The US Dollar, once the reigning superpower of global currencies, is now on the brink of demise. Currently, the US dollar accounts for approximately 60% of the total value of world currencies, but this trend is rapidly changing.
The DE-DOLLARIZATION OF THE WORLD is underway as Brazil, Russia, India, China, and South Africa unite to establish their own global reserve currency.
This is a significant financial event that’s currently unfolding, and it’s essential to understand how it will impact us.
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To comprehend this, we first need to know what it means to be a world reserve currency.
The US dollar wasn’t always the world’s reserve currency; other currencies held this status in the past, such as France from 1720 to 1815 and Great Britain from 1815 to 1920.
The US dollar took over this status after the Bretton Woods agreement.
“We must protect the position of the American Dollar as a pillar of monetary stability around the world.” — President Richard Nixon
It’s been approximately a century since the US has held its world reserve currency status, and according to billionaire Ray Dalio, this changes roughly every 94 years.
Therefore, the US dollar’s expiration date has already passed, and this change is happening now.
So, why is this happening all of a sudden?
To answer this, we need to understand the significance of a world reserve currency and how it creates new superpowers.
The world reserve currency usually comes with three superpowers.
The first superpower is stability.
Countries do not trust each other’s currencies because they are unsure of the actual value of that currency. By using a world reserve currency, countries know that the currency they are trading in has a stable value and is backed by something of value.
This trust and stability facilitate global trade.
The second superpower of a world reserve currency is that the country holding it becomes an investing powerhouse.
As the world’s most stable currency, currently the US dollar, countries hold foreign exchange reserves in dollars. They invest the excess funds in US treasuries and securities.
This makes the US a significant recipient of foreign investments. Countries like Japan, China, and the UK hold trillions of dollars’ worth of US assets.
The third superpower of the US dollar is its ability to buy oil exclusively.
The Bretton Woods agreement, signed shortly after World War II, tied all currencies to the US dollar and the dollar became extremely powerful.
However, in 1971, the US ran out of money and President Richard Nixon announced that the US would no longer redeem one ounce of gold for 35 US dollars, as promised.
As the US ran out of gold in 1971, the dollar’s value became backed by nothing more than just debt.
Despite this, the rest of the world couldn’t simply switch back to their own currencies because of the dollar’s third superpower: The exclusive ability to buy oil.
In 1945, President Franklin Roosevelt arranged a secret meeting with the king of Saudi Arabia, promising protection in exchange for the exclusive right for the US to develop oil from Saudi Arabia.
This agreement created the Petro Dollar, which made it necessary for countries to hold US dollars if they wanted to buy oil.
This gave the US global dominance over the last century and sometimes used this power to cut off other countries from their life force: energy.
Now, as some countries are rebelling against this dominance, new alliances are being formed to challenge the supremacy of the US dollar.
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Now hold on a minute,
If you take a closer look at the value of the US dollar today, you’ll notice that it’s actually increasing, and is now close to its highest point over the past two decades.
So why are some people saying that the dollar is decreasing in value when its price is going up?
Well, there are a few reasons for that, aside from just the price.
One reason is that the total amount of US dollars held globally has been gradually decreasing.
Another reason is that the US has demonstrated to the world how powerful the dollar can be when used against a country, as demonstrated in Russia’s case, where its foreign exchange reserves were frozen and threatened to be used to help Ukraine.
As a result, countries are increasingly forming their own alliances and partnerships, with the help of Russia, which provides energy.
This has been happening behind the scenes for quite some time.
For example, in 2000, the UN allowed Iraq to sell oil in euros instead of dollars, and by 2007, Iran stopped selling oil in dollars altogether. In 2014, Russia and China signed a deal to bypass the US dollar, and Iran followed ditched the dollar through their $400 billion investment deal, joined by India and Japan.
The list goes on with other countries forming partnerships, such as Russia and Iran, Iran and India, and more.
Recently, China and Saudi Arabia have teamed up to create a competitor to the Petro Dollar, called the Petro Yuan. Alliances such as the BRICS nations, representing 31.5% of the world’s GDP, are growing stronger as more countries seek to join.
Even the Federal Reserve’s Jerome Powell has suggested that it’s possible to have multiple world reserve currencies. This is why some people believe that we may be witnessing the beginning of the end of the US dollar.
So the question is, should we be worried about the end of the US dollar, or is it just sensationalized news aimed at grabbing attention?
The truth lies somewhere in between. Before we start panicking about the end of the dollar, it’s important to note that this idea has been talked about for years.
Articles warning about the disappearing dollar date all the way back to 1975, with many more articles following in the years since.
While it’s true that the world has been trying to replace the dollar, not everyone agrees that it will happen. Some experts argue that if it does happen, it will take a very long time.
Furthermore, data shows that the dollar remains very stable. For example, this chart shows the share of transactions in dollars around the world versus other currencies over the past 35 years.
The dollar is still by far the dominant currency for global transactions, with the Chinese yuan growing at the expense of the euro and Japanese yen, but not the dollar.
So while there may be some truth to the rumors about the end of the dollar, we shouldn’t be too quick to panic.
This chart depicts how central banks have been reducing their holdings of the dollar, which suggests that the dollar is losing strength.
However, this reduction mostly occurred around the 2008 global financial crisis, a time of great uncertainty and instability when nobody knew what would happen to the world.
Despite this, the value of the dollar itself is actually rising due to the Federal Reserve’s increasing federal funds interest rate, which is attracting foreign investments to Treasury bonds.
This, in turn, is still strengthening the dollar, which is seen as a symbol of economic stability and power, and this is not expected to change in the foreseeable future.
Based on history, changing a world reserve currency occurs only through a significant conflict.
While it is uncertain if this time will be different, some people argue that the US would lose its ability to export dollars, which would result in more dollars staying in the US, leading to higher inflation as witnessed during the pandemic.
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Consequently, some people say that commodities such as gold would skyrocket, and we could return to the gold standard, although these are typically the people who have gold to sell.
Others argue that we would experience hyper Bitcoinization, but again, these are usually people who have Bitcoin to sell.
While some people believe that a transition away from the US dollar would be catastrophic and irreversible, this is likely an extreme opinion.
It’s important to remember that throughout history, the majority of currencies have risen and fallen, and the dollar is no exception.
While we are currently seeing some shifts away from the dollar, it’s important to recognize that the dollar is still the dominant currency in global commerce, and any major transition would likely happen over a long period of time, perhaps even spanning several decades.
So before you panic and consider drastic measures like moving to a new country, it’s important to keep these facts in mind and approach the situation with a level head.
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This post was previously published on medium.com.
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