WHAT IF THERE IS NO RESERVE ANY LONGER?
EDU DDA Dec. 2, 2024
Summary: Dollar doom-ism is everywhere even though those allegedly on the wrong side of it are complaining about something VERY different. The BRICS, for example, are right now struggling mightily with currencies. Those have nothing to do with money printing and a falling dollar. From rupee to real, they are hitting record lows. The dollar “bull” is being unleashed on the world to the point nations are purposefully trying to avoid the reserve currency system not replace it. That’s a far more profound result than just a global recession question because it means we already don’t really have a reserve currency any longer.
Dollar Doom-ism has become an industry unto itself. Some of it stems from a righteous crusade (or crusades) against government interventionism and intrusion. While proceeding from the right premise, it nonetheless comes to all the wrong conclusions owing to a nineteenth century mindset and even worldview.
The idea is that continuous government spending and deficits are, first, inflationary that then destroy the currency. A closed (or nearly so) loop system might encounter that potential yet even “back then” there were a range of possible outcomes which weren’t always catastrophic, as is so often claimed.
For those approaching the subject honestly, they simply want something to force the federal government to confront its awful ways (this we before the coming DOGE department gets to work). Rising inflation (of the legit kind) would have, as would the dollar’s descent toward its demise. Neither of those were even close during the 2010s, yet the supply shock opened the door to bring back all the prior false assumptions.
Dollar doom-ism was given new life by the CPIs of 2021 and 2022. Again, for many people the desire to get at the root deficit problem was noble, they just didn’t know the monetary mechanics had changed so radically long before Nixon and 1971.
Many others are just selling their own books. It’s always interesting to see the loudest proclaiming the dollar’s imminent destruction in their very next breath even more forcefully claim to have the perfect financial product or insurance to sell and protect you against that very eventuality. Convenient.
We have any number of examples which undermine the doom claims. Japan has shown repeatedly (sadly) that government debts can pile up seemingly forever with no limit (and it doesn’t matter of the Bank of Japan is QE-ing or not) without either a bond or currency collapse. That doesn’t mean there aren’t huge costs, there are, they just aren’t interest rates skyrocketing with a currency sucked into a vortex of hyperinflation.
America itself even has experience of this. Forgotten these days if only because it is more than inconvenient to all the doom-ism, there once was a US federal government which strongly ventured into an unprecedented spending spree financed by bond borrowing. It did not lead to dollar collapse or rising interest rates, either. On the contrary, rates fell and it was federal government diktat which had lowered the dollar’s value (price in gold).
The feds under the New Deal had broken all established conventions in money and fiscal handling. According to dollar doom-ism, the only result would have been inflation and currency collapse. Nope. Deflation ruled not inflation. The difference is money scarcity and it means everything. Dollar doom-ism doesn’t even get its own story straight.
We don’t have a too much money problem and you don’t have to take my word for it (see: below).
In other words, what we have today has more in common with the deflationary thirties and forties rather than something like Weimar Germany or even the 1970s (which sprung from a completely different set of factors having next to nothing to do with the government or the Federal Reserve either way). Thus, dollar doom-ism isn’t just misplaced, it is also a distraction taking away attention from the actual problem.
Much of the doom-ism centers on other countries allegedly scheming to snatch the role of reserve currency from the dollar as the final trigger. For the longest time China was the one everyone had pinned their hopes on – if only to show how completely twisted and distorted this whole matter has become. No matter how badly American politicians have botched the country’s fiscal position (a bipartisan failure if ever there was one), to go so far as to prefer China over it is a gross miscalculation and misunderstanding of the dangers.
Yet, every year they said the yuan was going to start taking over ended without any hint of it. From 2011’s bilateral Chinese agreements to 2018’s petroyuan debacle, the 2021 “digital yuan”, no matter which one CNY is no closer today than in 2009 when Zhou Xiaochuan kicked the whole distraction off by correctly stating the eurodollar wasn’t working (what with that whole massive global not-financial crisis).
Rather than seeking to replace the eurodollar, an absolutely enormous undertaking, foreign governments are instead naturally seeking to shelter themselves and their various countries from the negative effects of the malfunctioning eurodollar. This was, in reality, why China back in 2011 was beginning to turn to bilateral currency arrangements.
It was the doom-ists who hyped it up as something it never was.
If you have a constant problem acquiring dollars then the next logical course is to reduce your need to acquire dollars (from the eurodollar system). Replacing the whole system is an enormous step no one is willing or able to undertake. The easiest way to work around (and it isn’t as easy as it might sound) is to conduct as much bilateral trade as possible – to trade in home currencies between two countries.
The gift of a reserve currency is that when it is working it provides efficiency and flexibility, allowing the entire global marketplace conduct on like terms. Brazil and China were perfectly happy to transact with one another using the dollar denomination within eurodollar channels so long as it was so highly beneficial to do so. The 2008 crisis introduced a downside that had only been seen once before on a more limited basis in 1997-98’s Asian non-Financial Crisis.
Suddenly dollar scarcity became a real and persistent threat especially to weaker participants, those who experience the biggest backlash (reduced dollar availability and difficulties funding everything) starting with Emerging Market economies especially after 2011. It wasn’t only China.
Rather than move toward replacing the reserve currency with one of their own, they’ve consistently moved to enact bilateral even trilateral (or more) arrangements. It’s only the dollar doom-ers who have claimed otherwise.
This error culminated in last year’s BRICS debacle. Doom-ers were all over social media heralding a gold-backed BRICS currency that not a single one of the actual BRICS was interested in.
If that wasn’t enough, the whole BRICS(coin) was brought up again just today when South Africa’s (the “S” in BRICS) Finance Minister Enoch Godongwana was asked about working on a dollar replacement. His shocked response says it all.
“South Africa supports the increased use of national currencies in international trade and financial transactions to mitigate the impact of foreign exchange fluctuations, rather than focusing on de-dollarisation,” it said. “The strengthening of correspondent banking networks and the development of infrastructure for settlements in national currencies could further this aim.”
Think about how utterly profound this statement is, and not for any one of the reasons brought on by dollar doom-ism. An effective reserve currency is, as I wrote above, a tremendous gift to the entire world. The level and spread of prosperity brought on by it is an unqualified good which is why we went decades without giving it any thought. The eurodollar was out there the whole time for nearly three-quarters of a century and hardly anyone knew about it.
That’s a whole other double-edged sword, as we’re finding out with the distraction of dollar doom-ism which itself proceeds from not knowing about the eurodollar (or even what a reserve currency is and has to do).
What Mr. Godongwana admitted is that his country’s position is to use the reserve currency less where possible, opting for the far less efficient, more costly alternative bilateral or bloc transactions. This is not at all what dollar doom-ism proposes, yet it is as much or more of a threat to the world (because in this case it’s a real one).
Godongwana did not say he was worried about the dollar crashing in value rendering his country’s holdings of them worthless. What he did reference was “mitigate the impact of foreign exchange fluctuations” which like China, India, Brazil (Russia, too, for other reasons) means a “strong” dollar wreaking havoc not in terms of falling values of reserves but eurodollar shortages unleashing destructive financial volatility and macroeconomic damage.
The dollar goes up and that’s bad.
He described dollar scarcity without saying it largely because it’s not clear he appreciates where all this is coming from – just like RBI Governor Urjit Patel in 2018 had correctly identified the symptom (“dollar funding has evaporated”) without being able to correctly address the real cause (eurodollar scarcity brought on by money dealer risk aversion not Fed rate hikes or Trump trade wars). South Africa’s Finance Minister like Patel is describing to you the telltale signs of scarcity.
Protect yourself against the malfunctioning reserve currency by only using the thing when it makes sense to do so. We have a reserve currency system that was in many ways a modern miracle yet now major economies would rather not access it if they don’t have to!
We’re getting signs of this all over the place right now. Just today, as economies around the globe continue to display signs of worsening conditions (whatever Jay Powell says about it), China’s yuan fell sharply very nearly hitting a more-than-year low. India’s rupee plunged to another record low following the report last week (I went over on YT; below) the country’s central bank is massively short the dollar in offshore NDFs.
In other words, RBI is doing exactly what Godongwana was talking about having to try to deal with the negatives of dollar scarcity (in India’s case blaming it on “speculators”, thus being ridiculously short in NDFs).
Brazil’s real is yet another one (the BRICS really are getting hit). BRL dropped below 6 to the dollar for the first time ever. Having suffered through the absolutely devastating dollar shortage of Euro$ #3, leading to a massive depression as a result of it (having yet to recover from it almost a decade later), here’s the currency getting pummeled all over again.
It’s not Fed “hawkishness”, either, since Banco do Central Basil is raising rates and about to do a whole lot more while Powell is still cutting them on his side. Just like there is no dollar doom-ism in any of this, interest rates aren’t the problem, either. On the contrary, right now swaps in Brazil indicate markets expect interest rates to continue to rise, reaching maybe 15% within a few years.
Why?
The country’s economy which might otherwise appear to be solid is instead unsteady and getting increasingly shakier, having been propped up by (the irony) massive government intervention and deficit spending. As of the latest estimates, Brazil’s deficit ballooned to a massive 9.5% of GDP over the twelve-month period through October.
As S&P noted just two months ago:
However, strong growth has been accompanied by weaker-than-expected fiscal performance relative to original 2024 budget projections. Economic outperformance may partly result from the loose fiscal position. If fiscal performance is weak when growth is strong, it could deteriorate further in an unexpected slowdown. Uncertain consolidation prospects are therefore a key macroeconomic vulnerability constraining Brazil’s ‘BB’/Stable sovereign rating.
In short, Brazil’s President Lula has tried to “buy” prosperity that was otherwise lacking (like everywhere else around the world in the 2020s) with government transfers and spending. It boosted GDP though not in a sustainable fashion, plus the distortions have created price imbalances all over the place. Not only is the economy on a shaky foundation, the government is in even worse shape with so much higher risks should Brazil get hit with an “unexpected” downturn.
Like the one showing up in the rising dollar’s exchange value against practically everyone else these days – except the yen which is its own set of symptoms of the same monetary disease.
Dollar scarcity not doom. The evidence for it is everywhere, yet only doom-ism gets any attention even though the theory itself doesn’t stand up to historical scrutiny. Our problem isn’t money printing, it’s what happens when no one knows the difference. As the world attempts to work around the eurodollar rather than replace it, what that means is we don’t actually have a complete reserve currency any longer.
