The U.S. dollar has reigned supreme since the end of World War 2 and the implementation of the Bretton Woods agreement.  The dollar, throughout this time, has been considered the world’s reserve currency.

The U.S. dollar has gained this status for a few reasons.  Some people think it is because the U.S. is the world’s superpower with the greatest military might.  Some people think it is because the U.S. has the world’s largest economy.  I think it is a combination of these things, although probably more the latter.

Although the U.S. government is basically an empire, the currency would not be able to hold up without the economic power, unless the rest of the world was literally forced to use dollars.

At the same time, I do want to acknowledge the political aspect of the dollar as the world’s reserve currency.  Washington DC has had a deal worked out with the Saudis for decades now.  The Saudis trade oil in U.S. dollars, while the U.S. government keeps the House of Saud from sinking through its implicit, and sometimes explicit, military backing.

It is a deal that has served both sides well.  When I say both sides, I mean the governments of both sides.  I don’t necessarily mean the people under their rule. The House of Saud gets to stay in power and be wealthy from the oil revenues.  The U.S. government gets its military industrial complex, and it gets the benefit of a strong U.S. dollar.  It allows them to spend and run deficits to a much greater degree.

There was a time in the 1970s when the U.S. dollar was under threat.  It was a threat by the Federal Reserve system that creates the dollars.  There was too much money creation.

There was, at least to a degree, a gradual loss of faith in the currency.  This is what happens when the central bank creates money out of thin air and interest rates and price inflation rates are in the double digits on an annual basis.

It took the appointment of Paul Volcker as Fed chair to slam on the monetary brakes and bring the price inflation rates way down.  It brought on the recession or recessions of the early 1980s, but it had to be done.  If it hadn’t been done, then the U.S. dollar really did risk losing its status as the world’s reserve currency.  International markets are only going to rely on a currency with double-digit price inflation rates for so long.

Shooting Their Collective Feet

I believe that U.S. officials are currently overplaying their collective hands.  They are playing emperor of the world, and the rest of the world doesn’t really like it.

Look at all of the wars and meddling around the world by the U.S. government.  And aside from the shooting wars, there are sanctions and trade wars.

Just in the last decade, there have been major power plays by the U.S. government around the planet. There have been sanctions placed on Russia.  It started as a response to Russia’s annexation of Crimea, which was really just the people of Crimea overwhelmingly voting to join Russia.  It happened because of a CIA-backed coup in Ukraine.  The media will refer to “Russia’s aggression against Crimea”, but it was really just Russia accepting what the people of Crimea wanted.

There have been severe sanctions against North Korea and Iran, two countries that do not want war with the United States.  The leaders of these countries know they would be decimated.  They talk about nuclear weapons only as a deterrent.  They can see what happened to Gaddafi in Libya and Saddam Hussein in Iraq.  The war hawks in the U.S. are pushing especially hard for war with Iran.

There are severe sanctions against Venezuela, along with an attempted coup.  Even though this is a weak economic player, there is oil there.  But more importantly, Russia does not want war there, especially with U.S. involvement. Russia (Putin) also does not want war in Iran.  They didn’t want war in Syria, which Obama went ahead with anyway.

Putin, and presumably most Russians, are tired of the antics from the U.S.  They are tired of the threats and the bullying, just as they should be.  Sanctions alone can be seen as an act of war.  Therefore, Russia is trying to avoid the U.S. dollar as much as possible. Last year, Russia dumped most of its U.S. Treasuries.

Now China is feeling the heat from the Trump administration, especially in the form of tariffs. Trump recently threatened the president of China that he better attend the G-20 summit or else more tariffs will got into effect.  Is this really what the U.S. empire has come to?  The president of the United States threatens the president of China to attend a certain event or else there will be repercussions? How would Trump and U.S. officials take it if China’s president threatened something similar?

China still has over $1 trillion in U.S. government debt.  They could sink the U.S. bond market if it sold this debt in a hurry.  So far, there has only been brief mention of such a possibility, but no credible threats. I think it would take a lot for Chinese officials to go this far.  But when you push someone hard enough, and you keep pushing, don’t be surprised when the person being pushed eventually pushes back.

Russia and China have been amazingly patient with U.S. threats.  Putin in particular has been amazingly restrained, especially with the constant allegations made against him.

Instead of threatening back, Russia and China are somewhat quietly working on the sidelines to get along and bypass the U.S.  More accurately, they are working on bypassing the U.S. dollar.

There is no need to use the U.S. dollar has a middleman currency other than to bow down to U.S. officials.  Russia and China are big enough that they can ignore the threats, or at least not follow them. Both countries are being painted as really bad guys in the U.S. press, so kneeling before Trump isn’t going to get them anywhere anyway.

The Saudis and some other U.S. puppets will continue using U.S. dollars for now.  But some of the big players are starting to turn away from using dollars when feasible.  There is no reason to use the dollar as a middleman in most cases.  It would help more if the Chinese would allow the yuan to be a free-floating currency on the exchange markets.

I believe that foreign officials are realizing that they don’t have to use the U.S. dollar. With open exchange markets, there really doesn’t have to be a world’s reserve currency.  You can exchange foreign currency for your own currency, or you can use it to buy the goods and services that are produced in that foreign country.

If anything does replace the dollar as the world’s reserve currency, I don’t think it is going to be another fiat currency issued by a government/ central bank.  If anything, it will be gold.

This is a good long-term reason to buy and hold gold and gold shares.  Russian officials have shown the wave of the future, which is to dump U.S. government debt and to shore up gold reserves.

Every time you hear about the U.S. government issuing more tariffs or more sanctions, just think about adding another straw on a camel’s back.  But the camel isn’t going to collapse.  It is going to shake off the straw and turn elsewhere.  That elsewhere will likely be gold.