Is the dollar in trouble?
People are starting to talk about a growing trend of "de-dollarization." But what does that mean? And why does it matter?
In this episode of the Money Metals' Midweek memo, host Mike Maharrey talks about de-dollarization, why it's happening, and the potential ramifications. He explains how the weaponization of the dollar has hastened de-dollarization and why even a small decline in the dollar's global reserve status could be disastrous. He also discusses how the de-dollarization trend could drive gold much higher than most people realize.
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Mike opens the show talking about the time Voice of America fact-checked an interview he did with RT back in 2019.
"So, what was I talking about? The weaponization of the dollar. I explained how the US used the greenback as a foreign policy tool and that if the West wanted to, it could use the SWIFT payment system as a hammer."
Mike characterized the fact-check as "pretty lame."
"The headline was, 'RT Falsely Claims U.S. Uses SWIFT as Weapon.' It said I was 'misleading' because SWIFT 'is not an American organization.' Sidenote, I never said it was. Regardless, we all know that as the world superpower, the U.S. gets its way. We can get pedantic about who owns what, but the fact remains that SWIFT is a tool of the West – led by the U.S. And most importantly, I was right. For all of VoA’s efforts to convince us that SWIFT would never be used as a foreign policy billy club, that’s exactly what happened when Russia invaded Ukraine. The West locked Russia out of SWIFT, along with its other sanctions."
Mike emphasizes that he's not debating foreign policy.
"It is reasonable to argue that Russia deserves to be sanctioned, and it was the right move. But it’s also important to recognize the potential blowback of any policy – and there was certainly blowback to the way the U.S. and the West handled sanctions. It hastened de-dollarization."
What is de-dollarization?
"It's exactly what it sounds like. It’s the process of reducing exposure and dependence on the U.S. dollar. I know it kind of sounds like some kind of conspiracy theory, but it is happening. And it sped up after the aggressive economic moves the West made against Russia."
Mike points out that the reaction is perfectly reasonable.
"If you’re worried that the U.S. and its allies might cut off your access to dollars, what would you do? Minimize your dependence on dollars. In other words, if you are concerned that the U.S. could pull the "dollar rug" out from under you, why not pull out from the dollar system first?"
Mike points out this is almost certainly the reason so many central banks are buying gold.
Some people believe a complete collapse of the dollar might be imminent. Mike sees a less extreme scenario with the dollar gradually losing its dominance slowly over time.
"Here’s the thing. It doesn’t really matter if it happens slowly or all at once. An end to the dollar’s status as the world’s reserve currency would mean disaster for the U.S. economy. The United States depends on global demand for dollars to facilitate its borrowing and spending. The greenback’s status helps support America’s economic and military dominance. As I said, a complete collapse of dollar dominance seems unlikely. However, an equally problematic scenario remains within the realm of possibility—the evolution to a 'multipolar world' where the dollar plays a much less dominant role."
In a multipolar world, the dollar would no longer be the sole reserve currency. Several currencies, along with gold, would have an important role in the global economy.
"We’re already seeing this trend develop. I mentioned central bank gold buying. Central banks globally have added over 1,000 tonnes of gold to their reserves each of the last three years. To put that into perspective, central bank gold reserves increased by an average of just 473 tonnes annually between 2010 and 2021. Meanwhile, the percentage of dollars held by central banks has dipped by 14 percent since 2002."
Mike points out a recent specific example. The central bank in Kazakhstan plans to sell dollars to support its domestic gold-buying program.
He also explains how the rise of BRICS could hasten the evolution into a multipolar global financial system. As economist Peter C. Earle noted in a recent article published by The Daily Economy, “Member nations have increasingly expressed interest in reducing reliance on the U.S. dollar, exploring alternative payment systems, and strengthening trade relations within the bloc.”
Mike argues that BRICS isn’t likely to “bring down the dollar,” but a new financial order could erode its status. That would have significant ramifications for the U.S. economy and your wallet.
"So what?
"Well, as I’ve already mentioned, even a small decline in dollar-dominance could be significant. The global financial system runs on dollars, right? That means the world needs lots of them. The US depends on this global demand to underpin its bloated government. The only reason the U.S. can borrow, spend, and run massive budget deficits to the extent that it does is the dollar’s role as the world reserve currency. It creates a built-in global demand for dollars and dollar-denominated assets. This absorbs the Federal Reserve’s money creation and helps maintain dollar strength despite the Federal Reserve’s inflationary policies. If it weren’t for this global dollar demand, price inflation here in the US would be off the charts – probably in the realm of hyperinflation.
"So, what happens if that demand drops? What happens if BRICS nations and other countries don't need as many dollars?
"A de-dollarization of the world economy would cause a dollar glut. The value of the U.S. currency would further depreciate. At the extreme, global de-dollarization could spark a currency crisis. You and I would feel the impact through more price inflation eating away at the purchasing power of the dollar. In the worst-case scenario, it could lead to hyperinflation."
Mike also notes that this process could drive the price of gold much higher than many people realize. After all, the dollar price of gold will rise as the dollar devalues.
Mike then asks a key question: don't you want real money?
That leads to a call to action.
Call 800-800-1865 and talk to a Money Metals' precious metals specialist today!
About the Author
Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
