Are all dollars created equal?
The U.S. Dollar Index (DXY), which tracks the value of the dollar relative to a trade-weighted basket of other currencies, reached a fresh 20-year high in 2022 before retreating sharply this year. However, the long-term viability of the dollar may be in question in international financial markets.
According to the International Monetary Fund’s (IMF) Currency Composition of Official Foreign Exchange Reserves (COFER) data, dollar growth has been subdued while other currencies, from the Chinese yuan to Canadian loonies, have seen their representation on the rise.
With more nations on a de-dollarization crusade, the global dollar hegemony could be fading. Russia is now touting an alternative ruble-based payment system called the System for Transfer of Financial Messages (SPFS). China is officially buying Saudi Arabia’s crude oil in yuan. India has established a rupee-ruble trade agreement with Moscow. Suffice it to say, a lot is changing in international currency markets. But if the buck’s power diminishes, what about all of the other components within the U.S. economy?
For most people, we only know about the greenback, the international reserve currency, but there are so many other dollar-delated elements throughout the world’s largest economy. So, what are they?
- U.S. Dollar: The official currency of the United States.
- Gold Dollars: A one-dollar piece that is composed of 90 percent gold and ten percent copper, issued by the U.S. Bureau of the Mint from 1849 to 1889. The gold dollar is worth about $250.
- Silver Dollars: A silver dollar is another coin that is mostly composed of silver with a value of at least $25.
- Eurodollars: Deposits that are denominated in dollars and held at foreign financial institutions or American banks’ overseas branches.
- Commercial Bank Notes: While banks cannot issue their own currencies, they can issue demand liabilities (fixed deposits and cash certificates, for example).
- U.S. Dollar Liabilities: Cash is considered a liability because a commercial institution can return money to the central bank, while the central bank would give back the loans (government bonds).
- Treasurys: A fixed-interest debt security issued by the United States government, with a maturity date of more than ten years and completes regular interest payments.
- Digital Dollars: A virtual representation of the U.S. dollar, allowing consumers to execute transactions using digital tokens on their mobile devices or cards instead of physical cash.
This was the typical historical perspective when the dollar was mentioned, but since the Covid-19 pandemic, the issuance of debt and the weaponization of fiat currencies to support that debt have altered the trajectory of the monetary order. The new era of emergency stimulus and accommodating policies has brought the global status quo closer to an end and increased the global demand for a new world order. Unfortunately, the push for multipolarity has put tremendous pressure on the dollar as more countries question whether it is the best currency for conducting international trade.
Here are a few reasons why more countries are paying attention to what Washington, D.C., has to say now that the dollar standard has shifted.
Despite eviscerating 99 percent of its purchasing power since the inception of the Federal Reserve System, the ubiquitous nature of the dollar in the global economy is nothing short of exceptional. Today, central banks worldwide possess more than $7 trillion in dollars in their reserves. In energy markets, the dollar accounts for more than three-quarters of all transactions. Even the commodities market is priced in dollars.
Some economists believe that the dollar’s prevalence will remain intact, despite the panoply of states transitioning away from the currency. Indeed, the DXY has experienced a significant retreat from a 20-year high, suggesting immense dollar pressures. The Quantitative Tightening process has caused a global shortage of dollars, but the U.S. Treasures are not in high demand as countries started reorganizing their capital reserve portfolios. Therefore, it can be difficult to fathom the possibility of foreign markets, businesses, and consumers abandoning the currency completely.
But after printing close to $9 trillion in about three years, can the dollar survive unprecedented inflation?
Gold and Silver Dollars
Gold is trading at around $2,000, and silver is hovering above $25. Both precious metals have recently experienced a revigorating surge in demand amid a rising-rate environment, which lifts the opportunity cost of holding non-yielding bullion. Global Central Banks and private institutions are now optimistic about metal commodities, both as a hedge against inflation and as an industrial metal.
When the country maintained a system whereby money was backed by real money, gold and silver dollars were found throughout the marketplace. For the most part, they cannot be used as currency, but they can still be added to investment portfolios as a mechanism to shield your wealth from devaluation.
Over the last year, eurodollars have made headlines first because of Russia’s debt obligations at the start of the war and most recently as a result of the banking contagion. Moscow attempted to make eurodollar payments at first, but the international community made it nearly impossible. As a result of the economic sanctions imposed on Russia revealing the global interconnectedness of the debt markets, the global debt crisis combined with rising interest rates has spread to the European banking system, which is now under extreme pressure.
But the history of the eurodollar dates back to the Second World War when the United States facilitated the economic recovery through the Marshall Plan and shipped money overseas that was then injected into the regional’s banking system. The efforts then ignited a demand for an interest-rate pricing system, manufacturing the London Interbank Offered Rate (LIBOR) in the 1970s. This produces a daily Libor interest rate quote offered by a plethora of financial institutions.
Put simply, eurodollars are comparable to any other deposit completed in the local currency, except restrictions and regulations are minimal compared to other currencies, which is appealing to investors.
Commercial Bank Notes
Commercial banks can issue demand notes to clients who have been long-standing customers and maintain stellar credit profiles. These notes are informal loans given to clients without fixed terms or repayment schedules. However, financial institutions can call in these notes at any time without extended notice to the borrowers. This can be dangerous since customers might not possess the capital to cover their obligations.
When institutions take on excessive leverage during periods of low interest rates, the ensuing boom cycle can be irresistible. Yet when the opposite occurs and there is a lack of readily available capital, as was the case when regulators responded to the failures of Silicon Valley Bank and Signature Bank by guaranteeing their depositors, losses can accumulate.
These losses prompted the recent emergency meeting between the Federal Reserve, the U.S. Treasury, and the FDIC to stabilize the financial system. This financing is available through a new program, called the Bank Term Funding Program (BTFP), that will offer loans up to one year long to banks as well as savings associations, credit unions, and other eligible depository institutions that are “pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.”
You may have read in the mainstream media about the increasing demand for short-term U.S. debt. Due to the unpredictability of the financial markets and the low yield on savings deposits in commercial banks, investors are rushing to lend to the government in order to earn a higher APY. The sudden and dramatic increase in the Fed Funds Rate has made short-term debt more attractive to institutions and smaller investors alike, as earning close to four percent yielding to the government is preferable to incurring a loss by simply letting cash sit idle.
Since the Federal Reserve began raising interest rates and talking about reducing its balance sheet, which has nearly reached $9 trillion, the short end of the US bond market has triggered the infamous pre-recession alarm bells of the inverted yield curve. At this point, all mainstream economists have warned of an impending recession this year, and the Federal Reserve has now officially confirmed it.
This is providing a new lease on life for a lifeless corpse after slashing rates to nearly zero. But the chief problem is that there are nearly $8 trillion in debt securities in the global $119 trillion bond market. Should more countries, especially China, dump their holdings, it could collapse the dollar because the selloff would ignite a tidal wave of hyperinflationary pressures.
Will this happen? Only if the BRICS wants to cripple the U.S. – and their own country. My guess is that they are too savvy for that, but if they are thinking about reestablishing a new pricing mechanism or alternative standard to revalue global commodities in something other than the USD, they may have a trick up their sleeve that could limit their losses.
In March of 2022, a US lawmaker proposed a large-scale test of digital currency backed by the government. Rep. Stephen Lynch (D-MA) introduced the Electronic Currency and Secure Hardware (ECASH) Act, which would direct the Secretary of the Treasury to publicly test a “electronic version” of the US dollar. Despite the bill’s low likelihood of passage, it demonstrates governments’ growing interest in developing alternatives to cryptocurrencies., a virtual representation of the greenback. The money would be accessed through a government-backed mobile app.
Washington is concerned that it is falling behind the rest of the world as more nations adopt digital versions of their currencies, such as China and the e-yuan. While this is the predominant rationale for the push to rebrand the national currency, it is not the only one. The truth is that commercial banks create the current version of digital dollars after creating debt (loans). Without liability on one side of the ledger, there would be no asset on the other.
It is part of the Globalists’ strategy to reduce the size of the banking sector and concentrate most of the nation’s deposits with the institutions that might work exclusively with the regulators to issue the new version of digital currency, as evidenced by the recent banking contagion that sparked bank runs from the smaller regional banks into the coffers of the globally systemically important banks.
However, this is rebranding of the currency is extremely dangerous for a few reasons:
- Greater surveillance and monitoring of consumer affairs.
- The government could tap into its authoritarian tendencies and restrict Americans’ access to their money.
- Officials could expand the money supply and flood the economy with more dollars.
If China is leading the world in this development, you better watch out and hold onto your cash!
The Shift Away From I.O.U. Certificates
So, if you quickly look at all the different things that are labeled “dollars,” are they all the same? No. There are many tentacles on the Leviathan. The U.S. dollar is at the center of this thing, but all of its arms reach out to other parts of the global financial markets. This is what made the dollar the most important currency, giving it a stranglehold on the world economy and keeping hundreds of millions of people as hostages. It is only about the dollar.
Due to the realization that not all assets labeled dollars are being used in the same way, a new era of uncertainty has begun. For the past 50 years, the U.S. government and the Federal Reserve have relied heavily on financing deficits while the rest of the world has collected i.o.u certificates. To reassert a more reliable means of conducting international trade beyond a single currency that has been used to benefit one country at the expense of the other 194 countries on the planet is at the heart of the recent monetary shift and the noise surrounding de-dollarization.
While the U.S. debt market remains the most liquid and important to global trade, it is clear that attitudes are changing and that development is underway. While the current transformation is still in its infancy, it is only a matter of time before new possibilities emerge. I have a suspicion that the nations that have generated the most value in terms of goods and services will naturally want to be compensated in something of real value rather than just i.o.u certificates within the next few months or years.
So, ask yourself: Which nations are the world’s primary sources of energy, food, commodities, etc.? Whatever countries come to mind have more than $32,000,000,000,000 reasons to rethink the dollar and demand alternatives.
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