from Birch Gold Group:
Janet Yellen, the current Secretary of the Treasury and former head of the Federal Reserve (2014-2018), assured us in 2017 there wouldn’t be another financial crisis during our lifetimes.
Maybe that was just wishful thinking. I can forgive her for failing to predict the 2020 coronavirus pandemic panic, the Federal Reserve’s multi-trillion-dollar money-printing stimulus spree (and the subsequent 2nd, 3rd and 4th largest bank collapses in U.S. history).
She downplayed inflation as it was heating up at the time. In this case, she claimed it would only be a short-lived “transitory” event. As we now know after 24 months of historic inflation, she was obviously way off base. I’ll give her credit for admitting she was wrong – eventually...
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Well, everybody makes mistakes.
Which brings us to the present day.
We previously discussed the U.S. dollar’s declining share of global foreign exchange reserves, a 25-year low at the end of 2020. Since that report, the world’s central banks lowered their dollar holdings another 6%.
Why? For all the reasons we’ve discussed previously! Inflation and weaponization of the dollar – see this explainer of the Durban Accords for more details.
My colleague Phillip Patrick explained this issue to Steve Bannon not long ago:
Well, the outspoken Secretary Yellen has a different take. When called before Congress back in June and interrogated on the global de-dollarization trend, she announced that it was nothing at all to worry about:
We should expect over time a gradually increased share of other assets in reserve holdings of countries – a natural desire to diversify.
Now, that is an admirable bit of political spin.
If you believe it, we aren’t seeing an unprecedented global de-dollarization drive – not at all! We’re just seeing “a natural desire to diversify.” And we all know, diversification is smart. I talk about it all the time!
But in order to share Yellen’s perspective, you have to also agree that it’s a simple coincidence that the world has this “natural desire to diversify” after a multi-trillion-dollar dollar-printing spree, subsequent decades-high inflation and the unprecedented financial sanctions against Russia.
Politics may dictate her response – but logic contradicts her.
Either way, the world is de-dollarizing. That’s a problem for a nation that relies on foreign buyers to fund its multi-trillion-dollar annual budget deficits. Less dollar demand means fewer creditors, fewer creditors means borrowing costs rise.
So regardless of the motives behind the de-dollarization drive, the challenges to the U.S. and its debt-smitten government are the same. How does Yellen address that?
I would say there is no meaningful workaround for most countries, for using the dollar as a reserve currency.
Interesting! In that case, since Russia is completely frozen out of the dollar-based financial system, their entire economy must’ve ground to a halt, right?
And if there’s “no meaningful workaround” then why is China inking dollar-dodging trade agreements with Saudi Arabia, India, Brazil – frankly, with most of the world?
Why are BRICS nations launching their own gold-backed dollar alternative currency on August 22nd?
Once again, reality contradicts political spin.
So what does it matter to you and me?
The benefits of dollar dominance
The U.S. dollar has been the global reserve currency for over 80 years, and our nation has become dependent on the economic benefits of that role. Here’s a short explanation of why it’s critical. to maintain the dollar’s hegemony as global reserve currency:
Domestically, reserve currency status brings a greater global demand for dollars. This means more of a global willingness to absorb dollars into foreign central banks and foreign bank accounts even as the dollar inflates and loses purchasing power. Ultimately, this means the U.S. regime can get away with more monetary inflation, more financial repression, and more debt before domestic price inflation gets out of hand.
After all, even if the U.S. central bank (the Federal Reserve) creates $8 trillion in new dollars in order to prop up U.S. asset prices, much of the world will take those dollars out of US domestic markets, and this will reduce price inflation in the U.S. – at least in the short term.
Moreover, the fact the dollar dominates in global trade transactions means more global demand for U.S. debt. Or, as Reuters put it in 2019, the dollar is used “for at least half of international trade invoices – five times more than the United States’ share of world goods imports – fueling demand for U.S. assets.” [emphasis added]
From the U.S. perspective, there are only benefits to being the global reserve currency.
To the rest of the world? Well, to paraphrase Nixon’s Secretary of the Treasury John Connally, “The dollar is our currency, but it’s your problem.”
You can plainly see by reading the bolded text in the quote above that it would create a major economic catastrophe if the dollar were ever to lose its privileged status.
While that isn’t likely to happen soon, it will inevitably happen.
The global de-dollarization drive is accelerating. The dollar is losing market share, dollar demand is climbing, and viable alternatives to the dollar are in the works.
That said, Yellen is correct. Anyone who has assets, whether it’s a sovereign nation or an everyday American family, should have “a natural desire to diversify.” Like your grandma used to say, Don’t put all of your eggs in one basket.
So how are nations and households fulfilling this desire to diversify?
