrow (interest expense) continue to increase, so do concerns over the U.S.’s ability to ever pay back its debt.
Some analysts refer to this as a debt spiral, and you could argue it has already begun.
Since the Federal Reserve can print the currency in which its debts are denominated in, it is unlikely for the U.S. to nominally default. A default in real terms is more likely.
As mentioned in a previous piece, hyperinflation is a feeling more than it is some mechanical process.
Hyperinflation happens when a critical mass of creditors lose faith in the debt issuers ability to pay back the debt it promised to pay back.
Historically, the speed and volatility of such an event is staggering.
Russia began to decrease its holdings of U.S. debt in 2014 when the U.S. chose to weaponize it.
A strategy the U.S. implemented once again in 2021 in response to the Ukraine invasion; this time choosing to freeze $600 billion in reserves.
Freezing Russia’s FX reserves in 2021 + kicking them off SWIFT marked the end of the era of the world having a single global reserve asset/currency, in my humble.
Money is a tool. And the benefits for superpowers to use the tool was worth dealing with some level of weaponization on behalf the U.S. for some period of time. But everyone has a breaking point. And starting in 2014, Russia said enough is enough.
China was paying attention too. China’s ownership of U.S. debt declined from $1.25 trillion in 2015 to under $1.1 trillion in 2021. It continues to decrease and is now below $1 trillion.
As I said at the start of this piece, these trends take time. Here is what President Obama said back in 2015, regarding the U.S.’s decision to sanction Iran:
We cannot dictate the foreign, economic and energy policies of every major power in the world. […] We’d have to cut off countries like China from the American financial system. And since they happen to be major purchasers of our debt, such actions could trigger severe disruptions in our own economy and, by the way, raise questions internationally about the dollar’s role as the world’s reserve currency.
The temptation to politicize “money” is why I do not expect another fiat to “replace” the dollar.
“Fiat” means “by government decree.” I think other countries will have less and less patience for government decrees in an increasingly multipolar world where trust has broken down.
I cannot see the CCP exercising the restraint to not politicize the Yuan if [insert leader/nation] does something it doesn’t like. That level of restraint is not consistent with authoritarianism.
Additionally, having the reserve currency mandates a certain level of transparency in your capital markets — another tradeoff that I do not believe China is willing to make.
If only there was a money that required no trust.
A fixed supply money with no central issuer and no counterparty risk.
One that was not vulnerable to the centralization pitfall that caused analogue monies like gold to fail time and time again throughout history.
And that didn’t require Naval fleets to physically transport and ensure safe delivery of payment, but instead could be instantly zapped around the world in the blink of an eye.
That sure would be a valuable tool…
Nothing said in this piece is financial advice. I am Stanley Rizzo, a retired art director at SCDP with no formal financial education or training. The only thing I have is a nasty cigarette habit.