The US - killing the goose, laying a golden egg?
It's not that de-dollarization isn't a thing - the interesting question is who is saying what about it and why.
Sadly, we live in an age of the conspiracy theory, or at least belief in the conspiracy theory. It used to be the Bilderberg meetings, now it’s the World Economic Forum. Shadowy organisations whose purpose is to push some self-interested or perverse agenda at the people’s expense.
For some reason, many in the US seem particularly keen on these sort of theories. While the Kennedy assassination might appear to be the catalyst event for this type of thinking, it was really the subsequent cynicism, misinformation and mismanagement of the Vietnam war by the US government that seems to have sown seeds of doubt in the minds of its citizens about America being unquestionably a force for good in the world.
One can go back further. In the early 1770s, as the American colonies began their rapid repositioning towards independence from Britain, politics on the far side of the pond were beset by the idea of ‘secret influence’, particularly that of Lord North, George III’s prime minister, and the malign effect he had on British policy in the Americas.
Common sense though suggests that if those who govern us weren’t so poor at their day jobs, then perhaps their having a secret grand plan to bend the world to their nefarious ends could be taken more seriously. Reality suggests that running things is hard. Added to this, governance today is characterised for the most part by incompetence, short-termism and a narrowness of view. This analysis doesn’t rely on secret cabals or higher purposes.
The issue of the de-dollarization of the global economy is ripe for conspiracy, pitting the US rules-based system against Chinese and Russian autocracy, East versus West, or, if you prefer, the global North against the global South.
In an article in the Financial Times1 (FT Link), economic historian Adam Tooze highlights an emerging contradiction between America’s stated goal of defending the rules-based system and how this role is carried out. Mr Tooze describes recent US policy as a “series of unruly self-interested interventions”. His focus is on diplomacy and sanctions, and particularly the continuity between President Trump’s tariff war on China and President Biden’s subsequent actions which follow very similar lines. The dollar and its international role are notable absentees from the article - one doesn’t talk about currencies and geopolitical power in polite company.
There are those who think, with some degree of justification, that the US uses the dollar, the world’s reserve currency, as a policy tool to effect its diplomatic aims. The freezing of Russia’s international reserves following its invasion of Ukraine in 2022 lies at the heart of this thinking.
On a more conspiratorial note, there are some who think that the US Federal Reserve is keeping interest rates in the US high in order to prop up the dollar and to provide some incentive to invest in the US Treasury market, both of which are aimed at maintaining US hegemony abroad. These interests apparently override the Fed’s stated dual mandate of price stability and maximum employment.
How does one work out what is really going on? In empiricism, one relies on the observation of fact. In markets, prices are the fact of choice. The graph above shows the correlation breakdown between US 10yr Treasury real yields (nominal yields less inflation) in black (inverted), and the price of gold, appropriately in yellow. Gold yields nothing and generally performs badly when real yields rise. This trend clearly broke in 2022 - at around the time when Russia’s assets were frozen.
There are prices, then there are the flows behind them. The graph below from the World Gold Council (WGC), highlighting central bank gold purchases, shows a clear uptick in 2022 and 2023. These flows have continued into 2024.
Why gold? The answer is simple - if you keep it in your own vault, no one can confiscate it. If one adheres to the weaponised dollar theory, then it’s clear that America throwing its weight around by freezing Russian assets and suspending the country from the SWIFT payment system is the explanation.
Yet central banks around the world have been quietly buying gold since 2010, as the WGC graph clearly shows. The dollar-as-weapon theory doesn’t seem to provide all the answers here.
Unfortunately for conspiracists, there is a far more prosaic narrative behind this. Debt grows over time because interest payments make the stock of debt rise. When you get to a debt crisis, you either default or write the debt off, or print money and cut rates to reflate the debt bubble. The world chose the latter in 2008, if ‘chose’ is really the right word to use here.
The US has a precedent of favouring its own economic wellbeing in times of crisis. The devaluation of the dollar versus gold in 1933 and in 1971 are the key examples here. With the massive US bank bailouts in 2008-9 and subsequent easy-money policies from the Fed, is it surprising that central banks around the world, probably more attuned to economic history than most, sought to sure-up their own reserves with gold rather than dollars? This behaviour seems to jive with the critique of the America first policy discussed in Mr Tooze’s article mentioned above.
The problem for conspiracists and those who seek to tie themselves to a single explanation (or a single solution) to an economic problem is that most of the time, several things are going on at once, where cause and effect are not always easy to discern, especially if one limits the time horizon of one’s investigation.
The US is clearly nearing a fiscal crisis, with the national debt rising by $1 trillion every 100 days at present2. It’s running a near double-digit budget deficit even with full employment, and a high Fed Funds rate is exacerbating this. The Fed itself is trapped by its inflation fight even as the government’s fiscal position deteriorates and political gridlock in Washington belies the absence of a desire for a more balanced budget.
In this context, jawboning by US Treasury Secretary Janet Yellen to use frozen Russian assets to fund the Ukrainian war effort can clearly be construed as unsettling, undermining as it does the neutrality of the dollar and US Treasuries as reserve assets3. Even before the G7 has had a chance to agree on this massive and legally-questionable step, the US Justice Department has transferred $500k of forfeited Russian funds to Estonia with the express purpose of helping Ukraine4. This ball sadly seems to be rolling already.
In the midst of new highs in the US stock market, a bitcoin and crypto rally, and the apparent non-arrival of recession in the US, it’s hard to judge whether gold hitting new highs against the dollar, as it has done in the last week, is a response to US domestic economic woes, the weaponization of the dollar, the wider de-dollarisation process, part of a wider asset-price rally, or all of the above. Those hoping for a return to the gold standard or a gold standard may be left waiting for some time yet.
In one of those brilliant ‘perhaps he said it’ quotations, UK Prime Minister Harold Macmillan was supposed to have responded to a question about the greatest challenge for a statesman by saying, ‘events, dear boy, events’.
In a highly-interconnected, highly-leveraged and financialized global economy, struggling with geopolitical tension and rebalancing, the limits of empiricism start to reveal themselves. Prices are the facts of economics, but what they ultimately mean often only becomes clear with time. Lots of events, lots of theories about their significance - some of which are conspiratorial - and a lot of confusion in the meantime.
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Adam Tooze, America’s economic security doctrine has taken on a darker hue, Financial Times, 05/03/2024.
Michelle Fox, The U.S. national debt is rising by $1 trillion about every 100 days, CNBC, 01/03/2024
Andrea Shalal, Yellen: Moves to unlock value frozen Russian assets ‘necessary and urgent’, Reuters, 27/02/2024
Justice Department Transfers Approximately $500,000 in Forfeited Russian Funds to Estonia for Benefit of Ukraine, Justice Department press release, 17/02/2024