How does a currency lose its privileged position as the world’s currency reserve? Exactly like Ernest Hemingway’s description of the way one goes bankrupt: “Gradually and then all of a sudden.”
The U.S. dollar’s premier position has done gradually. It is on the verge of suddenly. That will mean a lower standard of living for Americans and a rush into gold.
The special status of being the world’s reserve currency means that a majority of international trade is priced and settles accounts in terms of U.S. dollars. As such, it creates a higher utility and greater demand for dollars – and therefore a higher exchange value for the dollar – than would otherwise exist.
That extra value contributes to American’s standard of living. It also facilitates government borrowing. The dollar’s privileged position makes it easier and less costly to borrow money; the government would otherwise find it more difficult to borrow its trillions, having to pay higher interest rates. But as it is, the average interest rate on the Treasury’s marketable debt portfolio is about 1.46%.
Think about that. The biggest debtor in the world has borrowed an incomprehensible $28.5 trillion at some of the lowest interest rates in history.
That would not be possible if the U.S. dollar were not the world’s go-to currency.
Alas, the dollar’s preferred status is changing right before our very eyes! Reserve currency status reflects economic strength. The dominant economy is accompanied by the dominant currency.
After World War II, with much of the rest of the industrial world in a state of waste, it was only natural that the U.S. would have the world’s most prized currency. The world depended on dollar investments, dollar aid, and dollar trade.
But as the adjoining chart from The Economist makes clear, America’s days at the global trade and manufacturing hegemon are expiring.
In the last 20 years, China has surpassed the U.S. as far more countries share greater trade with China than with the U.S. This trend started gradually. Now it is happening all of a sudden.
Meanwhile, the world is losing confidence in the Federal Reserve’s dollar management. This is hastening global de-dollarization. Countries are rapidly pioneering alternative non-dollar international account balancing and payment systems. And that includes those with gold components.
This is accompanied by central banks fortifying their gold holdings. For U.S. investors, this represents a one-two punch. It is very bearish for the dollar as it represents dollar selling, and it is bullish for gold as it represents a substantial buying dynamic headed gold’s way.
As we have said, changes in the world’s reserves happen gradually, then all of a sudden. After World War II, the British pound, which had been the world’s dominant currency for a century and a half represented more than 80% of the world’s reserves. Today it is less than 5%.
The dollar’s share rose thereafter to about 80% until the U.S. cut the dollar’s ties to gold. Today, the dollar share of reserves is down to 59%.
That is the gradual part.
With the U.S. Producer Price Index up 8.3% over the last year, the world is losing confidence in the Fed and U.S. monetary policy. And with $3.5 trillion of mostly deficit-financed new spending before Congress and massive tax increases in the pipeline, we are about to discover that capital flows to places where it is treated kindly.
We have been living through gradually. Be sure you have protected your wealth, your family, and your retirement with gold and silver. Because all of a sudden is next!
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