Absolutely on target with this. The key thing to using a weapon is to know both a) when to use it, b) when not to use it, c) at some point it will have diminishing effects and your enemy will copy it. Once we tied the USD to policy and showed it to be a completely political weapon with zero neutrality, other governments were incentivized to find both counters and other options. I'm a full on statist patriot, but I'm also a practical man and completely understand why Russia and China have sought other options. If positions were reversed, I would want the US to do the same. Put another way, we turned the petro-dollar into an ied, handed the detonator to our competitors, then gave them a reason and the right time to press the button. How are we surprised when they press it?
It's deliberate - while the Biden Administration seems incompetent, I think that the interest groups who actually control policy are purposely trying to crash the US into an iceberg so that they can then sell the lifeboats to the survivors (never mind the casualties).
In this case, the lifeboat will be a global totalitarian government. Once you view the past few years through this perspective, the actions of the US and other governments make actual sense.
The writing is on the wall. I just wonder if the Fed would be stupid enough to create a 2nd dollar... a currency issued by the treasury that is backed by a hard asset of some kind. I'll use gold as the default example, although, as Lepard has pointed out, there is a great chance that China/Eastern thought defaults to basing their currencies in gold as evidenced by the massive accumulation of the physical asset to do so while the USA will be left with some other assets to choose from... meaning, there is no way the USA can commandeer enough physical gold NOW to back it's ridiculous international debt. Thus, the USA will need another natural resource abundant enough locally to stockpile and back a new currency. Or at least, keep the fiat to service old sins, and new option to those that want it backed by something else. Like btc. (I'm not a fan fyi, I just think the options will be limited and btc is just ONE option they could fall on... but not being in control of supply will cause some sort of upheaval at the treasury AND the Federal Reserve in any case.)
Of course, the flaw here is that every single dollar holder says: "I want the new thing"... so... what a fucking quagmire we have created here. China/Russia have been planning for over a decade for this. Look at their CB's decisions for reserve assets as the only example we need.
I don't see how the USA gets out of this without complete destruction of the ccy. We built an highway without off ramps.
Hey Chris. I share your concerns about the dollar. I do have more questions though. Why would China kill the goose that lays golden eggs? America buys all their shit… you crush your customer, and your own economic well being collapses. How do you answer that? Also, most of the world.. and primarily Western civilizations, condemn the atrocities Russia has committed. I’m certain that if a good portion of the world unites against Russia… they will solve their oil/energy needs problem, and leave Russia to bathe in their own oil.. sure they could sell it to China, and that may be fine for them. I don’t think this means the end of the West.
As the Saudi oil minister said a number of years ago: "The stone age didn't end when they ran out of stones." The US needs a crash course in SMR, grid upgrading and other technology to produce and distribute energy. We are yelling and arguing about trans athletes, CRT and asking Supreme Court nominees if they have hidden agendas. The Fed front runs stock trades, the airline raccoons blow 95% of FCF on buybacks (so their stock based comp was $350 million) for 5 years and threatened to go under unless we handed then $50++ billion. To paraphrase a caller on Paul Finebaum's show, (Go Gators) our collective heads are so far up our asses we need windows put in our stomachs so we can see...
Most important Supreme Court question: what is your definition of a woman? What a joke the US has become. No wonder more conservative societies are moving away from this decadence!
Except that “most of the world “ is more aligned with Russia and China than the west. So we have the US, UK, EU, and Australia/New Zealand on one side, and China, Russia, India, most of Africa, along with Central and South America on the other. Even US puppet Bolsonaro is not going along with Russian sanctions. Any country that has been economically and/or militarily damaged by the US is not going to side with them now. Notice that the US just had Imran Khan deposed in Pakistan? Massive demonstrations may alter that down the road. Now Blinken is pressuring India. He actually started accusing that country of human rights abuses (code phrase for “we’re going to attack you if you don’t do as we say.” ). Same playbook as Iraq, Iran, Venezuela, Syria, Libya, and on and on.
Fair point. However 17% is a pretty big number to take off the table. Sure they could move that product to mother countries…. but are other countries able to pick up that much slack? I guess it’s possible. So if the dollar looses reserve status.. then what? We ramp manufacturing production locally? I’m just not as terrified as other about all of this. The bigger challenge is when Chris mentions Austrians have been saying this for 40 years… well what the heck are people supposed to have done for half of their lives? Hoard gold and wait until eventually shit hits the fan? It’s not a way to live.
I believe there is another article on this site (or possibly ZeroHedge) that mentioned the Chinese could facilitate allowing more products to be sold within China, especially now that much of its population is financially able to purchase more stuff.
17% is likely the total cost, not volume of goods. Currently China has a huge surplus of dollars because of the huge trade imbalance with the US. How long will they allow that to keep building? And if they get out, Japan will be left holding the bag.
And yet, since RUS invasion the USD has increased and ready to breakout to new highs. Like so many other things, Austrians are correct in a rational world that doesn't exist. Reality is that the blowback has been so great that U.S. standing has improved without doing anything and Austrians want to believe gold or oil or trade partnerships will rebalance the financial system. In the end, it will always be about perspective supporting a thing as long as you control the narrative. Currencies will always strengthen with power despite the rational thinking of Austrians, and U.S. power is still number one - despite all the obvious deficiencies. BTW, I'm an Austrian...
the dollar is strengthening because despite the fact that we are heading towards its demise, all of the world financial and physical products are still denominated in dollars, so people need dollars. In the short/medium term, the dollar is going to get stronger as people require dollars to exit their positions. once that's done, watch out because the dollar is gonna go bye bye.
The dollar has strengthened against the euro. The ruble has strengthened against the dollar. Without Russian oil and gas, Europeans will freeze. Their governments are already telling them to take fewer showers and ride bicycles. What will next winter look like? (Perhaps this is part of the WEF global depopulation project?)
Compared to the only thing that matters - other currencies. Review pricing since the invasion 2/24 and you'll find a strong USD, investors might change their mind and agree with QTR but for now they're saying nyet!
No, I don't think that other currencies are the "only" thing that matters... Currencies (including the USD) can still depreciate against any other assets.
If the price of oil has increased 50% in USD terms (and say 60% in other currency terms), would you rather be holding USD or the oil?
In global finance and especially for a reserve currency, relative strength matters which is why the dollar wobbled in the 70's. Yes, hard asset currencies can do better in the short term which is why RUS bounced back after invasion, but long term support can only happen if your military can defend your currency.
First of all, when you look at what Russia actually does (as opposed to what it says), you will see that over the last weeks they did everything they could to service their USD denominated debts and paid coupons on their bonds in dollars. So, they a) serviced their debts, and b) did so in USD, which means it further depleted their reserves. Why do they do that? The only answer I can think of is: they do not want to lose access to capital markets when sanctions will be lifted (presumably in years). If they were determined to ditch the dollar for good, they'd be happy to default on their USD debt and show everyone in the West the middle finger.
Second, the idea that they back the Ruble with gold and only accept payment for oil in gold-backed Ruble or outright gold. I just don't see anything happening in that direction, and I believe it would be a bad strategic move. I encourage you to read Credit Suisse Zoltan Poszar's latest note to get a glimpse how complex moving oil from Russia is going to be if Europe isn't buying it anymore. Also, if Russia backs its Ruble by gold, I guess most people in Russia will just want to sell their Rubles and get gold to protect themselves.
On that last point, I believe that they opened up the gold purchase window by dropping taxes but had to temporarily halt the program due to a rush for gold... I'm curious if that halt was lifted as the Bank of Russia Ruble/gold/oil peg concept only makes sense to me if the Bank of Russia sells gold at a fixed Ruble price.
The US$ is reaching a more obvious transition point, marked by Ukraine, but maybe the overall process will continue along a slow path just like it always has.
Want it to go fast?
Then unleash the cyberp0lyg0n kraken!
All kidding aside, it looks like we are queued up for eating grasshoppers first.
Can you cite any reliable sources for your opinion that Putin and Xi “both have ugly track records of human rights abuses?” If you’ve not read Chomsky’s ‘Manufacturing Consent,’ you should. I’d be interested in absolute proof that these two world leaders are the law-breakers you believe. (And let’s not forget that the US installed two of the most horrific dictators the world has ever seen: Shah Reza Pahlavi (Iran) and Augusto Pinochet (Chile), both puppets installed after bloody US coups.)
Fantastic blog post, Chris! I honestly would love if you had Luke Gromen on your podcast. He has been writing about the US closing the global reserve window being akin to the US closing the gold window. Highly inflationary and highly conducive to reshoring of manufacturing. This is a major change to our monetary system, and much like in August of 1971, the world gave it a big yawn. I am loading up on Gold stocks. Gold still above $1,900 with rising yields is an incredible show of strength.
Keep writing, please! I'm always learning more about economics and you, along with ZH, are helping so much. Critical thinkers need help when we have questions. ;-)
I've been trying to get my family to prepare with varied success, but my husband and I have been getting hard assets thanks to you all.
Fellow Americans, the USD *is* your prison. As the mess hall, latrines and showers crumble, so too do the bars and walls that constrain you. Always remember that you were a prisoner here, and forget not who acted as guard and who acted as warden.
Thanks for making this a free post.
Thanks for giving it a chance and stopping by.
Absolutely on target with this. The key thing to using a weapon is to know both a) when to use it, b) when not to use it, c) at some point it will have diminishing effects and your enemy will copy it. Once we tied the USD to policy and showed it to be a completely political weapon with zero neutrality, other governments were incentivized to find both counters and other options. I'm a full on statist patriot, but I'm also a practical man and completely understand why Russia and China have sought other options. If positions were reversed, I would want the US to do the same. Put another way, we turned the petro-dollar into an ied, handed the detonator to our competitors, then gave them a reason and the right time to press the button. How are we surprised when they press it?
It's deliberate - while the Biden Administration seems incompetent, I think that the interest groups who actually control policy are purposely trying to crash the US into an iceberg so that they can then sell the lifeboats to the survivors (never mind the casualties).
In this case, the lifeboat will be a global totalitarian government. Once you view the past few years through this perspective, the actions of the US and other governments make actual sense.
Hey well, this falls under the "play stupid games, win stupid prizes" category for the New Monetary Theory morons.
The writing is on the wall. I just wonder if the Fed would be stupid enough to create a 2nd dollar... a currency issued by the treasury that is backed by a hard asset of some kind. I'll use gold as the default example, although, as Lepard has pointed out, there is a great chance that China/Eastern thought defaults to basing their currencies in gold as evidenced by the massive accumulation of the physical asset to do so while the USA will be left with some other assets to choose from... meaning, there is no way the USA can commandeer enough physical gold NOW to back it's ridiculous international debt. Thus, the USA will need another natural resource abundant enough locally to stockpile and back a new currency. Or at least, keep the fiat to service old sins, and new option to those that want it backed by something else. Like btc. (I'm not a fan fyi, I just think the options will be limited and btc is just ONE option they could fall on... but not being in control of supply will cause some sort of upheaval at the treasury AND the Federal Reserve in any case.)
Of course, the flaw here is that every single dollar holder says: "I want the new thing"... so... what a fucking quagmire we have created here. China/Russia have been planning for over a decade for this. Look at their CB's decisions for reserve assets as the only example we need.
I don't see how the USA gets out of this without complete destruction of the ccy. We built an highway without off ramps.
Hey Chris. I share your concerns about the dollar. I do have more questions though. Why would China kill the goose that lays golden eggs? America buys all their shit… you crush your customer, and your own economic well being collapses. How do you answer that? Also, most of the world.. and primarily Western civilizations, condemn the atrocities Russia has committed. I’m certain that if a good portion of the world unites against Russia… they will solve their oil/energy needs problem, and leave Russia to bathe in their own oil.. sure they could sell it to China, and that may be fine for them. I don’t think this means the end of the West.
As the Saudi oil minister said a number of years ago: "The stone age didn't end when they ran out of stones." The US needs a crash course in SMR, grid upgrading and other technology to produce and distribute energy. We are yelling and arguing about trans athletes, CRT and asking Supreme Court nominees if they have hidden agendas. The Fed front runs stock trades, the airline raccoons blow 95% of FCF on buybacks (so their stock based comp was $350 million) for 5 years and threatened to go under unless we handed then $50++ billion. To paraphrase a caller on Paul Finebaum's show, (Go Gators) our collective heads are so far up our asses we need windows put in our stomachs so we can see...
Most important Supreme Court question: what is your definition of a woman? What a joke the US has become. No wonder more conservative societies are moving away from this decadence!
Haha! Totally agree with you on this. We do need some sort of shock to the system to get our heads out of our asses lol
right!
Except that “most of the world “ is more aligned with Russia and China than the west. So we have the US, UK, EU, and Australia/New Zealand on one side, and China, Russia, India, most of Africa, along with Central and South America on the other. Even US puppet Bolsonaro is not going along with Russian sanctions. Any country that has been economically and/or militarily damaged by the US is not going to side with them now. Notice that the US just had Imran Khan deposed in Pakistan? Massive demonstrations may alter that down the road. Now Blinken is pressuring India. He actually started accusing that country of human rights abuses (code phrase for “we’re going to attack you if you don’t do as we say.” ). Same playbook as Iraq, Iran, Venezuela, Syria, Libya, and on and on.
Fair point. However 17% is a pretty big number to take off the table. Sure they could move that product to mother countries…. but are other countries able to pick up that much slack? I guess it’s possible. So if the dollar looses reserve status.. then what? We ramp manufacturing production locally? I’m just not as terrified as other about all of this. The bigger challenge is when Chris mentions Austrians have been saying this for 40 years… well what the heck are people supposed to have done for half of their lives? Hoard gold and wait until eventually shit hits the fan? It’s not a way to live.
true enough Darren, but now may be "the time".
I believe there is another article on this site (or possibly ZeroHedge) that mentioned the Chinese could facilitate allowing more products to be sold within China, especially now that much of its population is financially able to purchase more stuff.
I trust your statistics here but there is way more than 17% of products from China in every Wal Mart inventory.
17% is likely the total cost, not volume of goods. Currently China has a huge surplus of dollars because of the huge trade imbalance with the US. How long will they allow that to keep building? And if they get out, Japan will be left holding the bag.
And yet, since RUS invasion the USD has increased and ready to breakout to new highs. Like so many other things, Austrians are correct in a rational world that doesn't exist. Reality is that the blowback has been so great that U.S. standing has improved without doing anything and Austrians want to believe gold or oil or trade partnerships will rebalance the financial system. In the end, it will always be about perspective supporting a thing as long as you control the narrative. Currencies will always strengthen with power despite the rational thinking of Austrians, and U.S. power is still number one - despite all the obvious deficiencies. BTW, I'm an Austrian...
the dollar is strengthening because despite the fact that we are heading towards its demise, all of the world financial and physical products are still denominated in dollars, so people need dollars. In the short/medium term, the dollar is going to get stronger as people require dollars to exit their positions. once that's done, watch out because the dollar is gonna go bye bye.
The dollar has strengthened against the euro. The ruble has strengthened against the dollar. Without Russian oil and gas, Europeans will freeze. Their governments are already telling them to take fewer showers and ride bicycles. What will next winter look like? (Perhaps this is part of the WEF global depopulation project?)
Totally agree with you on this. 100%
"Strengthened? As compared to what?"
Compared to the only thing that matters - other currencies. Review pricing since the invasion 2/24 and you'll find a strong USD, investors might change their mind and agree with QTR but for now they're saying nyet!
No, I don't think that other currencies are the "only" thing that matters... Currencies (including the USD) can still depreciate against any other assets.
If the price of oil has increased 50% in USD terms (and say 60% in other currency terms), would you rather be holding USD or the oil?
In global finance and especially for a reserve currency, relative strength matters which is why the dollar wobbled in the 70's. Yes, hard asset currencies can do better in the short term which is why RUS bounced back after invasion, but long term support can only happen if your military can defend your currency.
First of all, when you look at what Russia actually does (as opposed to what it says), you will see that over the last weeks they did everything they could to service their USD denominated debts and paid coupons on their bonds in dollars. So, they a) serviced their debts, and b) did so in USD, which means it further depleted their reserves. Why do they do that? The only answer I can think of is: they do not want to lose access to capital markets when sanctions will be lifted (presumably in years). If they were determined to ditch the dollar for good, they'd be happy to default on their USD debt and show everyone in the West the middle finger.
Second, the idea that they back the Ruble with gold and only accept payment for oil in gold-backed Ruble or outright gold. I just don't see anything happening in that direction, and I believe it would be a bad strategic move. I encourage you to read Credit Suisse Zoltan Poszar's latest note to get a glimpse how complex moving oil from Russia is going to be if Europe isn't buying it anymore. Also, if Russia backs its Ruble by gold, I guess most people in Russia will just want to sell their Rubles and get gold to protect themselves.
On that last point, I believe that they opened up the gold purchase window by dropping taxes but had to temporarily halt the program due to a rush for gold... I'm curious if that halt was lifted as the Bank of Russia Ruble/gold/oil peg concept only makes sense to me if the Bank of Russia sells gold at a fixed Ruble price.
The US$ is reaching a more obvious transition point, marked by Ukraine, but maybe the overall process will continue along a slow path just like it always has.
Want it to go fast?
Then unleash the cyberp0lyg0n kraken!
All kidding aside, it looks like we are queued up for eating grasshoppers first.
Let’s do our part to uncouple the US from our dependency on the Chinese supply chain. Visit www.reservecurrency.co
Can you cite any reliable sources for your opinion that Putin and Xi “both have ugly track records of human rights abuses?” If you’ve not read Chomsky’s ‘Manufacturing Consent,’ you should. I’d be interested in absolute proof that these two world leaders are the law-breakers you believe. (And let’s not forget that the US installed two of the most horrific dictators the world has ever seen: Shah Reza Pahlavi (Iran) and Augusto Pinochet (Chile), both puppets installed after bloody US coups.)
Fantastic blog post, Chris! I honestly would love if you had Luke Gromen on your podcast. He has been writing about the US closing the global reserve window being akin to the US closing the gold window. Highly inflationary and highly conducive to reshoring of manufacturing. This is a major change to our monetary system, and much like in August of 1971, the world gave it a big yawn. I am loading up on Gold stocks. Gold still above $1,900 with rising yields is an incredible show of strength.
Keep writing, please! I'm always learning more about economics and you, along with ZH, are helping so much. Critical thinkers need help when we have questions. ;-)
I've been trying to get my family to prepare with varied success, but my husband and I have been getting hard assets thanks to you all.
As someone that grew up in Upper Darby, what’s the play here?
I think you are exactly right here and have had a feeling this would be coming for 2 years, just waiting for gold to make it's move now.
Oh yes and one more thing, per Columbo....
Worth a click:
https://www.oftwominds.com/blogmar22/funeral-USD3-22.html
Fellow Americans, the USD *is* your prison. As the mess hall, latrines and showers crumble, so too do the bars and walls that constrain you. Always remember that you were a prisoner here, and forget not who acted as guard and who acted as warden.