US dollar collapse predictions: the dollar is about to disappear (2023)

US Dollar Collapse Predictions:Here are many reasons why the dollar is running out


Predicting the Collapse of the US Dollar: Bretton Woods and the History of the Petrodollar System

Today, most of the world's trade is conducted in USD (United States Dollars). This is the "de facto" global reserve currency for trade between most nations. At the end of World War II (World War II), the "Bretton Woods" system was formed by a group of 44 nations at a conference in Bretton Woods, New Hampshire (USA). This monetary system established the rules for trade and financial relationships between participating nations, including the United States, European nations, Australia, and many others. Member countries would peg their currencies to theAmerican dollar, and the US would peg the US dollar toor, priced at $35 an ounce.

Vietnam War and the Golden Pen:The dollar's central role in world trade ended up forcing the US into a sustained trade deficit. In the early 1960s, the solid value of the US dollar against gold ($35 an ounce) was considered overvalued. Unnecessary spending due to the Vietnam War and welfare programs in the 1960s meant that the dollar was seen as overvalued against gold. Reserves Some countries tried to withdraw gold that they had sent to the United States for safekeeping. After depleting its gold reserves, then-President Nixon declared a temporary suspension of the dollar's convertibility into gold in August 1971, overturning the original Bretton Woods system. In 1973, the Bretton Woods system was replaced by floating fiat currencies. Subsequently, the dollar lost 20% of its value (it was devalued against gold)

The 1973 Oil Crisis:Unconditional support by the United States for Israel during the Yom Kippur War in 1973 angered the Arab states of the Middle East. These OPEC oil producing states have imposed an oil embargo on the United States. As a result, the price of oil quadrupled, with serious economic repercussions for the US and other oil-importing nations. This contributed to the stagflation of the 1970s, leading to increased economic misery in the United States. In July 1974, to improve his relations with the Saudis and lower oil prices, President Nixon sent his Treasury Secretary, William Simon, to asecret missionnegotiate a deal with the Saudis. According to the agreement,

  • The US would buy oil from Saudi Arabia and provide the Kingdom with military/hardware aid
  • In return, the Saudis would use their oil wealth (which had increased sharply, largely due to rising prices) to buy US Treasuries (i.e. US debt).

This mechanism (oil prices in US dollars) was soon adopted by other OPEC countries.

This reconfirmed the hegemony of the US dollar as a mechanism for global trade [p. B. Sterling Oil Purchasesdropped from 20% to 6%in just a few years after this event]. What this meant was the "petrodollar" system, in which the price of oil was quoted exclusively in US dollars and oil-producing nations in turn invested their oil revenues in the United States.

Buying US Treasuries with oil yields helped keep the US dollar strong and US debt cheap. Because of these foreign purchases of US debt, the US government was able to keep the cost of borrowing low and was not forced to take on even greater debt, which it used to finance wars, welfare programs, and so on. during the coming decades. For OPEC, it allowed them to put excess money into US Treasuries, considered one of the safest investment products given the long-term stability of the dollar system and the US government's ability to pay (i.e. , the implied collusion to default on its debt obligations).

DXY Diagrampor TradingView

US dollar collapse predictions: Russian sanctions and their impact

The Russian invasion of Ukraine in February 2022 resulted in the removal of Western nations (including the US) from the SWIFT banking system (a messaging system used for ever faster cross-border transactions/payments between trading partners).

Severalbanksand financial institutions have ceased operations in Russia and also refuse to do business with companies in Russia. However, in an unprecedented move, the US has led a movement to freeze the Central Bank of Russia's monetary assets. About half of Russia's foreign exchange reserves, worth $600 billion, have reportedly already been frozen. Traditionally, under the petrodollar system, many central banks also parked their foreign currency and gold reserves with the US and other Western nations for safekeeping. Many preferred to keep their foreign assets in the West, to avoid them falling into the wrong hands through local corruption or unrest, and also to keep them in safer American treasuries, less vulnerable to the vagaries of local currency volatility.

US Dollar Collapse Prediction 2022: Dollar Index Performance

While there is limited causality, in 5 presidential terms for both Republicans and Democrats, the dollar index has fallen to its lowest level in 7 terms.

  • Reagan (R, 1 term)
  • Bush Senior (R, 1 term)
  • Clinton (D, 1 term)
  • Bush Jr. (R, 2 terms)
  • Obama (D, 1 term)
  • Trump (R, 1 thermo)

The index was below

  • Clinton (D, 1 term)
  • Obama (D, 1 term)
  • Biden (D, 1 term)

Here are the data by year.

  • January 1, 1986– 122,2
  • January 1, 1993– 93,0 [Reagan + Bush, -29,2]
  • January 1, 2001– 110,4 [Clinton, +17,4]
  • January 1, 2009– 84,6 [Busch, -25,8]
  • January 1, 2017– 100,9 [Obama, +16,3]
  • January 1, 2021– 90.6 [trump, -10.3]
  • December 1, 2022– 103,6 [Biden, +13,0]

US dollar collapse predictions: the dollar is about to disappear (1)

US Dollar Collapse Predictions: The Morality of Freezing Central Bank Reserves

Now, within a year, both theAfghanand Russia's foreign exchange reserves were frozen with the proverbial "click of a button".

Part of $7 billion in Afghan reserves is already theresharebetween 9/11 families and humanitarian aid. So, in the case of Afghanistan, even if relations with the ruling Taliban elite are normalized or are overthrown by a friendly democratic regime, some of the money will never come back because it is already being donated.

Something similar, where the Russian central bank's frozen reserves are turned over to Ukrainians, would not be far-fetched at this point. Aside from the moral question of whether the money helps the Russians and the Taliban, this opened up a Pandora's box about whether money in the US Treasury, and specifically dollars parked abroad, is safe. Even the venerable Wall Street Journal in its recent op-edmeantwith the holder"If Russia's foreign exchange reserves are not really money, the world will be in shock."

The unwritten principle of recent decades that central bank reserves are sacrosanct was overturned in one fell swoop. Any country that threatens or breaks the alliance between the West and the US could find itself on the wrong side of sanctions, including exclusion from the dollar-based global monetary order. Nations that have gradually gained their foreign exchange reserves from years of trade surpluses will be wary of leaving their wealth at the mercy of other powers.

The Russian Ruble has now stabilized somewhat after a sharp devaluation against the US Dollar, but is still ~40+% lower than before the Ukraine invasion. With Russia out of the Western banking system, it will be difficult to obtain dollars for transactions with the rest of the world. Central Bank of Russia to stabilize its national currency (ruble)deficientCitizens exchange rubles for dollars. Russia had already gradually increased its yuan/ruble trade with China (i.e. moved away from the dollar) before 2022.

Russia exports around $1 billion worth of natural gas to the rest of Europe every day. Now ask the EuropeansgasimportPay in rubles instead of dollars. This is forcing European nations to now convert their dollars and euros into rubles to settle their energy payments to Russia. This creates greater demand for rubles, which helps to stabilize their currency against the dollar/euro.

India has also used theserupee-rublepar to avoid CAATSA sanctions and now that Russia is out of the financial system, this trade is likely to increase given India's dependence on Russian military equipment/parts. As more nations begin to move away from the dollar system to avoid risking a position like Russia, the dollar's long-term dominance will be weakened. OPEC countries such as Saudi Arabia have tried to explore deals to sell oil to China.Yuan(against dollars).

US dollar collapse predictions: foreigners sold US Treasuries

Over the past 7 years, foreigners have been net sellers of US Treasuries (compared to net buyers prior to 2015).

US dollar collapse predictions: the dollar is about to disappear (2)

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Now, if other nations start selling US Treasuries (in net terms) more aggressively than ever, it will raise the cost of borrowing for the US government, which already faces high levels of debt. As a last resort, to keep interest rates low, the Federal Reserve would have to step in and buy these government bonds. Otherwise, when interest rates are too high, you risk bringing down the entire heavily leveraged and indebted financial system.

China handed over its huge portfolio of US Treasuries (reportedly over $1 trillion). If you have plans to reunify with Taiwan, you must sell those Treasuries before moving to Taiwan. The sale of US Treasuries in a single country may not have a huge impact, but if a significant number of countries follow suit, there will be long-term problems for the dollar and the United States.

Many smaller countries with dollar-denominated debt cannot come out of a crisis like the US. As a reserve currency, the US can print more of its own currency, which, combined with foreign buyers of US Treasuries, allows the US to find its own way out of any financial crisis. However, the cost of printing all those US dollars is having dire consequences for other nations that are now even more mired in financial repression.

US Dollar Collapse Predictions: Could the Chinese Yuan Replace the Dollar?

During the Bretton Woods Conference in 1944, British economist John Maynard Keynes proposed to BANCOR a new neutral reserve currency to be used to settle international accounts. However, the US withdrew that proposal in favor of a fixed exchange rate regime with the US dollar (which was a gold standard currency for central banks) as the reserve currency.

Now, if resource-rich nations like Saudi Arabia and Russia suddenly decide not to use the dollar for world trade, then the trillion dollar question becomes what the world's next reserve currency will be. Looking back at the history of the last few centuries, it can be seen that the global reserve currency has changed hands every ~80-100 years. The dollar is also approaching the 80-year mark, so a changing of the guard would mean no departure from the historical norm for years to come.

US dollar collapse predictions: the dollar is about to disappear (3)

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The global reserve currency at this point in history was closely aligned with the world's dominant power. China, a rising power, sees itself as a great power (at least in its own mind) and would be in the minds of many as “calling the shots” as to what the next global currency would be. While China is not opposed, in theory, to most world trade being conducted in yuan, given the Triffin dilemma the US faces today, this would be an obstacle.

To dieDilema de Triffinsit is the conflict of economic interests that arises between national short-term goals and international long-term goals for countries whose currencies serve as global reserve currencies. The use of the US dollar for world trade creates a huge demand for dollars across the world, resulting in the dollar strengthening against other world currencies. That strength of the dollar has made US exports uncompetitive compared to their peers abroad. This has led to an erosion of the US manufacturing sector and a flight of jobs in recent decades. This imposed heavy costs on workers in many areas of the United States, including the so-called "rust belt“.

As an export-oriented economy, China does not want to fall into the same trap as the United States. While they fundamentally like (out of national pride) world trade in yuan, it is doubtful that they want their exports (which make up a large part of their economy) to become more expensive. Furthermore, for all trade to be conducted in yuan, China would need to export yuan to many other nations that would need yuan to trade with their trading partners. Given China's strict capital controls, it would be surprising if China allowed large amounts of yuan to leave the country abroad.

China has benefited from the dollar system (year-on-year trade surpluses) where it can cheapen its exports due to the strength of the dollar, so it wouldn't mind having the reserve currency as something other than its own currency. Even if China wanted to make the yuan the standard reserve currency, the question is whether other countries would accept it unreservedly.

Today, due to tensions with the West, Russia is forced to develop a friendship with China, but they have not been on the best of terms, including always amilitary battlein 1969. The Chinese occasionally bring theirterritorial claimsin the Russian Far East, including Vladivostok, which China allegedly gave up as part of unequal treaties during its "150-year humiliation" with foreign powers and now they want it back. Many other Asian neighbors, including India, Vietnam, South Korea, Japan, etc., with which China has antagonistic relations, would also be wary of adopting a yuan-based reserve currency if they depended on China receiving yuan for their trade.

Furthermore, in the event of military hostilities with China or its allies (such as Russia is currently facing), they could be “cut off” from the reserve currency, the yuan, which would govern them.

A return to a system like BANCOR (neutral reserve currency) proposed by Keynes in 1944 would require active cooperation between many nations around the world. Given the active geopolitical tensions between different peer groups of nations: Russia and the US, US and China, Europe and Russia, Saudi Arabia/UAE and Iran, etc., the possibilities for a different kind of “Bretton” “Woods” consensus are almost equal to zero.

US Dollar Collapse Predictions: Will Gold and Bitcoin Replace the US Dollar?

Many observers of macroeconomics, Luke Gromen, macro analyst and founder and chairman of Forest for the Trees (FFTT), mentioned that in the future a world where neutral assets like gold or even Bitcoin are used to settle transactions for international trade could . . . Gold and bitcoin, being neutral assets, eliminate triffin dilemmas for nations, while offering options that are also, to some extent, free of counterparty risk.

OROIt has been around for centuries and was used as a medium of exchange in earlier times. Gold reserves can be held locally, eliminating dependence on other nations to buy, say, dollars or yuan or any other currency that affects trade. Russia is already considering accepting natural gas payments from "enemy nations" in gold. This eliminates the need to convert dollars into rubles they receive for oil/gas payments, which is now more difficult due to sanctions. Russia has one of the largest gold reserves in the world, with more than $130 billion, which can be used as collateral for trade (instead of dollars, which are now hard to come by).

The further introduction of gold-backed trading will increase the price of gold, in which case it will benefit you more due to your large reserves. Nations could trade gold directly with each other, eliminating the threat of third-party sanctions. However, moving large amounts of gold between nations would have its unique challenges in terms of transportation, security and insurance for such transfers. Gold also requires rigorous testing of its weight and quality/purity, which would be another added burden in this type of currency system. In theory, one could set up trade between 2 nations on a "net" basis (instead of trying to pay for every little transaction between them with gold), but that would mean the government would have to pay individual entities until trade is normally settled. established as one. final transaction.

Bitcoins:The other possibility for the next global reserve currency suggested by some (particularly Bitcoin enthusiasts) is Bitcoin. Unlike gold, which is physically difficult to move due to its weight and security/transportation costs, Bitcoin has no such challenges. The value of bitcoin in the open book can be easily verified and there is no counterparty risk if it is held securely by individuals/nations. Furthermore, gold requires extensive testing of gold and verification of gold itself (i.e. purity), which Bitcoin does not. Russia has recently indicated its willingness to acceptbitcoinfor its oil and gas.

Accepting bitcoin for all global commerce would be a bitcoin purist's biggest dream, but given the amount of liquidity in the bitcoin market, it would be interesting to see how that plays out. Further development in the L2 (Tier 2) application area, such aslightning networkcan help overcome this challenge. Although Bitcoin's volatility is decreasing over time (on a relative basis), the volatility can be unattractive for some traders to trade. A mitigation mechanism like instant conversion of Bitcoin transactions back to local fiat currencies would help overcome the volatility problem. Bitcoin, whether on the main chain or through L2 applications like the Lightning Network with its low fees, would be cheaper in terms of the cost of moving money from buyer to seller compared to traditional financial channels.

An example of this is the Lightning network used by Salvadoran expatssend moneyto relatives back home over the Lightning network as opposed to traditional methods such as Western Union. Money is sent home at a fraction of the cost compared to Western Union, plus your family members don't have to make the arduous journey to the nearest Western Union office, which not only can be time-consuming, but can also be prone to prohibits B .by criminal gangs who may demand their "cut" instead of safe conduct.

The Bitcoin network is decentralized, which would make it extremely difficult for nation states to prevent other nations from trading with it, making it highly resistant to censorship and sanctions. A nation should not fear that angering Nation A, where it parks its foreign exchange reserves, or angering Nation B, which holds the global reserve currency, could cause economic damage by not following the other nation's instructions. With Bitcoin, no government or group of actors can inflate the currency or manipulate it to the detriment of other nations.

US Dollar Collapse Predictions: Epilogue

Recent events have exposed the pitfalls of a reserve currency in which other nations cannot control their own reserves and therefore their own economic destiny. Formerly friendly nations may turn against each other in the future, leading to sanctions against the smaller nation and/or its separation from the global economic system. A larger nation could use the threat of sanctions to "shape" the "behavior" of a smaller state to its liking. This highlighted neutral assets that are harder to sanction, freeze and confiscate, such as gold and bitcoin. Once derided as "golden beetles" and "bitcoin maxis", a transition for them to process cross-border payments doesn't seem as far-fetched as it did a few months ago.

Russia and even other states could opt out of the current system and explicitly denominate a barrel of oil in ounces of gold or a cubic foot of natural gas in satoshi (i.e. a smaller unit of Bitcoin). Given the current spikes in commodity prices, many nations (unless they quickly diversify into other sources, which takes some time and money) may be forced to pay Russia for these new mechanisms due to lack of options. [or be forced to "step up and scream" on the new payment system rather than gradually adopting it voluntarily]

This does not mean that the US dollar will lose its currency reserves tomorrow, but it is about to break out. Just like on the geopolitical front, as the world moves from a unipolar America to a multipolar world, there could be something similar on the economic front, where we could be running multiple reserve currencies at the same time!

Legendary investor and billionaire Stanley Druckenmiller in aInterviewHe said last summer that he doesn't expect the dollar to be the reserve asset 15 years from now. The 2020s were marked by great turmoil with all kinds of problems: pandemic, supply chain problems, massive central bank printing, inflation, geopolitical tensions, rivalry between great powers, war, commodity price crises, etc. this decade, it would be hard to say what the future holds in terms of the next reserve currency, be it gold or bitcoin or whatever, but it wouldn't be surprising if the dollar doesn't have global reserve currency status by the end of this decade.

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