SHOCK: U.S. Treasury Department Economist Calls for End to the Dollar’s Reserve Status
A strengthening U.S. dollar and deteriorating technicals led to more selling in precious metals last week, although the selling has abated this morning.
European Union economies are sliding back toward recession, and the European Central Bank is again applying the favored remedy of modern central bankers, i.e. lower interest rates and currency devaluation. As a result, the U.S. dollar is riding high – particularly because the Fed is slowing the pace of new monetary stimulus.
Crude oil prices, like the precious metals, are also suffering as the dollar strengthens. Meanwhile, an anti-dollar axis is rapidly developing between Russia, China, the other BRIC nations and mid-eastern oil producers, including Iran. Last week, Russia and China had formal talks about launching an alternative to the U.S. controlled SWIFT system for international payments.
But, if history is a guide, U.S. officials won’t tolerate strength in the dollar for long. A prominent economist on the inside at the U.S. Treasury Department hinted that government officials are growing frustrated with it. In fact, this government insider just argued publicly for ending the U.S. dollar’s reign as the world reserve currency! More on that below…
At least one official inside our own Treasury Department now has something in common with officials in Russia and China. He believes it is time to put an end to the dollar as the world’s reserve currency!
Kenneth Austin, an economist at the Treasury, broke decades of precedent and argued the burden of “reserve currency status” is one America can no longer afford to bear. And the article, initially published in an obscure journal (The Journal of Post Keynesian Economics), got some high-profile attention in a New York Times op-ed drafted by Jared Bernstein -- a senior fellow at the Center on Budget and Policy Priorities.
The argument is remarkable given it represents a complete about face from the decades of policy and rhetoric bureaucrats in DC spewed about the importance of the dollar’s privileged status. Austin blames the strong dollar for excess savings and investment abroad and excess consumption and lower manufacturing at home.
As usual with the Keynesian argument, you must accept the theory that price inflation through currency devaluation leads to prosperity. You must also believe that capital investment, the real foundation for building wealth, will occur even when savers are severely punished by negative real interest rates. If you can do that, Austin’s argument makes a ton of sense.
Perhaps the Treasury Department is simply recognizing the inevitable future and positioning itself.
Important world economies -- Russia and China in particular -- have grown weary of domineering U.S. foreign policy. And holding massive quantities of dollars backed by the "full faith and credit" of an increasingly insolvent United States looks less appealing by the day. Maybe the Treasury Department recognizes an inexorable trend and simply wants to posture as if the dollar’s dethroning is a deliberate policy!
Time will tell if anyone else at the Treasury or the Fed echoes Austin’s perspective in the coming weeks. We doubt such an unprecedented public call would be made without significant internal support. Given the emerging international trend to deal outside of the dollar, if Austin’s desire to dethrone king dollar becomes overt U.S. policy, investors should not expect the dollar to hold up long under the combined onslaught.
Short-term weakness in prices for tangible assets, including precious metals, should be looked at as a buying opportunity given that the macro outlook for the dollar continues to darken.