by Sean Kelly
Few Americans realize the US dollar is more than simply another currency, that thanks to its global dominance the dollar has also been weaponized. It is not just a unit in commercial transactions; whether for good or for ill, it is a bludgeoning tool of US foreign policy.
President Nixon’s Treasury secretary John Connally rubbed the world’s face in this reality in 1971 when he told a group of foreign finance ministers that “the dollar is our currency, but it’s your problem.” Connally was right. Only weeks earlier the US suddenly repudiated its promise to foreigners to redeem the dollar they held with the gold they had been promised.
This vulnerability to US dominance is a remnant of the post-war Bretton Woods agreement. With that arrangement, most of the world’s countries agreed to hold dollars instead of gold as their own currency reserves. Having abandoned gold, they became hostages to US policy.
The dollar’s status as the world’s reserve currency has cemented this dominance into geopolitical affairs. Tools of this reach include the SWIFT system, a global interbank financial communications system used to settle international accounts. By denying countries at odds with US policy access to SWIFT, the US cuts foreign nations out of international markets and thereby exerts unprecedented control over global economic activity in furtherance of its geopolitical and military objectives.
Sanctions… penalties… asset seizures: foreign banks have been fined billions of dollars while entire countries have had their foreign assets frozen and claim to have been economically crippled by the US for violation of what they believe are promiscuous, arbitrary, and cruel US sanctions.
Although they have been biting their tongues for years, foreign governments are now openly bristling at this state of affairs and making common cause to change it. They are racing to establish bi-lateral and multi-lateral institutions to bypass the old order, the “exorbitant privilege” enjoyed by the dollar.
The accompanying movement of central banks around the world, most notably Russia and China, to de-dollarize by repositioning the reserves out of dollars and into gold may prove to be the most significant megatrend of this decade. It is a shift in global monetary management that can damage the dollar badly and propel gold much higher. Since 2006 China’s gold reserves have grown from 600 tons to 1,948 tons, while Russia’s have swollen from 400 tons to 2,299 tons today.
Foreign nations aren’t ganging up against the dollar because it is in a position of strength. The COVID-19 pandemic, with its exponential growth of US debt and warp speed Federal Reserve money printing, provides a fresh opportunity to unite against dollar hegemony.
The president of the Shanghai Gold Exchange, the world’s largest spot physical gold trading center, Wang Zhenying, used this pandemic moment to voice the common dissatisfaction with the dollar. “When the Fed turns on the liquidity tap, the U.S. dollar will, in theory, be in a long-term depreciatory trend,” he said. “Future global trade needs a super-sovereign currency system under which no single country has the power to freeze the international assets of another country.”
Talk of a “super-sovereign currency” may ring a bell. Long ago French President Charles de Gaulle called for a new monetary system “on an indisputable monetary base that does not carry the mark of any particular country. . . . Yes, gold, which does not change in nature, which is made indifferently into bars, ingots and coins, which does not have any nationality, which is considered, in all places and at all times, the immutable and fiduciary value par excellence.”
De Gaulle was on to something. A few years before dollar holders were left holding the “old maid” when the US suspended the dollar’s convertibility to gold, de Gaulle had sent the French navy across the Atlantic to pick up France’s gold reserves held in the US.
The moral of this story is that with the old-world monetary order under growing strain and de-dollarization spreading, moving assets into the global “super sovereign currency” is especially alluring.
For nation states and individuals alike.
Gold is the super sovereign currency today, just as it has been for thousands of years.