The End of the US Dollar? Lets Discuss it?

Hey There,

Time for a newsy letter, I’m still letting some symphony ideas cook before I showcase some more.

One of the major topics I’ve seen across the Corporate Media and Finance Twitter over the last few weeks has been the idea of “De-Dollarization.” The loss of reserve status of the US Dollar. This sounds like something with no positive interpretation, so lets see what we can dig up on both sides, yeah?

For those uninitiated in to the world of Macroeconomics and Geopolitics, a quick primer - Being the world reserve currency means that a significant portion of global transactions, trade, and investments are conducted in that currency. The US Dollar is currently the world's reserve currency, which gives the US economic and geopolitical advantages. Countries hold US dollars as part of their foreign exchange reserves (Money used to trade with other countried), and the USD is used as a benchmark for international commodity prices. It also allows the US to borrow money at lower interest rates, as other countries are willing to lend to it due to the perceived stability and liquidity of the dollar.

Side A - The Dollar is Doomed

This is the big one you see plastered all over FinTwit, leaving as little to the imagination as the average OnlyFans thumbnail. The theory is that enough countries will, for one reason or another, decide to no longer use the US Dollar as the primary means of exchange. We see some evidence of this already,

1. Saudi Arabia is planning to price oil exports to China in Yuan.
   As the linked article states, this is a historic move from Saudi Arabia, breaking nearly 50 years of dominance the USD has had over the oil trade. This dominance is how the USD got the name “the Petrodollar” after the removal of the Gold Standard in the 1970’s by Richard Nixon.
   

2. The US Debt Ceiling battle.
   The 2023 fight over the debt ceiling of the US Government is shaping up to be slightly more interesting than previous years. A conversation typically packed to the gills with political brinksmanship, maneuvering, and plenty of attention paid to special interests, this year will be no different. However, this time we have a Speaker of the House who took more rounds of voting to get elected than has been seen since 1859 (interesting to think about what episode of American history came not long afterwards.) Since the nations credit cards are all maxed out already, not raising the limit would, in simple terms, cease the federal governments ability to spend money. On anything, up to and including payroll for its employees. Yikes.

3. The Federal Government is kind of an asshole sometimes.
   Since the rise of the USD as the instrument of global trade, economic sanctions against countries and individuals the Feds aren’t fond of have become pretty common. Sometimes justified, sometimes not, the international objection to our sanction-happy diplomacy is less about the sanctions themselves and more about our enforcement of them.

France wants to do business with people the feds don’t like, and the price tag for those actions is roughly 9 Billion Dollars. While I make no claims about the legitimacy of those sanctions, surely a price that sizeable is going to cause some serious thought about what side of the sanctions poses the most benefit to you.

The Dollar is (still) King.

The counterpoint to the above doom-and-gloom is pretty simple, and can be laid out as a series of questions to be answered.

What is the most liquid?
What is accepted in as many countries?
What can service the overwhelming majority of sovereign debt?
What is the currency of the most dominant cultural and military superpower the world has ever known?

The short answer to all of the above? The USD.

So lets tackle these in order shall we?

Liquidity and acceptance

Roughly 60% of the worlds central banks hold USD as their currency reserves. This is down from the high 70% range in the 1970’s, but still a staggering lead over the 20% range held by the Euro. If you’re traveling the world and want to bring hard currency that’s going to be exchangeable just about anywhere, bring the USD. The same logic can also be applied to investments, there are few economies that boast the resilience and stability of the US Economy (despite the myriad issues we currently face, most places have it worse off than we do somehow.) The result of this is something known as the Dollar Milkshake Theory.

The important point to note about the above infographic from the International Monetary Fund is that the potential BRICS nations currently make up, at most, roughly 5% of global reserves vs the ~60% claimed by the USD.

The "Dollar Milkshake Theory," a term coined by Brent Johnson, CEO of Santiago Capital, theorizes that the US dollar will strengthen as a result of global liquidity being poured into the US economy.

It’s based on the fact that the US Federal Reserve has been pursuing an aggressive monetary policy that has resulted in a flood of liquidity into the US economy. This liquidity has propped up asset prices and stimulated economic growth in the short term. However, as the global economy struggles with low growth, negative interest rates, and political instability, investors have been seeking safe-haven assets to protect their wealth. According to Johnson, the US dollar is the ultimate safe-haven asset because of its status as the world's reserve currency.

He argues that the US dollar is like a "milkshake" and that investors are pouring liquidity (milk) in to the US economy, in search of safe-haven assets. He argues that as more liquidity is poured into the US economy, the US dollar will become even stronger, creating a positive feedback loop that will further increase demand for the currency.

Heres a video explaining the Dollar Milkshake Theory, with production assistance from the guy who coined it.

Sovereign Debt

The United States has the largest bond market in the world, at roughly $51.3 Trillion. Thats a remarkable 39% share of the global Debt Market. Every dollar of US debt that is held, is a dollar that the holder will receive. The more dollars held, the more dollars used, more dollars shoved in to the blender to make a delicious, delicious milkshake.

Its the US, what else do you need to hear?

As the above tweet suggests, at present the US holds a… commanding lead in a lot of things. When someone dreams of leaving their home country, the US is almost always on the short list of places they want to go. Overall, favorability of the US compared to the largest economy in BRICS (the C), is higher in most polled countried according to Pew Research.

When you couple this with information such as Trade Deficits and who we trade with, it begins to look unlikely that certain countries are likely to abandon the US as a trading partner.

I guess in summary, this is a really complex topic that has been talked about for the last 50 years.

Not to submit too highly to my normalcy bias, but I don’t see the currency sitting at 2.5% of global reserves rising up to overtake the one at 60%, at least not in my lifetime.

Do you think the USD is going to collapse? Come join me over on the Discord server and tell me why I’m wrong!

Please note that the information provided is for general informational purposes only and is not intended to be financial advice. The information provided is not a substitute for professional advice and should not be relied upon as such. Always consult a financial advisor before making any financial decisions. Additionally, The Hard Road staff and contributors may have a stake in the Securities, Cryptocurrencies, Platforms, and other assets that are mentioned in this article and others.

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