Has the Dollar Already Lost World Reserve Status?
The pillars underpinning the Dollar's status as the world reserve currency are shaky and the rest of the world is dedollarizing.
Is it possible the US Dollar (USD) is the world reserve currency in name only? Such a provocative question might lead to an uncomfortable answer for the western elite.
Serious discussion of dedollarization (exiting the dollar to transact or save) began in earnest in the wake of Covid-19 when supply chain disruptions, lockdowns, fiscal glut, and political disorder rekindled doubts about US monetary leadership dating back to the Global Financial Crisis (GFC) when China openly called for the dollar to be replaced at a Group of 8 Summit in 2009.
China openly called for the dollar to be replaced at a Group of 8 Summit in 2009.
Covid unleashed Antifa pyrotechnics and the 6 January protests, nosebleed fiscal spending, global supply chain disruption, and inflation induced Fed rates hikes (the fastest in history) triggering the world’s debt bomb. Worse, Russia’s invasion of Ukraine surprised DC Globalist and exposed deep fractures between possessed Western ideologues and Asian leaders committed to economic nationalism.
After four volatile years since the first global pandemic in a hundred years the world looks quite different so where does that leave USD’s status as the world reserve currency? If viewed from a perspective of US power the answer is - dubious.
The pillars of America’s monetary power are more straightforward than is widely understood. Fundamentally speaking, the United States commands the power it does because of 4 core elements:
The strength of the US economy, and specifically the breath of the US middle class tax payer who buys the world’s goods and subsidizes the US Government (USG)
The US Military’s (USM) ability to project power by air and sea (less so on the ground) secured by superior aerospace technology, global forward presence, and asymmetric precision-strike weaponry
The financial stability and depth of US capital markets. As Lyn Alden has said America is the global Capital Sponge:
60% of the world’s market capitalization is invested in US stocks (see below)
foreigners hold an estimated $32T in US banks, stocks, real-estate, government bonds and more
Gold - On paper at least, the US has the largest repository of gold in the world, a sizable portion of which comprises foreign owned gold custodied by the Fed and USM
While Fortune 500 CEOs, Wall Street, the DC establishment and perhaps average Americans believe these pillars to be intact, even unshakable, the reality is quite different.
Beneath the surface the US economy is in steep decline.
Beneath the surface the US economy is in steep decline. Warning signs of severe stress on middle-class households are compiling by the week. Credit card debt has exploded and delinquencies are piling high. Blue chip companies have introduced “operational efficiency,” another Orwellian HR term used in place of the more uncouth layoffs. Housing starts are at record lows because mortgage rates are incredibly high, and inflation is gutting consumers across the board, which is why Starbucks, McDonalds, Target, Walgreens and more are showing signs of distress (see below).
Second, and perhaps most alarming of all, the USM has deteriorated materially. Last year, the GAO put out a scathing assessment of America’s shipyards, some have been sold for scraps to distressed asset hedge funds. GAO concluded China can produce more warships from one shipyard than all US shipyards combined. Similar limitations exist with the surge capacity of US munitions, and a broad-based decline of US industry courtesy of decades of offshoring.
The story gets bleaker when you consider recruitment and human capital. No one wants to join the USM, and the quality people (especially white men) are leaving in droves. Morale, competency, industrial war fighting capacity are in disarray, and it is likely that Russia, China and other global powers are beginning to sense US armed forces are overstretched, ill-trained, and poorly resourced.
Russia, China and other global powers are beginning to sense US armed forces are overstretched, ill-trained, and poorly resourced.
Financial stability and trustworthiness might be the most flagrant example of America’s fragility. A weaponized dollar is not new but seizing Russian assets to fund the war in Ukraine, potential sanctions against China, and supporting Netanyahu’s multi-front war in the Middle East are worrying signs that the US is no longer a reliable custodian of foreign wealth, which, ironically, has impelled new monetary arrangements (BRICS, SCO, Project mBridge) rooted in more robust financial assets (commodities, infrastructure, military power) and importantly gold.
Then there is a steadily declining financial system. Commercial Real Estate (CRE), Mortgage Backed Securities (MBS), US Treasuries (USTs) and other toxic derivatives are beginning to blow up (see below), which spells doom for the US banking system, the UST bond market, and the US real estate where the vast majority of American wealth is stored. Such financial upheaval is worrying foreigners and Americans alike of trouble to come.
Lastly, we revisit America’s gold holdings, which have only been seriously tested twice in the last one hundred years, in the 1930s and in the 1960s. The Great Depression forced FDR to outlaw private gold holdings and the collapse of Bretton Woods forced Nixon to suspend the gold standard. This time around, as I suggested in a recent SubStack the US bluff will be called because the West has been selling and the East has been stock piling gold since 2001. If we have less gold than we claim to have, a dollar repeg to gold is a non-starter and the Western banking system may be unrecoverable as a result.
If we have less gold than we claim to have, a dollar repeg to gold is a non-starter and the Western banking system may be unrecoverable as a result.
Let’s be clear, while US political-economic weakness is compounding, USD remains the dominant trade and settlement currency in the world by a wide margin (see below). Second, the rest of the world is not keen on dedollarizing; if Asian countries, for example, can keep using USD they will. And while the relative power of the US has materially declined, in absolute terms it remains a great power, perhaps the most dominant one. However, maintaining the world reserve currency is something altogether different.
While dollars remain ubiquitous, USTs, formerly the gold standard for pristine collateral is no longer. Foreigners are replacing USTs with gold and buying energy instead of sovereign bonds as Luke Gromen and others have pointed out. Plus, increased tensions between East and West unearthed by the Ruso-Ukraine War are unlikely to harmonize in such a way that retrenches USD. Saudi Arabia has committed to joining BRICS+ and Saudi sheiks are looking to Asian markets to buy Aramco oil, effectively ending the long-standing Petrodollar (see more below).
The world is clearly shifting into a post-dollar world and a new monetary order is rising. Perhaps the first to recognize the broad strokes of a new, fledging system was Analyst Zoltan Pozsar. To use Pozsar’s words:
“We are witnessing the birth of Bretton Woods III – a new world (monetary) order centered around commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West.”
The fact of the matter is that the world has been fundamentally remade since 2000, perhaps the peak of the Liberal International Order (LIO). The principle weapon of the LIO has been the dollar, and backing the dollar are the four core strengths addressed above. As those wobble so will the dollar regardless of what happens outside the US where the dollar’s future prospects are equally precarious.
The new world order, Bretton Woods 3, the Age of Scarcity, or whatever you call it, is something the world has not witnessed perhaps since before the industrial revolution; a truly multi-polar world consisting of separate economic blocks, multiple monetary systems, and spheres of influence from North America to Eurasia and beyond.
We live in a truly multi-polar world consisting of different economic blocks, multiple monetary systems, and spheres of influence from North America to Eurasia and beyond.
So, is the US the world reserve currency today? Symbolically yes, but in fact probably not. The silhouette is still there but the fleshed out body behind it is emaciated.
Americans have a choice like the monetary empires who have come before us, we can adapt to a changed world or fight against it, which is the current posture assumed by DC. If history is any guide, doing so only means an accelerated demise of the dollar, and lead to collateral damage of potentially biblical proportions. Unfortunately, the internal dysfunction, corrosive leadership, and degradation of America’s national identity leave us disoriented and vulnerable to just such a disaster.
Stay alert, stay liquid.
