The Biggest Threat to Dollar Dominance Isn’t What You Think

Phillip Patrick: The Biggest Threat to Dollar Dominance Isn’t What You Think

From Phillip Patrick, for Birch Gold Group

Over the last year and a half, we’ve been watching the global dedollarization trend very closely. Peter Reagan has written about the BRICS nations’ R5 currency project, and we’ve seen Saudi Arabia dismantle the petrodollar pact. A growing number of nations are signing bilateral trade agreements for international trade in local currencies (effectively bypassing the dollar as an intermediate currency).

Now, there are many reasons for dedollarization, both political and economic. We’ve covered them before.

And it turns out the biggest danger to the dollar probably isn’t Russia or China or even the BRICS alliance…

What’s the biggest threat to dollar dominance?

Recently, two heavyweight economists weighed in on the dollar’s waning global reserve status. Steven Kamin, a former director of the Fed’s Division of International Finance, and Mark Sobel, a former Treasury Department economist, collaborated on a report that clearly identifies the threat.

Kamin and Sobel acknowledge the global dedollarization efforts I outlined above.

They do not think the BRICS nations or bilateral trade agreements are the biggest threat.

Rather, the biggest threat to dollar dominance is the U.S. itself. Well, specifically, the federal government. Turns out you can’t run up $6 trillion in debt in three years without consequences…

Kamin and Sobel warned any “severe deterioration” in the U.S. financial and economic situation could be enough to destroy the dollar as a viable global currency. And that severe deterioration is extremely likely, thanks to the massive government debt.

This isn’t a problem likely to be solved soon:

Given the political polarization of the country, the dysfunction of the U.S. Congress, and the disinterest of politicians of all stripes in curbing the widening U.S. budget deficit, [crisis] is hardly unthinkable.

And when an economic crisis strikes, what does the federal government do? What does the Federal Reserve do?

We all know the playbook: They ramp up spending, lower interest rates and flood the economy with dollars.

The result?

…a sustained rise in inflation, crowding out of private investment, heightened financial volatility, and reduction in the dynamism of the U.S. economy, then the loss of dollar dominance would be the least of our worries. And those of the rest of the world.

The only good news Kamin and Sobel offer is that, when the crisis strikes, the situation in the U.S. will be so awful that we won’t even care about the dollar’s decline. That’s cold comfort, indeed…

The last time debt toppled a global reserve currency

Not long ago, Professor Barry Eichengreen (UC Berkeley and International Monetary Fund) rang alarm bells over the federal government’s debt. Now, this is notable because Eichengreen is far from fiscal conservatism! For example, his most well-known book is In Defense of Public Debt

Regardless of his politics, Eichengreen wants Congress to understand that the last global reserve currency, the British pound sterling, collapsed due to excessive debt.

He tells us:

…whether the dollar retains its global role will depend not simply on U.S. relations with Russia, China, or the BRICS. Rather, it will hinge on whether the U.S. brings its soaring debts under control…

Since Eichengreen wrote that article, U.S. debt has increased by $2.4 trillion dollars. And, for the first time ever, in 2023 the federal government paid nearly $1 trillion in debt service payments. (Mostly on debt that was issued during the near-zero-interest-rate period.)

So what’s the plan to pay it back? Well, since the Biden administration wants to spend $1.6 trillion more than the government collects this year, there is no plan to pay it back. 

Even worse, there are some $6 trillion in IOUs coming due this year – again, at or near 0%. Instead of paying them off, the Treasury Department plans to refinance, borrowing at today’s 4% rates instead…

To be fair, the 2024 Biden budget claims that wealthy corporations and individuals aren’t paying enough in taxes – so they’re going to increase taxes. By their own numbers, though, that only brings in about $120 billion (7% of the total 2024 budget deficit).

The other 93% will be borrowed.

The government is the biggest threat to the U.S. dollar (and your financial future)

History shows us that government debt is a far greater threat to the dollar than the BRICS alliance or global dedollarization.

Our political leaders don’t seem to understand this. They act like spending other people’s money is free! As if lenders around the world will never want their money back!

Every dollar of deficit spending destroys the dollar’s purchasing power just a little bit more. It’s no wonder so many nations are desperate for a dollar replacement.

That’s why the last two years have been the biggest in history for central bank gold buying. 2022 set the record, and 2023 virtually a tie. Why are central banks loading up on gold?

They don’t know what will replace the dollar – but they DO know that the dollar’s days are numbered. So it makes sense to diversify with the one asset that’s been a safe haven store of value throughout human history – physical gold.

We may be stuck with dollars in our daily lives, for buying gas and groceries and paying our taxes. But that doesn’t mean our financial futures should depend on the dollar’s future. I believe it’s smart to take a page from the central banker playbook and diversify your savings with physical precious metals right now – because when the dollar does collapse, gold and silver prices are likely to skyrocket.

2024, brics, Featured, global reserve currency, phillip patrick, us dollar