All That Glitters Is Not The U.S. Dollar

You’ve probably heard the U.S. Dollar referred to as the world’s “reserve currency.”  This designation is afforded our dollar due to the economic strength of the United States.  Foreign countries must have reserves in order to serve as a back up to their currencies.  Prior to the mid-20th century countries only used gold as their reserves.  Because the U.S. Dollar is considered “as good as gold”, foreign countries do not have to hold gold to back up their currencies, but can hold dollars instead.

Unfortunately, that’s changing.  Back in June 2022, Vladimir Putin announced that a new reserve currency is being developed by the BRICS (Brazil, Russia, India, China, South America, and others).  It’s believed that this currency will actually be the Chinese Yuan.

If you wanted to develop your own reserve currency, what would you do?  Well, one thing would be to buy gold to hold in reserve to back up your currency.

Guess what?  China has been a huge buyer of gold.  During the July-September 2022 period, China was a purchaser of 300 tons of gold worth about $55 billion.  This purchase and prior purchases were financed by the sale of $121.2 billion of U.S. Treasury securities. China still holds over $1 trillion in treasuries.

So, China is dumping U.S. Dollar investments to buy gold to act as a reserve for the Chinese Yuan.

Russia is actively participating in this activity by selling gold and oil to China in part to finance the Ukraine war.  Russia’s motivation is to skirt the sanctions imposed by the West. India and other countries are helping by acting as agents for Russia to acquire sanctioned goods.

So, what does all this mean to us?

The introduction of a new reserve currency will:

• Have an effect of depressing international demand for U.S. Dollars since countries will have another currency available for reserve.  

• Make oil more expensive.  Oil is currently priced in U.S. Dollars and if the dollar is worth less, oil will us cost more.

• Make imported goods more expensive, including all the plastic crap we buy from China. 

• Have the effect of increasing interest rates, because other countries do not need to hold U.S. Treasury securities.  This lower demand will lower the prices of these securities, thereby increasing their effective interest rates.

None of this is good for the U.S. 

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SBF On Ice

A curious thing happened Tuesday.  At the behest of the U.S. Attorney for the Southern District of New York, Samuel Bankman-Fried (SBF) was arrested by the Bahamian authorities.  Their rationale was that SBF was a flight risk.

The curious part is that SBF was due to testify, under oath, before Congress the next day.

So, let me pose some questions for your consideration:

• Why did the U.S. Attorney wait until December 13 to charge him, and not sometime in early November when the FTX fraud was discovered?

• Also, if SBF was a flight risk, why did the U.S. Attorney impower a Grand Jury and wait for the Jury to indict him?  Why not just go get him (with the assistance of Bahamian authorities)?

• If you were working as a prosecutor in the U.S. Justice Department and you had a criminal suspect who was potentially willing to testify (under oath, no less), why would you not want that hearing to occur to bolster the case against your suspect?

• Why, on the eve of the congressional hearing, would the U.S. Attorney mobilize to effectively block his testimony?  Why not wait one day?

You’re smart; I’m sure you can guess why this might have happened.

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“Intellectuals may like to think of themselves as people who ‘speak truth to power’ but too often they are people who speak lies to gain power.”

-          Thomas Sowell

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