De-dollarization

 Everyone has a subject that gets them on their soapbox. This is mine. 

Everything about MAGA has made me wonder if its supporters understand what makes America as powerful as it is: the dollar. Everything about Trump makes me think he is hell-bent on destroying the dollar's dominance.

My DM knows of my interest and sent me a link to Is the US dollar done? (Kitco News). If I sound like I am fearmongering, then you will really not like this article,

In the 1960s, French politician Valéry d’Estaing complained that the United States enjoyed an “exorbitant privilege” due to the dollar’s status as the world’s reserve currency. His point was well taken.

The US dollar is the most important unit of account for international trade, the main medium of exchange for settling international transactions, and the store of value for central banks.

Because of the dollar’s position, the US can borrow money cheaply, American companies can conveniently transact business using their own currency, and when there is geopolitical tension, central banks and investors buy US Treasuries, keeping the dollar high and the United States insulated from the conflict. A government that borrows in a foreign currency can go bankrupt; not so when it borrows from abroad in its own currency i.e. through foreign purchases of US Treasury bills.

Lately though, “de-dollarization” is being pursued by countries with agendas at odds with the US, including Russia, China and Iran.

Get that? There is why America has its power.

See what China and others are doing now to undermine the dollar. But this was news to me:

China reportedly reduced its official holdings of US Treasuries by more than 27% from January to December 2024 — much faster than the 17% it dropped in seven years from 2015 to 2022 (The Financial Times). Beijing has two fears: one, that Washington could freeze its holdings of US government debt like it did to Russia; and two, that the US government could default on its debt.

(The latter fear is well-founded. “Secretary of the Treasury Scott Bessent has been talking about extending Treasury maturities and lowering coupons on Treasuries held abroad. The United States has $37 trillion of debt in funded liabilities and over $200 trillion in unfunded liabilities and let me be absolutely clear: the United States is bankrupt. It’s not my opinion. Anybody that can work the math out realizes it. For all of Trump’s talk about lowering the cost of the United States government, he’s actually increasing the cost, he’s increasing the deficit, he’s increasing the total debt. When the Secretary of the Treasury starts talking about extending maturities and lowering interest rates what he is talking about is a default. Rest assured, we’re very close. That will destroy the US dollar. And we’ve certainly seen about a 20% change in the value of the dollar against other currencies literally in the last few months.” — Bob Moriarty, 321gold)

Does not Trump and MAGA understand that you pick fights with your friends, then you do not have friends because they no longer trust you. Without trust, former friends are not there to support your power. Why should they? No longer friends, American power becomes a threat.

There are two reasons why the dollar is the number one reserve currency. The first and most obvious relates to oil. The so-called petro-dollar was set up in the early 1970s as an agreement between the US and its ally in the Middle East, Saudi Arabia. In exchange for military protection, the Saudis agreed to sell all their oil in dollars. Eventually other OPEC members joined the pact, creating an endless demand for dollars in an economy that ran, and continues to run on oil.

The second reason is more practical. When countries trade, it’s awkward for them to use their own currencies to buy and sell goods and services. It’s easier to use an intermediary like the dollar. For example, when a Brazilian farmer sells soybeans to a Japanese condiment company, he converts the needed yen into dollars, and then the condiments company converts the dollars they receive into yen. 

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JP Morgan points to two scenarios that could erode the dollar’s status. The first includes adverse events that undermine the perceived safety and stability of the greenback. “Bad actors” like Donald Trump seem to fit this description perfectly. The second factor involves positive developments outside the US that boost the credibility of alternative currencies — economic and political reforms in China, for example.

The influential bank notes that signs of de-dollarization are evident in the commodities space, where energy transactions are increasingly priced in non-US dollar currencies. India, China and Turkey are all either using or seeking alternatives to the greenback, while emerging market central banks are increasing their gold holdings in a bid to diversify away from a USD-centric financial system.

As mentioned above, new payments systems are facilitating cross-border transactions without the involvement of US banks, which could undermine the dollar’s clout.

Finally, the US dollar’s share of foreign-exchange reserves has decreased, mostly in emerging markets.

 Trump always mismanaged his businesses; now he mismanages the business of this country.

U.S. Treasury yields: Where investors are putting their money (CNBC)

Mould added that half of publicly held Treasurys — or some $14 trillion of federal debt — would soon mature and need to be refinanced at higher rates.

"Emerging market investors will be very familiar with the risks attached to the current situation," he said. "Higher bond yields mean higher interest bills, higher interest bills mean more debt, more debt may mean QE [quantitative easing] or efforts to loosen monetary policy, only for that to perhaps lead to higher inflation, higher interest rates, higher bond yields and around we go again."

"This is a classic emerging market trap, except America (and for that matter Japan) are staring right into it," Mould added.

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