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Tag Archives: USD

Charts: Foreign Holding of USD Down in 2022

Source : Goldmoney

The End of World Dollar Hegemony: Turning the USA into Weimar Germany

Patrick Barron wrote . . . . . . . . .

In a recent essay, I explained how over time the US abused its responsibility to control the supply of dollars, the world’s premier reserve currency for settling international trade accounts among nations. This abrogation of its duties is leading to the likely adoption of a new reserve currency, commodity based and controlled not by one nation but by members, all watchful that the currency is not inflated.

Let us continue the analogy of an individual receiving a “magic checkbook” which allows him to write as many checks for as much money as he desires. Receivers of these checks could only pass them along to others through the normal course of trade. Over time the owner of the magic checkbook becomes increasingly irresponsible. He funds all kinds of welfare and warfare initiatives.

Naturally dollar reserves build to levels completely unnecessary for peaceful exchange. Prices start to rise at a faster and faster rate. Then a reform consortium assembles a team to offer an alternative currency. Why, one may ask, is that such a problem for the dollar and dollar users?

The Weimar Republic: A Lesson in Supply and Demand

A successful alternative reserve currency would dilute demand to hold dollars. When demand for dollars drops, its price must drop unless and until its supply drops. (A drop in the dollar’s “price” is just another way of stating that its purchasing power falls—i.e., more dollars are required to buy the same goods and services.) Through irresponsible use of the magic checkbook, you have obligated yourself to funding a free-for-all of entitlements such as Social Security, Medicare, and the military-industrial complex being the largest by far. Politically, it may be almost impossible to cut any of these three categories of spending to the extent necessary to arrest the dollar’s drop in purchasing power.

The world has seen all this before, and not just in less developed nations like Zimbabwe. The US will find itself in the same trap as experienced by Germany’s Weimar Republic following World War I. The Reichsbank, Germany’s central bank, printed papiermarks to placate powerful constituencies within Germany. As the Reichsbank printed more money, the purchasing power of papiermarks dropped. And herein lay the trap. Rising prices led powerful constituencies to demand increases in pay and benefits. Industrial labor unions, government civil servants, welfare recipients, old age pensioners whose life savings were being decimated—all demanded more money. Strikes and violence became endemic. So, the Reichsbank printed more money … which, of course, simply led to higher prices and another round of payment increases … which led to even higher prices until the papiermark became worth more as wallpaper than money.

Why did the Weimar Republic government continue to increase payments, and why did the Reichsbank continue to print papiermarks? Many sophisticated answers have been advanced, such as that the government and the Reichsbank deliberately destroyed the papiermark in a roundabout plot to thwart the financial terms of the Versailles Treaty in which a defeated Germany was ordered to pay reparations to the Allied powers. But the simplest answer is that both believed that there was no other choice than to increase payments and print money in a crisis. It was felt that powerful constituencies must be placated in the short run.

But short run tactics just made things worse. There was neither the political will nor the economic understanding of the need to end excessive spending and currency debasement and endure the pain thereby induced.

The US and the UK: A Lack of Political Will and Economic Understanding

I fear that the same is true today. In fact, the seeming lack of adverse consequences (all in the long term) and advantages of money printing in the short term have led to a knee-jerk response by the US Treasury and the Federal Reserve Bank to increase the money supply and lower interest rates in the face of any economic problem, even higher prices themselves. For example, just look to Britain. Its energy shortages have caused prices to rise. The government’s response has been to pledge payouts to households! That’s right. No pledge to dismantle barriers to increased energy production … just a pledge to increase the government’s deficit, which requires more money printing! As the saying goes, you can’t make this stuff up.

One thing is certain, however. What Britain can do, the US can and will do in spades. Hyperinflation is a real possibility. Remember, the Reichsbank in Weimar Republic Germany actually had to print physical money. The US Federal Reserve Bank need only click a few buttons on a computer. As prices rise, powerful groups demand more money. Police, firemen, road workers, etc. Demand that they not suffer a lowering of their lifestyle. Since government is spending someone else’s money, it accedes to these demands.

Back to our British example. The exchange value of the pound has been plummeting in currency markets, leading to serious consequences. The Bank of England was forced to raise interest rates and now government debt has become unaffordable. So, the Bank, as handmaiden to the government, has applied the only politically permissible remedy that it knows: its computers’ money printer is forced into overdrive, just to keep up.

What Happens on the Ground

Where does government get its money? State and local governments get money from state and local taxes. So captive property owners get increased tax bills to pay for maintaining public school teachers, police, etc. Social Security recipients must be compensated, of course, so payroll taxes are increased, which depresses business. American products become less competitive on the national and world market.

The price spirals continue to destroy all in their path until the dollar loses all purchasing power and society descends into chaos. And not one politician in a thousand understands what happened, or if he does understand, does not have the political will to do anything about it—i.e., reduce public spending, liquidate the Fed, and tie the dollar to our still significant gold reserves. It can be done.


Source : Mises Institute

Charts: The US dollar Is Falling, and It’s Falling Fast.


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Source : All Star Charts

The U.S. Dollar, Safe Haven or Leaky Lifeboat?

John Hathaway wrote . . . . . . . . .

The “strong U.S. dollar” has been, of late, the most topical affliction for gold. Already sagging under the weight of hawkish Fed speak, receding financial liquidity, competition from crypto and disappointment from its failure to rise to new highs on the back of high inflation. The investment consensus appears to be one of highly convicted bearishness. Technical charts bear this out, with the metal breaking to a three-year low. The U.S. dollar lifeboat is no longer safe for occupancy.

The parabolic ascent of the U.S. dollar (USD) against all currencies and commodities, however, contains the seeds of its own demise. It is akin to the panicky overcrowding of a leaky lifeboat. The facade of USD strength foretells a comeuppance for all paper currencies: A steep devaluation relative to gold. As noted by economist Mohamed El-Erian, the “relentless appreciation of the dollar is terrible news for the global economy.” (Fortune, 9/26/2022). It is the latest and maybe final refuge of safety certain to disappoint clingers on as much as the late lamented “ultrasafe” refuge, U.S. government debt securities which are down 12.47% year-to-date through October 3, 2022.

What comes next? Could it be the rediscovery of gold, the one and only safe haven still relatively unscathed?

The kiss of death for the strong USD may well have been delivered by the Bloomberg Businessweek cover below. Overcrowded consensus trades are often top-ticked by magazine covers, a long-standing media tradition in keeping with Business Week’s “Death of Equities” cover in 1979.

Extreme Dollar Strength May Lead to Instability

Dollar “strength” is a mirage. It is the reverse image of all other paper currencies’ weaknesses. In our view, the dollar “wrecking ball” may well represent the last stand for paper currencies in general, all of which are the ever-increasing issuance of fiscal decay.

Should the Federal Reserve (the “Fed”) stick to its Kamikaze inflation-fighting mission, the interest rate on U.S. debt will accelerate from its current monthly upward creep of 8.7 basis points (Figure 1). When annualized, that rate of gain translates to a nearly $300 billion addition to the fiscal deficit. The latest 12-month interest bill of $716 billion is based on a minuscule average annual interest rate of 1.971%. The average maturity on the debt is 6.7 years. Factors that would accelerate this monthly creep to a gallop would be the continuation of Fed hawkishness plus sales by foreign holders of U.S. Treasuries to defend their national currencies.

Figure 1. Interest Expense (12mo sum, not Fiscal YTD) vs. 1-Month Basis Point Change in Interest Rate Paid on Debt (2011-2022)

The days of the Fed purchasing 60-80% of annual government borrowing needs through balance sheet expansion have been decreed over. Quantitative tightening will add to supply already swollen by trillion+ dollar deficits. In addition, the Fed monetary MENSAs did not consider that foreign Central Banks would resort to selling their holdings of U.S. Treasuries to support their sinking currencies. To support the yen’s decline, the Central Bank of Japan sold $21 billion of U.S. Treasuries, resulting in a 3% one-day decline (September 26, 2022) in long-dated U.S. Treasuries. If you add foreign holdings of $7.5 trillion in U.S. Treasuries to the normalization (via quantitative tightening) of the $8.8 trillion Fed balance sheet, this tallies $16.3 trillion. What slice of that supply overhang leaks into the market as governments rush to defend their own currencies battered by U.S. dollar strength remains to be seen.

As Luke Gromen (Forest For the Trees, 9/30/2022) noted, rising interest rates against a backdrop of falling inflation would likely be based on an unfavorable market assessment of U.S. sovereign credit risk. How far will price discovery be allowed to operate in the face of a potentially massive mismatch between supply and demand? We reckon that market price discovery is on a very short leash, irrespective of the chorus of Fed Speak promising restrictive liquidity as far as the eye can see.

Alarm Bells for the U.S. Dollar?

Strong U.S. dollar alarm bells are beginning to ring far and wide:

“The spillover effect of the Fed’s interest rate hikes has triggered many deep-rooted problems in the global economic and financial system…The dominant global status of the dollar means many central banks are forced to raise interest rates following the Fed, even if economic activities in those countries are under pressure or their domestic inflation remains soft.” – Sheng Songcheng, former director of the People’s Bank of China’s statistics and analysis department. (Bloomberg, 9/28/2022).

Multiple warnings of Treasury market dysfunction are surfacing. According to Ralph Axel, Bank of America rates strategist (as quoted in Grant’s, 9/16/2022):

“Declining liquidity of the Treasury market arguably poses one of the greatest threats to global financial stability today, potentially worse than the housing bubble of 2004-2007.”

In our view, U.S. Treasury market fragility combined with a potentially historic mismatch between supply and demand is the perfect recipe for stifling price discovery. As noted by the Wall Street Journal (The First Central Bank Casualty, 9/29/2022), citing the Bank of England’s rapid response to the rapid depreciation of the pound, “central bankers are easily spooked into rescue mode”. The MOVE index (Figure 2), broadly reflects bond market stress, with recent readings the highest since the 2008 Global Financial Crisis.

Figure 2. MOVE Index Chart (2002-2022)

While the Fed may have been resolved at one time to look askance at the damage to the U.S. equity and bond markets when it embarked on its anti-inflation crusade, we believe that it was ignorant, even clueless, as to the economic repercussions of rising interest rates and draining liquidity. We have long believed that the consequences of applying a tight money regimen are different this time. The difference between the days of Paul Volcker and today is the much greater level of leverage in the U.S. and the world economy. The financial system of 2022 was built on submarket interest rates. What was painful medicine in 1980 is poison to the financial system of 2022.

Hard Landing?

We believe the effects of collapsing leverage are only beginning to surface. The Fed’s laser focus on unemployment and CPI (consumer price index) inflation as the sole metrics to guide policy is in our opinion misplaced. Both are lagging indicators. By the time they are flashing green for the Fed to relent, long-lasting damage will have been inflicted. Waiting for unemployment to rise or the CPI to print 2% could take well into 2023. By then, the current recession that is underway will have steepened into an “L” shape, meaning an economic recovery delayed for years.

Collateral damage includes more than the still overvalued equity market. Don’t take it from us. As noted by Stanley Druckenmiller in a 9/28/2022 CNBC interview, the Fed engineered the:

“Wildest raging asset bubble I’ve ever seen… We’ve had 30 trillion QE [quantitative easing] globally over the last ten years. When you have free money and you have bond buying for that period of time, it creates bad behavior….That 30 trillion has created all sorts of stuff that’s probably under the hood.”

Druckenmiller sees a “hard landing” in 2023. In our view, a hard landing is not priced into the equity market where the consensus estimates of earnings at 225.10 for the S&P 500 Index seem far too optimistic. As those estimates come down, so will the equity market.

Our view continues to be that exigent circumstances will cause the Fed to abort its anti-inflation mission. Timing is always and everywhere speculation, but realistically there are too many leaks in the dike (faltering Treasury market liquidity, widening credit spreads, chaotic FX markets) for the Fed’s resolve to last much longer. Fed Vice Chair Brainard, in a nod to unruly markets, stated (WSJ, 9/30/2022) that the:

“Fed was attentive to financial vulnerabilities that could be exacerbated by the advent of additional adverse shock but the drive to tame inflation could set a higher bar for the Fed to deviate from its plans to raise rates.”

Really? Will the Fed drive the world economy over a cliff just to save face? Highly dubious, in our opinion.

Markets will celebrate a pivot, but the rally may not be long lasting. Most likely, inflation will survive an aborted Fed assault and public policy will revert to papering over mistakes as in 2008. If so, the outperformance of gold relative to financial assets may last for years. The historical precedent is from year-end 1968 (DJII 903.11) to year-end 1981 (DJII 932.95). During the same stretch, gold rose from $39.11 to $460/oz.

Gold May Anticipate a Fed Pivot

Gold and mining stocks may anticipate the coming pivot in advance of the headlines. Mining stock valuations on a relative and absolute basis are at rock bottom. The risk/reward is asymmetric to the upside. The real investment challenge, all too familiar to the contrarian, is to muster the patience to wait. To paraphrase the words of stock trader Jesse Livermore, “Get right and sit tight. It was never my thinking that made big money for me. It was always my sitting. Got that? My sitting tight”. The U.S. dollar lifeboat is no longer safe for occupancy. The wait for gold to be rediscovered as a safe haven is nearing an end.


Source : Sprott

What Does The Yuanization Of The Russian Economy Mean For The Dollar?

By The Jamestown Foundation . . . . . . . . .

On September 12, Russian President Vladimir Putin stated that, given mounting economic sanctions, full “de-dollarization” of the Russian economy is only a matter of time. Putin`s remark was preceded by a statement from Russian Deputy Finance Minister Alexey Moiseev, who argued that “Russia no longer needs the US dollar as a reserve currency.” Instead, Russia must accumulate funds in currencies of so-called “friendly countries,” such as the Chinese yuan, which is playing a key role in this regard. The idea of departing from the US dollar as a reserve currency is by no means new to Russia: It was first entertained in the 1990s. By 2018, Moscow had devised a “plan on the de-dollarization” of its economy. Prior to the outbreak of Russia`s war against Ukraine on February 24, Dmitry Medvedev stated that, if the Kremlin`s operations with US dollars were to be restricted, Moscow could fully switch to the yuan and euro instead. However, following Russia`s attack on Ukraine, the United States, the European Union, and other large economies have effectively barred Moscow from using their national currencies. As a result, aside from the Turkish lira, the United Arab Emirates` dirham and the Indian rupee—each of which cannot be fully relied on due to a number of factors—Russia has been reduced to the use of the yuan as an alternative reserve currency to the US dollar and euro.

Growing popularity of the yuan in Russia reached an intermediary zenith in August 2022, when sales of the Chinese currency skyrocketed. Importantly, business giants, including Rosneft, Rusal, Polus and Metalloinvest, dramatically increased their investments in yuan bonds. As stated by Alexander Frolov, deputy director of the National Energy Institute, it makes perfect sense for Rosneft (and other resource-producing companies) to strengthen cooperation with the Chinese side via increasing the yuan’s use in their operations.

Yet, while many Russian experts and officials are applauding the decision to increase the yuan’s use in financial operations, other experts and officials share serious doubts and concerns. For instance, during the Moscow Financial Forum, Russian Minister of Finance Anton Siluanov and Maxim Oreshkin, current economic adviser to Putin, disagreed on the yuan’s role as a reserve currency. While the former stated that currencies of foreign “friendly countries” should become a key factor in diversification of assets, the latter disagreed, arguing that all monetary reserves must remain in Russia’s national currency. Interestingly, even one of Russia’s main proponents for “de-dollarization,” Andrey Kostin, chair of the VTB Bank management board, speaking at the Eastern Economic Forum (September 5–8) in Vladivostok, argued that, while there are many positive aspects related to the use of the yuan, other negative aspects reveal the risks of overreliance on the Chinese national currency, which is stipulated by “distinctive features of Chinese financial legislation”.

From his side, well-known Russian economist Stanislav Mitrakhovych indicated three main risks Russia could face when increasing reliance on the yuan. First, the Russian Federation does not have the necessary skills and infrastructure to work with the Chinese currency. Although manageable over the long term, for now, the Russian financial system is ill-equipped and largely unprepared for the challenges of relying more on the yuan. Second, a high level of nonmarket regulations will make the process incredibly difficult. Unlike Russia’s previous experience of dealing with foreign currencies—both the US dollar and euro are currencies of free-market economies—the yuan’s price is regulated by the Chinese state. Thus, when in need, Beijing can easily manipulate the price of the yuan (say, to create favorable conditions for foreign trade). This could leave Russia as a “hostage” to Chinese interests. Third, despite China’s growing trade power and economic might, the yuan has not yet become a fully independent currency, remaining tight to other leading global currencies. Thus, it should be remembered that—at least in the short term—the yuan will still be tight to the US dollar, meaning that the Chinese national currency might become an excellent investment tool for the future. For now, however, “making a bet solely on yuan could be a risky enterprise”.

Other Russian economists have also drawn attention to the fact that operations with the yuan could pose multiple risks. For instance, even ultra-conservative Russian information outlets have argued that the People’s Bank of China (PBC) could easily devalue China’s national currency, which could result in serious challenges for Beijing`s partners who are investing in the yuan. Thus, despite its decreasing volatility, the yuan remains a somewhat challenging investment tool, whose exchange rate is almost fully dependent on the PBC. Interestingly, now—only after Russia was barred from operations with the US dollar and euro—Russian economists are starting to realize that it is much safer and more beneficial to work with transparent reserve currencies. For instance, Sofia Donets, an economist at Renaissance Capital specializing on Russia, complained that, if before, Russian economists and finance experts could easily access and read all regulations in “plain English,” now, working with the Chinese side, regulations are opaque and unclear.

In truth, some of the challenges feared by Russian economists and finance experts regarding Russia’s growing involvement with the yuan are coming true. The Russian side has been compelled to admit that Moscow’s inquiry to China to strengthen their partnership in the realm of financial cooperation has not been strongly supported by Beijing. In effect, Chinese authorities are unwilling to change domestic regulations to allow its investors to operate with Russia-issued bonds. Instead, China is more comfortable with foreigners investing in its so-called “panda bonds,” which are sold only in the internal Chinese market. Moreover, Russian experts fear that, with 17 percent of foreign exchange reserves in yuan, the Kremlin will not be able to pull money promptly when needed, thereby becoming trapped by China.


Source : Oil Price

Global Times Editorial: The Strong Dollar Should Not Become a Sharp Blade to Cut the World

The US Federal Reserve will hold a new policy meeting on Tuesday and Wednesday, with the decision on interest rate growth being the limelight. It is widely anticipated that the Fed will deliver at least another 75-basis-point interest rate hike to tame inflation. This might further increase the value of the US dollar against other currencies, which is at its 20-year high. Driven by the Fed’s aggressive rate hikes, the US dollar is viewed as “experiencing a once-in-a-generation rally.” For many countries in the world, this might be the beginning of another nightmare.

The meeting will witness the fifth time that the Fed will raise interest rates. The direct reason is to ease the high pressure of inflation in the US. But if people dig the root cause, this is an inevitable consequence of US’ blind and unlimited money printing to temporarily maintain “prosperity.” In other words, in the face of the deep-seated problems exposed by the 2008 financial crisis, Washington has been powerless, and unwilling as well, to solve them. Instead, it was extremely short-sighted to cover up the crisis and curry favor with the Wall Street, while taking advantage of the hegemony of the US dollar to quietly treat the crisis like dumping wastewater – draining it to the world.

A super strong US dollar and the fall of other currencies will, to a certain extent, ease the scorching inflation in the US economy, but the world will have to pay for it, which is often referred to as “when the US is sick, the world has to takes pill.” The ensuing severe inflation, economic recession and other problems have already appeared on a large scale in many countries. Thirty-six currencies around the world have lost at least one-tenth of their value this year, with the Sri Lankan rupee and Argentine peso falling by more than 20 percent, since the dollar strengthened.

This has not only worsened the already weak economies of Europe and Japan, but also forced a large number of developing countries to swallow the bitter pills of the economic recession caused by imported inflation. Countless families were impoverished overnight. This is a very abnormal situation that is not supposed to occur, but it is the cruel truth behind the US “containment of inflation.”

In fact, since the end of World War II, the US has used dollar hegemony to carry out “financial looting” or “export crises” against other countries several times. As a widely popular phrase in the West goes, the US enjoys the exorbitant privileges created by the dollar and the deficit without tears, and used the worthless paper note to plunder the resources and factories of other nations.

Each round of dollar appreciation in the past decades has been accompanied by extremely bad memories: The Latin American debt crisis broke out in the first round, Japan suffered from the “lost two decades” during the second round and the Asian financial crisis took place during the third. Particularly in the Asian crisis, which is still fresh in many people’s memories, more than 100 million middle-class people in Asia fell into poverty, according to the World Bank estimation. The strengthened dollar, time and again, cuts the world like a sharp blade.

Therefore, while the political elites in Washington boast of the “myth of the American system” and take credit for “alleviating the crisis,” thousands of poor families around the world are being trampled by them. They are not unaware of this, but still collectively choose to be indifferent and arrogant, as if this is the privilege that the “hegemon” should enjoy. As US former treasury secretary John Connally put it in the 1970s, “The dollar is our currency, but it’s your problem.” Today, the dollar is once again the world’s problem. In a sense, it’s hard to believe that the “prosperity” of the US is clean and moral.

However, the crisis cannot be covered up forever. Washington keeps laying mines but never removes them, which will eventually explode the US itself. The incompetence of US financial policymakers has been exposed by the consecutive interest rate hikes that have contributed to the abnormal appreciation of the US dollar with the purpose of defusing the severe inflation.

For the US itself, what will rise accordingly are the cost of corporate financing, the pressure on residents to repay their loans, and the price of export production among others. Meanwhile, the credibility that the US dollar has as a global currency is being continuously exhausted by the US “beggar-thy-neighbor” policy. Now the anxiety and insecurity brought by the US dollar to the world has heralded the beginning of the decline of its hegemony – regarding Washington’s insatiable exploitation, Europe, Asia, the Middle East and other regions have explored the path of “de-dollarization,” leading to the inevitable diversification of the international monetary system.

The best way to restrain the rampaging hegemony is to practice true multilateralism. Whether it was the Asian financial crisis in 1997 or the global financial crisis in 2008, the world seemed to have stumbled more than once by the same stone, which, however, is not that firm anymore. The instability and fragility of international financial markets have once again become prominent. It is precisely at such times that the international community should be more determined to cooperate and build a reliable, systemic and long-term multilateral international financial system. This cannot wait.


Source : Global Times

A Post-dollar World Is Coming

Ruchir Sharma wrote . . . . . . . . .

This month, as the dollar surged to levels last seen nearly 20 years ago, analysts invoked the old Tina (there is no alternative) argument to predict more gains ahead for the mighty greenback.

What happened two decades ago suggests the dollar is closer to peaking than rallying further. Even as US stocks fell in the dotcom bust, the dollar continued rising, before entering a decline that started in 2002 and lasted six years. A similar turning point may be near. And this time, the US currency’s decline could last even longer.

Adjusted for inflation or not, the value of the dollar against other major currencies is now 20 per cent above its long-term trend, and above the peak reached in 2001. Since the 1970s, the typical upswing in a dollar cycle has lasted about seven years; the current upswing is in its 11th year. Moreover, fundamental imbalances bode ill for the dollar.

When a current account deficit runs persistently above 5 per cent of gross domestic product, it is a reliable signal of financial trouble to come. That is most true in developed countries, where these episodes are rare, and concentrated in crisis-prone nations such as Spain, Portugal and Ireland. The US current account deficit is now close to that 5 per cent threshold, which it has broken only once since 1960. That was during the dollar’s downswing after 2001.

Nations see their currencies weaken when the rest of the world no longer trusts that they can pay their bills. The US currently owes the world a net $18tn, or 73 per cent of US GDP, far beyond the 50 per cent threshold that has often foretold past currency crises.

Finally, investors tend to move away from the dollar when the US economy is slowing relative to the rest of the world. In recent years, the US has been growing significantly faster than the median rate for other developed economies, but it is poised to grow slower than its peers in coming years.

If the dollar is close to entering a downswing, the question is whether that period lasts long enough, and goes deep enough, to threaten its status as the world’s most trusted currency.

Since the 15th century, the last five global empires have issued the world’s reserve currency — the one most often used by other countries — for 94 years on average. The dollar has held reserve status for more than 100 years, so its reign is already older than most.

The dollar has been bolstered by the weaknesses of its rivals. The euro has been repeatedly undermined by financial crises, while the renminbi is heavily managed by an authoritarian regime. Nonetheless, alternatives are gaining ground.

Beyond the Big Four currencies — of the US, Europe, Japan and the UK — lies the category of “other currencies” that includes the Canadian and Australian dollar, the Swiss franc and the renminbi. They now account for 10 per cent of global reserves, up from 2 per cent in 2001.

Their gains, which accelerated during the pandemic, have come mainly at the expense of the US dollar. The dollar share of foreign exchange reserves is currently at 59 per cent — the lowest since 1995. Digital currencies may look battered now, but they remain a long-run alternative as well.

Meanwhile, the impact of US sanctions on Russia is demonstrating how much influence the US wields over a dollar-driven world, inspiring many countries to speed up their search for options. It’s possible that the next step is not towards a single reserve currency, but to currency blocs.

South-east Asia’s largest economies are increasingly settling payments to one another directly, avoiding the dollar. Malaysia and Singapore are among the countries making similar arrangements with China, which is also extending offers of renminbi support to nations in financial distress. Central banks from Asia to the Middle East are setting up bilateral currency swap lines, also with the intention of reducing dependence on the dollar.

Today, as in the dotcom era, the dollar appears to be benefiting from its safe-haven status, with most of the world’s markets selling off. But investors are not rushing to buy US assets. They are reducing their risk everywhere and holding the resulting cash in dollars.

This is not a vote of confidence in the US economy, and it is worth recalling that bullish analysts offered the same reason for buying tech stocks at their recent peak valuations: there is no alternative. That ended badly. Tina is never a viable investment strategy, especially not when the fundamentals are deteriorating.

So don’t be fooled by the strong dollar. The post-dollar world is coming.


Source : Financial Times

Charts: Yuan Depreciates Against US$ but Appreciates Against EURO and Yen

Source : Trading Economics

Charts: The Rise of US$ Created Risk for Heavily-in-debt Emerging and Developing Economies

Source : Nikkei

World Slowly/Openly Turning Away from the USD

Matthew Piepenburg wrote . . . . . . . . .

With the USD losing influence, it would be the understatement of the year to say that we live in interesting times, for we certainly do.

But despite the inevitable attacks of appearing sensational, un-American or just plain cynical, I feel a more appropriate phrase boils down to this:

“We live in dishonest times.”

Below, I bluntly address the “Fed pivot debate,” the “inflation debate” and the USD’s slow global decline in the setting of a now multi-FX new normal in which gold’s historical bull market has yet to even begin.

These views are not based on biased politics, but honest economics, which for some odd reason, ought to still matter.

Let’s dig in.

The New Normal: Open Dishonesty

I recently authored a report showcasing a string cite of empirically open lies which now pass for reality on everything from the CPI inflation scale to the Cleveland Fed’s +1 real interest rate myth, or from official unemployment data to the now comical (revised) definition of a recession.

But a more recent lie from on high comes directly from the highest of all, U.S. President Joe Biden.

Earlier this month, Biden waddled to his podium and prompt-read to the world that the US just saw 0% inflation for the month of July.

Oh dear…

It’s sad when our national leadership lacks basic economic, math or even ethical skills, but then again, and in all fairness to a President in open (and in fact sad) cognitive decline, Biden is by no means the first President, red or blue, to just plain fib for a living.

A History of Fibbing

We all remember Clinton’s promise that allowing China into the WTO would be good for working class Americans, despite millions of them seeing their jobs off-shored to Asia seconds thereafter.

And let us not forget that little war in Iraq and those invisible weapons of mass destruction.

Nor should we ignore both Bush and Obama’s (as well as Geithner’s, Bernanke’s and Paulson’s) assurance that a multi-billion-dollar bailout (quasi-nationalization) of the TBTF banks and years of printing inflationary money (Wall St. socialism) out of thin air was, “a sacrifice of free market principles” needed to “save the free market economy.”

In reality, however, we haven’t seen a single minute of free market price discovery since QE1.

Thus, Biden’s announcement that there was NO inflation for July is just another clear and optically (i.e., politically) clever lie among a long history of lies.

That is, he failed to clarify that although there may have been LESS inflation in July, this hardly means “no” inflation, as any American who has a bill to pay already knows.

Setting the Stage (Narrative) for a Fed Pivot

What the July CPI decline does achieve, however, is yet another headline myth to justify an inevitable Fed pivot to more easy money by year-end (i.e., mid-term elections) or early 2023.

As we see below, the fiction writers, data-gatherers and fork-tongued policy makers in DC have already been gathering more official “data” to justify a Fed pivot toward more dovish money printing and hence more currency debasement ahead.

In addition to a decelerating CPI report for July, DC has also been checking the following, pre-pivot boxes to allow the Fed to get back to doing what it was truly designed to do, which is print debased money out of thin air to save the US Treasury market rather than working class citizens.

Specifically, DC is pushing hard on the following “data points” and narrative:

  • Decelerating inflation expectations
  • Declining online pricing
  • Declining PPI (Producer prices)
  • Declining oil prices (from their highs)

So, has inflation peaked? Are the above declines proof that inflation creates deflation by crushing consumer strength and hence price demand? Is the Fed’s work nearly done in defeating inflation?

My short answer is no, and my longer answer is that when it comes to market, currency and economic conditions, there’s…

…More Pain Ahead

One clear sign that there’s more pain ahead, and hence more reasons for the Fed to pivot from temporary hawk to permanent dove, is the credit tightening now taking place in the US.

As I’ve said too many times to recall, the credit—and bond—market is the most important market and economic indicator of all.

Earlier this month, the Fed’s quarterly Loan Officer Survey came out with some scary and telling news, namely that the credit markets are tightening.

It’s important to know that in the last 30 years, a tightening of credit has always preceded a recession, even if DC wants to pretend that we are not in a recession.

The hawks may argue, of course, that during the inflationary 1970’s, tightening bank credit did NOT stop Volcker’s Fed from a hawkish rate hike policy.

But let me remind again that 2022 USA (with a 125% debt to GDP ratio) isn’t the Volcker era, which had a 30% ratio.

So, I’ll say it once more: The US can’t afford a sustained (Volcker-like) hawkish (rate-rising) policy–unless you believe the Fed is under direct orders from Davos to destroy America, which, I suppose is a fair belief, but one I’m not ready to embrace (yet)…

Despite Powell’s fear of becoming another Arthur F. Burns who let inflation run too hot, and despite his failed attempts throughout 2018, and again now, to be the tough-guy at the Fed, I still feel the Fed, for all the narrative points/reasons set forth above (including falling US tax receipts in July), is waiting for more weak economic data to justify a dovish pivot toward more QE rather than less inflation.

Why?

Because the Fed’s Only Job is to Keep Uncle Sam’s IOUs from Drowning

The only way to keep US Treasuries from tanking (and hence bond yields and interest rates from fatally spiking), is for the Fed to print more money to buy Uncle Sam’s otherwise unloved debt.

And this can only be done with more, not less, QE down the road.

Of course, money created with a mouse-click is inherently inflationary and inherently fatal to the purchasing power of the USD, which is why gold is inherently poised to out-perform every fiat currency in play today, including the world reserve currency.

But as for gold’s rise, in addition to the dis-inflationary recessionary forces (which require a weaker dollar and lower rates to fight), there’s a lot going on outside the US which further points to gold’s pending rise.

Little Trouble in Big China?

Investors may have noticed that money is fleeing China in droves. Capital outflows are reaching levels not seen since 2015, which sent the Yuan to the basement by 2016.

Does this mean the FX jocks should start shorting the heck out of the Chinese Yuan (CNY)?

I think not.

In fact, the CNY is holding its own despite massive capital outflows.

But how?

China: Openly Mocking the U.S. Dollar and the Back-Firing Putin Sanctions

The openly back-firing, financially-inept and politically-arrogant Western sanctions against Putin’s war amounted to the biggest game-changer in the global currency system since Nixon closed the gold window in 71.

More to the point, and despite massive capital outflows, the CNY is remaining strong because its FX reserves (i.e., its national savings account denominated in foreign assets) are actually rising not falling.

Huh? Why? Where’s the money coming from?

Answer: Just about everywhere except for the dollar-led West.

That is, nations like China and Russia, who have been chomping at the bit for the last decade to de-dollarize, are now doing precisely that in the wake of recent moves by the West to weaponize the USD by freezing Russia’s FX reserves.

Myopic sanction chest-puffing by the West has given the East the perfect pretext to fight back financially and monetarily, and they are fighting to win a heating currency war.

No Dollars, Thank You

Specifically, countries wishing to purchase Chinese imports (i.e., commodities) now have to pre-convert and/or settle those purchases from local currencies into CNY rather than the once SWIFT-and-world-dominated USD.

In short, the USD is no longer the toughest guy in the room nor prettiest girl at the dance.

This is becoming more evident as headlines confirm Indian companies swapping USDs for Asian currencies, China and Saudi Arabia concluding energy deals outside the slowly dying (and forewarned) petrodollar, and the Russian Central Bank considering buying the currencies of friendly nations like Turkey, India and China.

As commodities like oil (priced-up 30% since 2018) leave places like China and Russia, they can now be purchased with local national currencies (Indian, Brazilian, Turkish) which are then converted into CNY.

This procedure adds massively to China’s FX reserves (especially when oil prices have been rising), thereby allowing its currency to stay strong despite massive capital outflows.

From Mono-Currency to Multi-Currency

In short, and despite Western attempts to flex its currency muscle via USD-driven sanctions, nations like Russia and China are now leading the charge from a one-currency world to a multi-currency world of import payments.

With its FX reserves frozen by the West, Russia, for example, can take its energy profits and Rubbles to purchase the currencies of friendly countries like China, India and Turkey to rebuild its reserves outside of the USD.

In this manner, and as I’ve repeatedly warned (in articles and interviews) since February of 2022, the West has shot itself and the world reserve currency in the foot.

The old world is slowly but surely turning irreversibly away from a USD-dominated currency system toward a multi-currency and multi-FX pricing model.

And as we head into winter, nations like the UK, Japan, Austria and Germany, who blindly towed the US line, will be feeling the cold pinch of backing the wrong policy as other nations stay warm/heated with oil and gas that can be bought outside of the old, USD-led system.

As energy prices continue to cripple the West, especially here in the EU, will such nations like the UK, Austria or Germany bend or stay firm?

Either way, the USD is the open loser over time, and will never be trusted as neutral currency again.

But agree or disagree, you may still be asking: What does any of this have to do with gold?

It Has Everything to do with Gold

As more nations turn away from the West (and the USD) and closer to the East (i.e., Russia) to meet their energy needs, how will they find the Rubles or Yuan to buy their oil, gas and other commodities?

After all, in the new, post-sanction, multi-FX importing model described above, Turkey can’t just buy Russian oil in Lira; it needs to first settle the trade in Rubles.

So, again, what currency will Turkey use?

From Petro-Dollar to Petro-Gold

John Brimelow, a consistently brilliant gold analyst, has given us a pretty obvious hint/answer: YTD Turkish gold imports are up 44% to nearly 70 tonnes, and can easily reach prior levels of 300 tonnes per annum.

In other words, Turkey could be dumping US dollars to buy gold at what we all know is a deliberately rigged (i.e., low) COMEX/LBMA price.

Turkey can then sell that gold to Russia’s central bank in exchange for Rubles “at a negotiated price” otherwise needed to purchase Putin’s oil.

Given that the physical oil market is nearly 15X the physical gold market, one can only imagine what further oil-for-gold transactions as per above will do for the rising price of a scarce asset like gold.

See the Sea of Change?

See how the USD is slowly losing its shine?

See why gold is slowly gaining in shine?

See how the US-led sanctions were the biggest political and financial policy gaffe since Kamala Harris tried to locate the Ukraine on a map?

See why the BIS/COMEX/OTC price fixing of gold earlier this year was the perfect (and artificial, legalized fraud) timing needed to keep gold cheap for other nations to buy?

Rhetorical Questions

Perhaps all this interest in gold rather than the USD explains Saudi Arabia’s recent push to refine gold within its own borders?

Perhaps this also explains why less-favored nations to the US (i.e., Nigeria and India) are launching a bullion exchange and opening gold trading?

Perhaps gold’s new roles are why the BIS, the biggest player (legalized scammer) in the paper price fixing of gold, has unwound nearly 90% of its gold swaps over the course of a year (from 502 to 56 tonnes)?

And perhaps gold’s stubborn significance further explains why the two biggest US gold price manipulators in the futures pits, JP Morgan and Citi, have been grotesquely expanding their gold derivative book (they own 90% of all US derivative bank gold) at the same time the BIS was unwinding their swaps?

Why?

Simple: To keep a boot to the neck of the natural gold price just a bit longer as they accumulate more of the same before the very currency system they helped ruin finally implodes?

Honest not Sensational: Gold’s Bull Market Has Yet to Even Begin

Given the dishonest times in which we live, and given all the mechanizations sited above, it would not be sensational to remind conventional investors what most gold investors already know: Gold is most honest and loyal when dishonest and disloyal markets implode.

Hedge fund managers and other candid analysts are collectively and already foreseeing massive market pain ahead, as Egon and I have been warning for years.

The big boys are now net-short US Equity futures:

Bond bets signal a weaker USD

Whether re-valued by oil, or simply re-valued by fiat currencies which have increasingly no value, gold can easily reach levels which current investors can’t imagine.

After Nixon’s debacle in 1971, gold surged 400% in just one year between 1973-74.

Watch the Foxes, not the Hen House

The TBTF banks have no morality in my mind. I’ve written of their open fraud for years.

Ever since folks like Larry Summers repealed Glass Steagall and turned banks into casinos and bankers into speculators (with depositor money), nothing the big banks do is either fair or fiduciary.

Ironically, however, it is fair to say that even these banks will be hoarding more physical gold (at currently repressed/rigged prices) as the world they created implodes under its own systemic sins.

And if JP Morgan or Citi is getting prepared, shouldn’t you?

After all, better a fox than a hen, no?


Source : Gold Switzerland