Hard data that confidence in the dollar is cracking

by Simon Black, Sovereign Man:

It is becoming increasingly clear that the world is losing faith in the United States dollar… and rapidly turning to alternatives. And that’s a huge deal for the United States.

For nearly eight decades, the US economy and US government have enjoyed the unparalleled benefits of the dollar being the world’s reserve currency.

This means that nearly every government, central bank, commercial bank, and large corporation  in the world holds at least some US dollars. Foreign companies use the dollar to trade with one another. Foreign governments and corporations often issue bonds in US dollars.

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And most of the world’s major commodities, including oil, are priced and traded in US dollars.

The dollar’s dominance is so ridiculous that even when Airbus— a European aircraft manufacturer— sells jets to Air France, that transaction is settled in US dollars.

This has been an enormous benefit to the United States; every other country in the world that engages in international trade and commerce HAS to hold US dollars… which means that foreign institutions end up parking vast sums of money in the US financial system.

And that money creates additional capital that gets put to work to grow the US economy.

Think about that again: rather than invest their own money to grow their own economies, foreign governments and institutions are essentially forced to invest a big part of their savings for the exclusive benefit of the US economy… simply because they need access to the world’s reserve currency.

A lot of that money ends up in the hands of the US federal government; in fact, foreigners own roughly $7.5 trillion of US government bonds… which has been an absurdly good benefit for the Treasury Department.

Whenever the federal government has come up with some stupid, expensive idea… like paying people to stay home and NOT work… foreigners have always helped pay for it by buying more US government bonds— again, simply because they need to own US dollars.

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But as I wrote to subscribers as far back as August of 2015, the dollar’s reserve currency dominance “is by no means written in stone. The US dollar is not the first global reserve currency, and it won’t be the last.”

Throughout history there have been many reserve currencies, from the ancient Greek drachma to the gold solidus of the Byzantine empire, the Venetian gold ducat, the Spanish real de ocho, to the British pound. No reserve currency lasts forever.

History shows that a reserve currency is displaced whenever the rest of the world loses confidence; this typically happens when the government’s finances deteriorate severely.

Back in 2015 I warned that America’s finances were also deteriorating, which posed a risk to the dollar’s dominance: “The US government is insolvent. Its major institutions and pension funds are insolvent. The central bank is borderline insolvent.”

That assertion is even more true today. In fact I would remove the qualifier “borderline” when describing the central bank; the Federal Reserve is, according to its own calculations, totally insolvent.

And the rest of the world is really starting to take notice. The French in particular have been complaining for years about the US dollar, and just recently the French President has been urging Europeans to seek financial independence from the United States.

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