reserve currency – Dennis Tubbergen

More on De-Dollarization

On these pages each week, I often comment on Federal Reserve policy and the effect that it will have on the economy and the markets.

The current tightening policy of the Fed, required as a result of the prior easy money policies of the Fed in order to contain inflation, is now the primary culprit of the accelerating de-dollarization movement that is taking place globally.

Aggressive US sanctions against some countries globally are simply adding gas to the de-dollarization fire as countries look to establish a permanent alternative to the US Dollar.

While the all-important question relating to de-dollarization remains when the proverbial tipping point is reached, it’s fair to say that day is approaching much more quickly than we could have imagined just a few short years ago.

This from Brazilian journalist, Pepe Escobar (Source: https://sputnikglobe.com/20230503/pepe-escobar-global-de-dollarization-nearing-crossroads-moment-1110062907.html):

De-dollarization is heading for a breakthrough due to rising global discontent with US ‘casino capitalism’, Pepe Escobar, geopolitical analyst, and veteran journalist, told Sputnik News.

“It’s a gigantic snowball all over the world. We cannot even keep up with it,” Pepe Escobar said in an interview with the New Rules podcast. “It’s very important what is going to be discussed at the BRICS summit in South Africa. This will probably be the crossroads moment where things are going to then go.”

Escobar explained that a growing number of countries in the Global South were doing the math and concluding that the US dollar was not a safe bet. The combination of aggressive US sanctions policy and reckless government spending has dramatically reduced the greenback’s international appeal.

“If you want to analyze the patterns these past two decades, you need to understand the fact that, if you are rich in commodities and if you are a productive capitalist nation and you decide to issue a currency, it will be internationally respected because people will know it’s based on facts, actual provenance, actual wealth,” he said. “That’s contrary to the system that we have now, which I have been calling it ‘casino capitalism’ for years. It’s futures, it’s bets, it’s suppositions. It may go right or wrong. If you lose, you lose it all. The house mostly always wins because the house is the one who prints the currency. It’s backed by nothing, literally, by a country that owes $30 trillion [in national debt] now and it will never be able to repay it.”

To make matters even worse, the US Federal Reserve’s aggressive interest rate hikes have made borrowing in dollars expensive for almost everyone in the world. Prior to the Fed’s move, Kristalina Georgieva, managing director of the International Monetary Fund, warned in January 2022 that the US raising interest rates could backfire on the global economy and especially on countries with higher levels of dollar-denominated debt.

The ongoing US banking crisis threatens to further destabilize international financial markets. No country in the world wants to “catch a cold” when the US economy “sneezes,” as memories of the 2008 financial crisis linger.

“They say, ‘look, why do we have to be subjected to this kind of arrangement?’ And of course, before, as we all know, it was ‘the Empire of bases’, over 800 military bases all over the world, ‘the power of the financial markets’, ‘the power of soft culture’, ‘the power of cancel culture’, but the Global South is not intimidated anymore. I think this is the first [time] in this new millennium. We never had this before in the past two and a half centuries, at least,” Escobar said.

In January 2023, BRICS – an acronym for Brazil, Russia, India, China, and South Africa – made a splash by announcing that it may soon explore the possibility of creating its own currency to by-pass the US dollar. The idea was articulated on both sides of the Atlantic: Russian Foreign Minister Sergey Lavrov touched upon the plan during a presser after his meeting with Angolan President Joao Lourenco on January 25.

On the other side of the pond, President of Brazil Luiz Inacio Lula da Silva discussed the issue of the creation of a common currency for BRICS and the countries of Mercosur, a South American trade bloc, during his meeting with his Argentine counterpart Alberto Fernandez.

“Why can’t an institution like the BRICS bank have a currency to finance trade relations between Brazil and China, between Brazil and all the other BRICS countries? Who decided that the dollar was the (trade) currency after the end of the gold parity?” Lula said during an April visit to the Shanghai-based New Development Bank.

According to Escobar, the formation and development of three organizations, namely BRICS, the Shanghai Cooperation Organization (SCO) and the Eurasian Economic Union predetermined the end of the greenback-centered world order. BRICS members are now discussing designing an alternative currency; similar discussions are being held in the Eurasian Economic Union; they should start coordinating and then this will spill over to the SCO, the writer projected.

The trend has already been engulfing other blocs, Escobar continued, referring to the Association of Southeast Asian Nations (ASEAN). On March 28, ASEAN finance ministers and central bank governors held a meeting in Indonesia to discuss how to move to settlements in local currencies by further enhancing an ASEAN cross-border digital payment system.

Initially, the agreement on such transactions was reached between Indonesia, Malaysia, Singapore, the Philippines, and Thailand in November 2022. The association is seeking to reduce dependence not only on the US dollar, but also on euros, yens, and British pounds in financial transactions.

“We have something that was absolutely unbelievable two months ago,” Escobar emphasized.

De-dollarization has been discussed for decades. For instance, Mikhail Khazin, a Russian economist and publicist, who served in the Working Center for Economic Reforms under the Boris Yeltsin government in the 1990s, and his co-author Andrey Kobyakov predicted the demise of the US dollar dominance roughly 20 years ago in their book titled “The Decline of the Dollar Empire and the End of Pax Americana.” While the idea has been in the air for quite a while, why is it that this phenomenon has only now started to gain critical mass?

“We can even establish a date for it,” responded Escobar. “February last year, with that freezing, confiscation, stealing of Russian foreign reserves. And the Global South as practically as a whole started asking themselves from Latin America to Africa to South East Asia, ‘if they can do this with a nuclear superpower, they can do it with any one of us snapping their fingers’. So that’s why the coordination inside these multilateral organizations and in other forums picked up astronomic speed.”

To illustrate his point, the journalist referred to the swift development of BRICS with a staggering 19 countries currently on the list to join the organization. Among them the strongest candidates are Iran, Argentina, Algeria, as well as the United Arab Emirates, Turkiye, Egypt, Kazakhstan, and Indonesia, as per the geopolitical analyst.

“So these are all strong middle rank powers from anywhere,” Escobar said. “And they’re going to start discussing the now notorious BRICS alternative currency. So they have to speed up this conversation and let’s hope that they are going to start discussing it in conjunction with the Eurasian Economic Union, which is much more advanced, and the Shanghai Cooperation Organization.”

Escobar believes that nothing short of a breakthrough in this respect could occur as early as next year.

Brazil and China have already dropped the dollar in trade between the two countries. So have Argentina and China.

China and France recently settled a natural gas trade in Yuan (the Chinese currency). (Source: https://www.firstpost.com/explainers/dollar-dumped-how-the-first-china-uae-gas-deal-in-yuan-is-a-big-blow-to-us-12423192.html).

The move around the world away from the US Dollar continues to accelerate.

If you have not yet diversified your portfolio so that some of your assets are not in US Dollars, it’s time to take a closer look. For many retirees and aspiring retirees, up to 20% of one’s portfolio in hard assets like gold and silver may be prudent.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com. Our webinars, podcasts, and newsletters can be found there.

Are Currency Changes Imminent? – Part 1

Despite the ever-so-slight rally in stocks this week, I view the primary stock market trend as down. Unless the market highs of the end of 2021 are exceeded, this will be the case.

This week, I want to discuss an event that has not been covered extensively so far as I can tell. But this event that recently occurred has the power to change the way the world does a lot of its business.

Here is why that could be a big deal to you – the rest of the world uses a lot of US Dollars in trade. As I have discussed in this publication previously, there has been a gradual, ever-intensifying move away from the US Dollar over the past twenty years or so. With this recent event, that move could really strengthen.

To what event am I referring?

This from “Fox Business” on February 28 (Source: https://www.foxbusiness.com/markets/us-freezes-russian-central-bank-assets-held-by-americans):

The U.S. said it is blocking financial transactions of Russian central bank assets, effectively freezing any of those assets held by Americans.

The freeze is effective immediately, a senior administration official said in a briefing for reporters on Monday. The official said that the U.S.’s actions are in conjunction and cooperation with the European Union, Japan, the UK, Canada, and others. This means that not only will Russia not be able to access funds in U.S. dollars, they will be unable to use dollars in the other countries turn to other banks and other currencies.

By making the move effective immediately, before markets open, the official said, Russia will be unable to move assets to avoid or mitigate the consequences.

“Our strategy,” the official said, “is to make sure that the Russian economy goes backward as long as President Putin decides to go forward with his campaign.”

As one would expect, Russia fought back. The country is now demanding payment for its vast natural resource exports in either gold or rubles giving any of the rest of the world that does business with Russia another reason not to inventory US Dollars.

Analyst and economic writer, David Kranzler, whose work I have discussed previously recently penned a piece on this topic titled, “Did Russia Intentionally Trigger a Monetary System Reset?” (Source: https://www.investing.com/analysis/did-russia-intentionally-trigger-a-monetary-system-reset-200621146). It is a thought-provoking article, here are some excerpts:

Fiat currency is a “promise” to repay a debt obligation and nothing more. A hard asset-backed currency is a guarantee that repayment will occur.

On Mar. 7, Zoltan Pozsar, who formerly worked at the NY Fed, was an advisor at the U.S. Treasury, and currently is a strategist at Credit Suisse, published a research report titled “Bretton Woods III.”

Anyone familiar with the Bretton Woods agreement understands the reference. Nixon’s snipping of the final thread connecting currency to gold is considered to be Bretton Woods II. Pozsar makes the case that Bretton Woods III is a reversion back to a monetary system in which currency is backed by commodities as opposed to being backed by a sovereign issuer’s “full faith and credit.”

The post-1971 fiat currency reserve banking system enabled by the removal of gold from the monetary system is nothing more than a Ponzi scheme. “Inside money” refers to the interbank repo/lending mechanism from which the fractional bank reserve monetary system blossoms.

Pozsar distinguishes “inside money” from “outside money.” Inside money” is created by the Central Bank/inter-bank lending mechanism that can magically turn one dollar of reserve capital into nine dollars of “credit” capital. And the one dollar of reserve capital is backed by nothing tangible—just the “full faith and credit” of the issuing entity.

Think of this monetary system as an inverted pyramid, e.g., something like Exter’s Pyramid. In bankruptcy law, “full faith and credit” would be considered, at best, an unsecured loan. Get in line and pray that there’s value left over to be distributed to the unsecureds.

In contrast, Pozsar references Bretton Woods III as the “rising allure of outside money over inside money,” where “outside money” is “commodities collateral,” meaning tangible assets for which definitive value can be determined, as opposed to the sovereign promise of “full faith and credit.”

In periods of banking crises, banks are reluctant to participate in the “inside game” (see 2008 and September 2019, for instance) because, at that point in time, they don’t trust the fiat currency collateral on which the fractional reserve banking system is predicated and thus are reluctant to lend money to their banking peers.

Every time this occurs, the Central Banks have to print more money to “lubricate” the system enough so that it functions. This in turn further devalues the “inside money” on which the system is predicated.

But if currency issued by Governments and printed by Central Banks is backed by hard assets, this problem is avoided. In this system, the counterparty to trade or financing transactions would have the option of demanding payment in the hard asset or assets backing the currency—most likely gold or possibly a pre-agreed upon commodity asset. Remember, fiat currency is nothing more than an unsecured debt instrument of the issuing entity.

It’s likely that Putin knew ahead of time that the West’s response to Russia’s invasion of Ukraine would be to freeze Russian currency reserves held at western Central Banks. Of course, this response by the U.S./West brought to light the inherent Achilles’ Heel of the modern Central Bank fiat currency reserve system.

Any country that keeps currency reserves for trade settlement purposes at foreign Central Banks, specifically the Federal Reserve and the ECB, is at risk of having those reserves confiscated, thereby rendering them worthless.

In response, Russia is now demanding payment for energy in either rubles or gold from what it deems to be “unfriendly” countries. Whereas in the “inside money” banking system, settlement of trade is merely a matter of accounting ledger adjustments at the respective Central Banks, in this trade settlement arrangement, a country purchasing oil or gas from Russia in exchange for gold would need to 1) demonstrate that the gold being used for trade payment actually exists, and 2) transfer the ownership rights to Russia. Russia ultimately would likely demand repatriation of the gold. The U.S./G7 made it crystal clear that possession of assets is 100% of the law.

The response by the West—led by the U.S. and its control of the global reserve currency—in all likelihood has triggered a reset of the global monetary system. I actually do not like the term “Bretton Woods III” because it references an agreement which, in its essence, destroyed the gold-backed global monetary system.

Regardless, it appears for now that Russia—likely with China’s tacit support—has set in motion a global monetary system reset. In the new system countries which supply the world with goods that have price inelasticity of demand—oil, natural gas and food commodities, for instance—will have the power to enforce trade settlement in hard currencies, e.g., gold or other hard assets, rather than fiat currency Central Bank accounting ledger adjustments.

“Coindesk” recently published a piece (Source: https://www.coindesk.com/policy/2022/03/08/credit-suisse-strategist-says-were-witnessing-birth-of-a-new-world-monetary-order/) that provided additional perspectives from Zolton Pozsar:

Former Federal Reserve and U.S. Treasury Department official, and now Credit Suisse (CS) short-term rate strategist, Zoltan Pozsar has written the U.S. is in a commodity crisis that is giving rise to a new world monetary order that will ultimately weaken the current dollar-based system and lead to higher inflation in the West.

“This crisis is not like anything we have seen since President [Richard] Nixon took the U.S. dollar off gold in 1971,” wrote Pozsar.

As the initial Bretton Woods era (1944-1971) was backed by gold, and Bretton Woods II (1971-present) backed by “inside money” (essentially U.S. government paper), said Pozsar, Bretton Woods III will be backed by “outside money” (gold and other commodities).

Pozsar marks the end of the current monetary regime as the day the G7 nations seized Russia’s foreign exchange reserves following the latter’s invasion of Ukraine. What had previously been thought of as risk-free became risk-free no more as non-existent credit risk was instantly substituted for very real confiscation risk.

What occurred surely isn’t lost on China, and Pozsar sees the People’s Bank of China (PBOC) faced with two alternatives to protect its interests – either sell Treasury bonds to buy Russian commodities, or do its own quantitative easing, i.e., print renminbi to buy Russian commodities. Pozsar expects both scenarios mean higher yields and higher inflation in the West.

Last week, I discussed how governments and central banks around the world are pursuing digital currencies with a great deal of determination. Perhaps this development helps to explain the sudden level of increased urgency. It certainly makes the case for non-US Dollar-denominated assets in a portfolio like gold and silver.

“Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion–when you see that in order to produce, you need to obtain permission from men who produce nothing–when you see that money is flowing to those who deal, not in goods, but in favors–when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed.”

-From “Atlas Shrugged”