Reserve Currency Privilege
What’s it doing for you? Will the U.S. dollar ever lose it?
The U.S. dollar has been the dominant reserve currency since the end of World War II, initially because of its gold-backing and the trust placed in the US government. However, in 1971 the U.S. abandoned the gold standard, ending the direct convertibility of the U.S. dollar into gold. They did this because gold was considered too "inelastic" for the spending preferences of politicians of the day. In other words, they wanted to outspend their available gold. So they switched to something they could print and spend at will. This marked the beginning of the era of fiat money.
The term “fiat” refers to currency that has value because a government or authority declares it does, rather than having intrinsic value based on a physical commodity like gold or silver.
Fiat money is essentially a representation of trust in the issuing government or authority. As long as people continue to have confidence in the stability and credibility of the issuing authority, fiat money can function effectively as a medium of exchange, a unit of account, and a store of value in an economy.
But what if that confidence begins to crumble?
It is important to recognize that a FIAT CURRENCY as a global reserve is a relatively new phenomenon, historically speaking. Precious metals had critical and central roles in currencies and finance for 8,000 years of recorded human history. The fully fiat dollar has only been around since 1971. There is no logical reason to believe the world's patience and trust in the US dollar will last indefinitely. In fact, we might be reaching a critical tipping point right now.
Weaponizing the Dollar
Sanctions against Russia got the globe’s attention. It wasn’t just limitations on trading certain items. Russia was kicked off the Society for Worldwide Interbank Financial Telecommunication network (SWIFT) which is the platform on which international banking is conducted. They also had their foreign exchange reserves frozen.
Weaponizing the dollar was not a great move for its reputation as trustworthy, reliable and apolitical[i]. The sanctions against Russia were a wake-up call to the rest of the world. The United States can and will use the power of the dollar as an enforcement mechanism in foreign policy. Having a competing, parallel system to defend against this is existential now, and BRICS are actively working on it according to some reports.
There is much talk of gold being involved in the backing of this new currency.[iv] Many are wising up to the folly of backing currencies only on the word of a government – any government. And why wouldn't these countries want the strength of gold behind this new monetary powerhouse they are exploring? They control a LOT of gold between them:
Russia 2300 tonnes
China 2100 tonnes
India 800 tonnes
Brazil 130 tonnes
South Africa 125 tonnes[v]
They also have a lot of gold still in the ground. Russia has an estimated 5,300 tonnes of unmined gold and South Africa has 3,200 tonnes.[vi] That's huge potential! If the price of gold rises enough to make it profitable to extract, it will be extracted. And if gold again takes its place in backing currency, he who owns the gold will call the tune, as they say.
Reserve Currency Privilege
We Americans benefit greatly from the dollar's status in ways we don't always appreciate. One of the great privileges of controlling and printing a global reserve currency is the ability to export one's inflation to the rest of the globe. If every country on the planet needs our currency to transact, there is insatiable demand for it. This means there is no pressing reason for us citizens to hold our politicians' feet to the fire on spending. They can spend as much as they like and the rest of the world absorbs most of the inflationary hit.
The observed pattern of history is that reserve currency owners eventually decrease their production of manufactured or agricultural goods and instead transition to allowing other countries to provide all that for them in exchange for the dollars they need. It works out pretty well for them, for a time.
And if other countries abandon the dollar, what will they use instead? Another currency of another government that has even worse fiscal discipline? The truth is there may be no other viable fiat alternatives in the currency world. But non-fiat alternatives are emerging and the world is turning (and returning) to them. Emerging technologies have shown different ways to transact, and gold is still gold. Gold has been used as money for thousands of years of human history and has the unmatched benefit of stable value. No one particular country mines or controls all the gold. Gold doesn’t care about your politics. Gold has no agenda. The efforts towards de-dollarization value these things highly. Gold is one very obvious answer.
What does that mean for you – if you're left holding the dollar bag? Inflation is likely to hit you hard, right in the grocery store aisles.