The US dollar: the final act

Kitco News
Frank Giustra Kitco News | James Alexander Michie

The unthinkable is becoming ever more likely. The end of US dollar dominance and the beginning of some new form of global monetary system will soon be upon us. It was bound to happen at some point.

The story of reserve currencies is long and stretches far back into ancient times. But as modern history shows, the average lifespan of reserve assets is just around 100 years. (Cases in point, the French Livre and the Dutch Guilder.) The end is always caused by over spending on wars, over consumption, excessive debt and easy credit. Sound familiar? I was asked about this in an interview last summer and my response was that, while it is inevitable, the decline of the US dollar was still many years away. Of course, that was before the COVID-19 pandemic and the US fiscal and monetary response to the crisis it created.

I doubt we will emerge from this calamity and its prolonged economic impact with the current system intact. Why? I’ll try to put it simply and focus only on the important, big picture dynamics.

Seemingly overnight, the novel coronavirus has brought the global economy to a standstill and the United States is experiencing unemployment levels not seen since the 1930’s. The difference between then and now is the sheer scale of the US government’s reaction to the pandemic. It’s unlike anything we have seen in our lifetimes. In effect, its approach has been to do whatever it takes to ensure the system does not implode. Translation: There is no limit to deficit spending and money printing. It is an understandable and predictable reaction. The problem is that we’ve entered this crisis devoid of the necessary tools needed to rescue the economy without destroying the US currency at the same time.

I started writing about this eventuality back in 2001, when the first signs of the kind of monetary and fiscal behaviour that would lead to ever increasing moral hazard became evident. I said then that rising deficits coupled with tax cuts and artificially low interest rates were setting the stage for a financial accident. We got that in spades with the 2008 financial crisis. Despite its devastation, we were spared a depression similar to the aftermath of the 1929 crash because the Fed printed a lot of new money to create a floor to underpin the economy. But there is eventually a price to pay for all that money printing and others, such as famed hedge fund manager Ray Dalio, voiced the same concerns. To soothe this uneasiness, the Fed assured the public that this was only a temporary policy and that as soon as the economy stabilized, they would normalize interest rates and take all of the extra money out of the system.

But they never did.

Last year I wrote two articles (Dancing on the Edge of the Precipice and Gold, The Unfortunate Final Refuge) warning my readers that we were in near-term danger of another financial accident, saying “So, what might trigger the next crisis? And why won’t we have the tools we had in 2008 to prevent a total collapse? The next crisis can start out of nowhere. It can be triggered by the failure of a financial institution, a made-at-home political crisis, or a serious geopolitical event. Anything that removes the cloak of confidence that the entire financial system is based on.”

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Source: Frank Giustra | Kitco News

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