De-Dollarization is Coming

The US Dollar Index was unchanged last week.

As I have discussed in past posts, the US Dollar Index is a relative measurement, contrasting the purchasing power of the US Dollar with the purchasing power of the currencies of the major trading partners of the United States.  So, when the US Dollar Index is higher, it means the US Dollar purchases more relative to the currencies against which it is measured.  It is NOT a measure of absolute purchasing power.

If the US Dollar Index was a measure of absolute purchasing power, it would show that the US Dollar is losing purchasing power.  Money creation via quantitative easing (or whatever term you wish to use) devalues the currency.

And, as far as the US Dollar is concerned, that is exactly what is taking place.

Andrew Moran, an economics correspondent for “Liberty Nation”, wrote about the global effort to “de-dollarize” this past week (Source:  https://www.libertynation.com/will-the-global-de-dollarization-collapse-the-greenback/).  Here is a bit from his piece (emphasis added):

In the last several years, the world has started to witness an incremental de-dollarization push by a handful of nations. The process of reducing dollar holdings, using local denominations, and taking part in currency swaps has become ubiquitous. Right now, it is only America’s so-called adversaries, such as Russia, Iran, and China, that are leading this movement. But the data suggest more states are gradually attempting to dethrone the dollar.

Today, the share of dollars held in global reserves has tumbled from 65.3% in the fourth quarter of 2016 to 61.8% in the second quarter of 2019. Meanwhile, the shares of allocated reserves are becoming more diversified as the euro, yuan, and yen have attained a greater representation in global reserves

The term “reserves” refers to the currency that a country might choose to store excess capital.

Since World War II, the US Dollar has been the world’s go-to reserve currency.  There was simply not a better place to store excess capital.  But, given that the US Dollar has been losing absolute purchasing power, that is now gradually changing.

Rather than inventorying or reserving US Dollars to use in trade with other countries as has been the norm for the past 70 years or so, countries are now making deals with other countries to trade using currencies other than the US Dollar. 

Here is more from Mr. Moran’s piece (emphasis again added):

Major oil producers and some of the world’s largest exporters have halted the accumulation of U.S. debt securities. In October 2014, China and Russia signed a three-year ruble-yuan currency swap agreement worth up to $25 billion, aimed at increasing trade with these currencies. In September 2017, the Russian government approved legislation that made the ruble the main currency of exchange at all Russian seaports. Zimbabwe, Venezuela, and Iran have either diminished their acceptance of the dollar or have refused it entirely. Germany has requested a new independent payment system, suggesting that it wants alternatives to the buck.

Bottom line?

Storing capital in the US Dollar as the Federal Reserve pursues weak Dollar policies just doesn’t make sense.  So, countries are looking for alternatives.

Here is more from Andrew Moran’s article (emphasis added):

According to the World Gold Council (WGC), central banks have purchased an all-time high of 375 tons of gold this year (so far). It might only account for one-fifth of the total global gold demand, but the trend does lead to some interesting speculations for these purchases. In the aftermath of the recession, these institutions were scooping up bullion to protect themselves from the uncertainty and chaos. Today, they may be preparing for another economic calamity or, perhaps, they are getting ready for instability that would transpire during the transition away from the dollar.

Yet, in our view, the move completely away from the US Dollar is a way off.  Mr. Moran, in his article, makes this point (emphasis added):
Compared to other currencies, the dollar is sound money. The yuan is crumbling, the ruble is worthless, the Canadian dollar is treading water, the euro is being systematically destroyed by the European Central Bank (ECB), and the Australian dollar seems fine where it is on the currency hierarchy. You could make the case for the Swiss franc to topple the dollar, but the issue is that the Swiss National Bank (SNB) is trying to curtail its immense demand and is debasing the franc.

In other words, the US Dollar is, at this point, the best house in a bad neighborhood.  As bad is that is, there is not a viable alternative…..yet.  But such an alternative will emerge eventually.

Mr. Moran offers his opinion on the subject:

Should the de-dollarization kick into high gear, it will still take decades for local currencies to overtake the buck. Of course, a dollar crisis, which is quite possible in the not so distant future, could speed up the move. The national debt has topped $23 trillion, the federal government is recording trillion-dollar budget deficits, and Washington faces more than $200 trillion in unfunded liabilities expenditures. It is hard to envision the greenback surviving another 50 years.

As I often state, the ‘what’ is far easier to predict than the ‘when’.  However, given the current trajectory, the ‘what’ is easy to forecast.  History will repeat itself. 

Historically speaking, currencies have always changed over time.  As I discussed here a couple of weeks ago, the reserve currency of the world changes periodically typically moving to the biggest creditor nation.

The term ‘creditor nation’ certainly doesn’t describe the United States.

When the dollar crisis occurs, many will blame a politician or group of politicians.  And, while the politicians will deserve to shoulder some of the blame, in my view, most of the culpability will rest with the central bank for pursuing hare-brained monetary policies.

History teaches us that printing money leads to the same consequences whenever it is tried.

Given the debt levels that exist today both in the private sector and public sector, we will at some future point have to deal with deflation.

But, given current monetary policy, we may have to deal with inflation first.

The country of Zimbabwe is a good, recent example of this.

Zimbabwe redenominated its currency three times between 2005 and 2010.  The last time the currency was redenominated, a $100 trillion bill was printed.  Eventually, due to the hyperinflation, Zimbabwe abandoned its currency and began using US Dollars and Euros.

Recently, due to the deflation that emerged, Zimbabwe once again adopted its own currency.  The result?

Since too much currency was created, massive inflation set in. 

In May of this year, the Country of Zimbabwe quit reporting the official inflation rate.

Historically speaking, there are many examples of this phenomenon.

High debt levels lead to deflation.

Money printing to avoid leads to inflation.  When confidence in the currency is lost and an alternate currency is used, deflation sets in again.

At this point in the cycle, I am becoming more confident that inflation is the most immediate risk.

Your best defense is to be tangible (and maybe tax-free too) in some of your investment portfolio.  Gold, silver and some real estate makes sense for many investors.

My company has the ability to help clients invest in physical real estate in their IRA’s or Roth IRA’s.  While returns will vary, 6% – 10% annually is possible.  If you’d like more information, give the office a call 1-866-921-3613.