Global De-Dollarization Accelerates – What’s Next?
From Peter Reagan at Birch Gold Group
We’ve written before about how economic catastrophes often start gradually, then suddenly accelerate into utter chaos.
Now it’s time to apply that idea to a different topic: de-dollarization.
Mike Maloney surmises that the dollar will, at first, slowly be replaced by alternatives as the global reserve currency. Then, after alternatives build momentum (e.g. BRICS nation currencies), they could get adopted “suddenly.”
It’s an idea Maloney called “S-curve rejection”:
In his 1926 novel, The Sun Also Rises, writing on how one goes bankrupt, Ernest Hemingway famously wrote, “Gradually and then suddenly.”
This is the basis for Mike Maloney’s notion of ‘S-curve rejection’.
The S-curve is a widely used graph to depict the pace of various processes.
In terms of adoption, this would mean that the acceptance of something new starts very slowly, builds critical mass, then picks up speed suddenly until it has very high adoption and then begins to slow.
The S-curve is a widely accepted and used model to describe technological innovations. Its shape is derived from two inflection points – when “gradually” becomes “suddenly” (and vice versa).
Here’s what it looks like:
We’ve talked a lot about the global de-dollarization drive. Maloney’s concern is that we’re nearing the first inflection point.
This has to do with the network effect. Put simply, it works like this:
- An increased number of participants improves the value of a good or service
- Conversely, fewer participants lower the value of a good or service
The inflection points indicated above show what happens when a network gains (or loses) a critical mass of participants.
In other words, every nation that dumps the dollar lowers the residual value of the dollar network.
This is only one signal that could be reflective of other countries that are vying to have their currencies (individually or collectively) dethrone the dollar.
Let’s take a deeper look into this idea…
“Time’s up for King Dollar”
In a recent piece, Wolf Richter revealed even more official data that supports the idea of the accelerating de-dollarization:
The U.S. dollar as the dominant global reserve currency has been on a slow long-term downward trend, interrupted by upticks…
The share of the [dollar] as global reserve currency rose to 59.0% in the first quarter of 2023, after having dropped to 58.6% in Q4, which had been the dollar’s lowest share since 1994, according to the IMF’s recent COFER data.
Interestingly, Wolf made an analogy to the episode starting in 1978 when the “dollar’s share collapsed from 85% to 46% by 1991.” The U.S. leaving the gold standard, and the subsequent inflation explosion, caused a global lack of trust in the dollar.
That time, the dollar recovered. There were simply no other alternatives to the dollar for world trade.
This time, though?
Maloney explained that trust is a critical factor keeping the dollar’s status as global reserve currency afloat:
The credibility of the U.S. government, its institutions and even its military power combine to keep the dollar valuable in the local and global market.
However, this implies that the degree to which the dollar is accepted depends heavily on the quality of stewardship of the government, the relevance of its institutions and the inevitable changes in the wider socio-political-economic landscape that it exists within.
When it comes to trust, the recent weaponization of the dollar caused a lot of damage. Even more trust was lost when the FDIC chose not to reimburse foreign depositors who lost their deposits during the series of bank collapses earlier this year.
If trust is necessary for the dollar to retain its global value, then the dollar may be out of luck this time.
Jim Rickards thinks so. “Time’s up for king dollar,” he recently wrote – and tells us that the “suddenly” part is coming faster than anyone might care to admit.
In fact, he thinks it’s long overdue:
The bigger-picture reality is that after 79 years under the Bretton Woods arrangements, 52 years since Nixon closed the gold window and 49 years since the petrodollar agreement with Saudi Arabia, the reign of King Dollar as the world’s leading payment currency is rapidly coming to an end.
This should come as no surprise since global monetary arrangements usually change every 40 years or so.
Nonetheless, the world is unprepared for this geopolitical shock wave… The BRICS nations are a substantial and credible alternative to Western hegemony. Acting together, they represent one pole of a new multipolar or even bipolar world.
On that note, Jim Rickards observed that the world’s central banks are already preparing for a world where King Dollar has fallen from his throne:
Meanwhile, central banks bought a record 1,136 tonnes of gold last year. That’s the greatest amount since 1950. You have to ask yourself why.
I think the answer is obvious.
Global central banks know that the dollar’s reign is coming to an end. They don’t necessarily know what will replace it, though. So instead of loading up on euro or yuan or yen, they’re stockpiling the only truly international currency that has no counterparty risk and no political risk. Physical gold.
“Heads we win, tails you lose”
Just to be clear – diversifying with gold isn’t a bet on the dollar’s downfall. It’s smart to diversify with gold regardless of what the future holds. Even smarter when the economic outlook isn’t bright, when inflation is well above historic levels and international tensions are high…
According to the World Gold Council, that sounds a lot like right now:
It’s hardly surprising then that in a year scarred by geopolitical uncertainty and rampant inflation, central banks opted to continue adding gold to their coffers and at an accelerated pace.
That’s right: 2022 has already gone into the record books as the biggest central bank gold buying spree ever.
According to research dating from June, four of the top five reasons central banks buy gold may seem familiar to you:
- Performance during times of crisis
- Long-term store of value/inflation hedge
- No default risk
- Effective portfolio diversifier
That’s right – central banks buy gold for the same reasons everyone else does. That doesn’t really surprise me although admittedly it’s interesting to see the central banks themselves admit their motives.
So if you’re concerned about economic crisis, inflation, defaults or just want to diversify your savings, take a moment to learn more about physical precious metals.
The value of precious metals like gold and silver tend to serve as a hedge against inflation over long periods. There’s a reason both have been used as money for thousands of years.
You can get all the information you need about both gold and silver for free to make an informed decision right here.
2023, central banks, Featured, us dollar