The global de-dollarization movement is being nitro-fueled by the Ukraine war.
Figuring large in the monetary calculations of foreign capitals and in plush central bank offices far and wide is the largely unprecedented move by the Federal Reserve to confiscate Russian assets. President Joe Biden announced in his State of the Union address that “we are cutting off Russia’s largest banks from the international financial system…. [We are] making Putin’s $630 billion ‘war fund’ worthless.”
In an epic understatement, the head of a European hedge fund said, “We suspect China is alarmed.”
China and other countries are alarmed for the same reason that you would be if your local bank stopped allowing withdrawals. That sort of thing makes depositors understandably nervous.
It also highlights the differences between government money – printed or created digitally – and gold. Gold is not money because anyone said so. Its value is intrinsic. But the value of the dollar, like all unbacked money, is a confidence game. It depends on the acts of the nation-states that issue it. If it overpromises and overspends, loses wars, prints money recklessly, or even “freezes” or “cancels” its currency for political reasons, confidence fades. That will eventually trigger the dishoarding of its currency.
It’s just like a run on the bank. Bank runs generally start small as a few alert depositors suspect problems and begin making withdrawals. The early arrivals may get their money back, but eventually, the troubled bank can’t keep up with the withdrawal demands, leaving later customers lined up outside locked bank doors and victimized.
What is the effect of Biden’s announcement about cutting off Russia and leaving hundreds of billions of its U.S. dollars worthless?
It rattles confidence. It threatens to change the international monetary order that’s prevailed for decades and has contributed mightily to the strength of the dollar and the prosperity of the American people. Here is a description from David Stockman, who was U.S. budget director under President Reagan:
Washington’s Sanctions War may bring the demise of the petrodollar regime in place since 1973. In fact, one of the core staples of the past four decades, and an anchor propping up the dollar’s so-called reserve status, was a global financial system based on the petrodollar: That is, an arrangement under which oil producers would sell their product to the U.S. (and the rest of the world) for dollars, which would then recycle the proceeds back into dollar-denominated assets, especially U.S. treasury and corporate debt. This explicitly propped-up the USD as the world reserve currency, by creating artificial dollar demand and in the process backstopped the standing of the US as the world’s undisputed financial superpower.
Economic sanctions are prone to backfire. Sanctions on Saddam Hussein before the Iraq war made him more powerful – not less. The Iraqi people became completely dependent on his government for food, which he could withhold as a means of enforcing loyalty. A recent New York Sun editorial relates that “economic sanctions backfired in the lead-up to World War II, hastening rather than avoiding conflict. The sanctions designed to stop Mussolini’s war against Ethiopia served only to drive Italy into an alliance with Germany. Tough American sanctions, intended to roll back Japan’s aggression in East Asia, instead led to escalation and the attack on Pearl Harbor.“
There is no question that today’s sanctions on Russia drive it deeper into China’s embrace. But other shoes are dropping. After being priced in dollars for generations, the Saudis are engaged in talks with China to price at least some of their oil sales in yuan, Beijing’s currency. That, says Stockman, will undermine the dollar’s preferred global value, which “Washington has relentlessly taken advantage of… by printing as many dollars as needed to fund runaway federal spending for the past several decades.”
China’s role in de-dollarization is especially important since its economy will surpass that of the U.S. before long. But it is not only Riyadh that is eyeing the dollar skeptically. India is working on ways to circumvent U.S. sanctions on Russia that would bypass dollars through direct rupee-ruble commerce.
The U.S. move to neutralize Russia’s dollar reserves has the potential to be one of the most significant dollar events since President Richard Nixon severed the dollar’s tie to gold in 1971. Inside accounts are shocking in their descriptions of how indifferent the authorities were about the unintended consequences of dropping gold. We are paying for their insouciance with $30 trillion in debt and double-digit inflation today. Much the same indifference is shown in making dollars held in foreign reserves conditional on Uncle Sam’s approval.
It is a very big deal. That’s why, although always wary of an overstatement, we don’t mind citing the emerging markets trader quoted in MarketWatch saying it could drive gold to $10,000 per ounce. It makes sense. The same article points out that over the last eight years, foreign central banks have purchased $260 billion in gold, but only $60 billion of it is U.S. treasuries. That’s a big change.
President Biden announced this week that there is going to be a new world order. With that, the White House is acknowledging that the old order is ending. We recommend you protect yourself by moving to gold.
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The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.