Crumbling privileges
Since the launch of the Marshall Plan, the U.S. dollar has been the world’s undisputed reserve currency. The main role of a reserve currency is to provide liquidity for the rest of the world. This is only possible if there is a permanent current account deficit. That deficit is a direct result of the overvaluation of the reserve currency versus most other currencies. That overvaluation causes the traditional commodity sector to become smaller and smaller over time. This means that the reserve currency economy must specialize in high technology, services, and more specific financial services. The role of the reserve currency is to recycle excess savings into debt, in this case, Treasuries, which can then be converted back into equities. This benefits the financial sector. This explains why the City of London became the financial heart of the world, and then post-Marshall Wall-street took over.
The structural overvaluation of the dollar allowed industrial companies outside the United States to benefit. The extra return became visible in the form of high savings, first in Japan, later in China. Trump has tried to eliminate that extra return, and thus the savings, through high trade tariffs. Those trade tariffs are equivalent to a devaluation of the U.S. currency for producers outside the United States. This partly explains the good performance of the U.S. stock market versus markets outside the U.S..long term returns on U.S. stocks and non-U.S. stocks are equal. So if the U.S. stock market has been doing well lately, it’s about time for an opposite move, only to be frustrated that in some ways Biden is more extreme than Trump.
There are trillions of dollars of debt outstanding with non-U.S. governments and corporations. Those parties assume they can always finance themselves in U.S. dollars. But U.S. authorities have turned the dollar into a weapon. Virtually every financial institution operates in the United States and thus must comply with U.S. regulations that apply worldwide. Countries like Iran, Sudan, and Venezuela have already experienced what it means when they no longer have access to international payments. Recently, Russia was added to the list; even the Russian central bank can no longer access its dollar reserves.
The monetary madness in the Eurozone and the United States makes it unattractive to hold dollars or euros. In addition to interest rates being too low, this policy is causing inflation to rise. Now that it appears that even central bankers can lose all their money in euros and dollars, the popularity of these two currencies is declining further. Nobody is going to hold reserves in a country where they can be quickly confiscated. A large part of world trade is in dollars, but gradually the dollar share is decreasing as a result. This movement has been accelerated by the Russian invasion.
Since the Great Financial Crisis, China has been trying to become less dependent on the United States and the U.S. dollar. One way it is doing this is by strengthening financial ties with countries in Asia. Just as the Marshall Plan had a leveling effect on European interest rates, interest rates in the large Asian trading bloc will also converge to those on the Chinese renminbi. The advent of the digital renminbi will accelerate this process.
