Is There a Worldwide Run on The Bank of The USA?
Last December I wrote about the possibility that the United States would lose its status as the world’s “reserve currency.” 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.
In June of 2022, Vladimir Putin announced that a new reserve currency is being developed by the BRICS (Brazil, Russia, India, China, South America, and others). It was believed that this currency will actually be the Chinese Yuan. This belief is backed up by China’s purchase of hundreds of tons of gold.
Well, now it’s come to light that certain nations and business interests around the world are transferring some of their assets and commitments from the “Bank of the U.S.” to the “Bank of China” or elsewhere. France, India, Saudi Arabia, Japan, Mexico, Brazil and others are suddenly hedging their bets by looking beyond the U.S. for partnerships and stability.
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Imagine you’re the CEO of a major German multinational company. You have hundreds of millions or billions of U.S. Dollars in corporate cash. You need this cash to support the growth of your company and you need to be certain that this cash will be available to you and at its full value.
As a German citizen, what is your impression of the U.S.? You see news reports of homelessness in San Francisco, crime in Chicago and unfettered illegal immigration at the southern border. You see bank failures like Silicone Valley Bank or Republic Bank. You wonder if the U.S. financial system is in danger.
You see virtually unlimited printing of money to fund government programs, a dangerous state of affairs regardless of the underlying value of those programs. You saw the U.S. government’s credit rating lowered on 2011 and, with no material change in the country’s fiscal restraint, wonder if it could be lowered again. You wonder if the U.S. economy could experience hyperinflation and risk losing significant value in your cash holdings.
What do you think? What do you do?
What a prudent CEO would do is diversify his company’s cash holding to include currencies besides the U.S. Dollar.
Now, multiply that CEO by the hundreds or thousands. Add in dozens of countries and the divestment of the dollar could be a major negative event.
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Because a flood of U.S. Dollars could enter in the foreign currency markets, the value of the dollar, relative to other currencies would plunge.
“So what” you say. Well, you should and will care very much if foreign businesses and governments stop holding U.S. dollars. In fact, unless you swapped your dollars for gold, or Bitcoin, or some other hard asset, you will go down with the ship.
Here’s what could happen:
A falling dollar drives up the price of everything that comes into America, including anything that’s petroleum-based like gasoline and plastics or that uses oil, like diesel in food production and distribution.
The raw materials and imported components that drive American factories and sustain American consumers will become more costly.
Medicines would become more expensive since most are produced in China.
If foreigners get nervous, they could begin to sell dollar-valued assets like stocks, bonds and treasury securities. 40% of American stocks and a third of corporate bonds are held by foreigners. A stock market crash could ensue if large amounts of these holdings are liquidated.
Foreigners hold over $8 trillion in U.S. treasury debt. If even a part of that is liquidated, the flood of dollars placed in the market would cause the dollar to lose more value and trigger a new round of inflation.
Interest rates would rise as the additional risk of U.S. Dollars would be “priced in” to treasury securities. This increase would filter through the rest of the economy.
Does this have to happen? No. Some of the negative issues above could be rectified. Foreigners could remain convinced that the U.S. is the “least worst” place to invest.
And, even if the divestiture of foreign dollars happens, it should be a gradual transition. If so, we all have a chance to make adjustments to our investments.
We all just need to keep our eyes open to the world outside of the U.S.
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“Much of the social history of the western world, over the last three decades, has been a history of replacing what worked with what sounded good.”
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Who Says the World is Crumbling? Here’s Something to Feel Good About.
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