EDITOR'S NOTE: There’s a fundamental problem with the notion of “the Almighty Dollar,” or perhaps, less satirically, “the Dollar” itself. When most people think about the dollar, they’re often conflating two different versions of it that are fundamentally opposed. Prior to 1971, dollars were commodity-backed, namely gold and silver. Post-1971, the dollar was 100% fiat, backed by nothing but the "full faith and credit" of the U.S. government. The fiat dollar is an experiment that’s not quite half a century old. And some economists would say that it’s failing. Money that’s backed by gold and silver can’t be devalued at the drop of a dime. Because if all currency were backed by gold and silver, it would be extremely difficult for governments to devalue the metals across the board on a worldwide scale. But you can do this with fiat. The West’s deliberate plunging of the Russian ruble served as a wake-up call to the fragilities of fiat. Credit Suisse investment strategist Zoltan Pozsar sees this global epiphany as something that may soon lead to a new monetary order, specifically one in which currencies may once again be backed by commodities. But in this new order, he sees the dollar as the one currency that has the most to lose; in short, the dollar’s status as the world’s reserve currency may soon be coming to an end.
A new monetary order is looking more and more likely as a commodities crisis feeds into inflation, according to Credit Suisse, which sees the U.S. dollar as losing the battle.
"This crisis is not like anything we have seen since President Nixon took the U.S. dollar off gold in 1971 – the end of the era of commodity-based money," said former Federal Reserve and U.S. Treasury Department official and now Credit Suisse investment strategist Zoltan Pozsar. "When this crisis (and war) is over, the U.S. dollar should be much weaker and, on the flip side, the renminbi much stronger, backed by a basket of commodities."
After the war in Ukraine, money will not be the same, said Pozsar describing the history of the Bretton Woods monetary order. The investment strategist is betting on commodities, including gold.
"From the Bretton Woods era backed by gold bullion, to Bretton Woods II backed by inside money (Treasuries with un-hedgeable confiscation risks), to Bretton Woods III backed by outside money (gold bullion and other commodities)," he stated.
Also, bitcoin stands a chance to come out on top, but first, it needs to survive, he pointed out.
The current monetary regime began to "crumble" when the G7 countries seized Russia's foreign exchange reserves following its invasion of Ukraine on February 24.
"We are seeing a regime shift unfold in funding markets currently (which, as always, will pass), and a sea change in inflation dynamics and FX reserve management practices," he wrote in a report published earlier this month.
Pozsar also explained the dichotomy seen in the commodities space following sanctions against Russia.
"Non-Russian commodities are more expensive due to the sanctions-driven supply shock that basically took Russian commodities' offline'. If you are a (leveraged) commodities trader, you need to borrow more from banks to buy commodities to move and sell them," he said. "Anyone in the commodities world is experiencing a perfect storm as correlations suddenly shot to 1, which is never a good thing. But that's precisely what happens when the West sanctions the single -largest commodity producer of the world, which sells virtually everything.
Because of this chaos when trading commodities, Pozsar wonders whether there is enough collateral for margin or credit for margin, or what happens to commodities futures exchanges if some participants fail?
"If you believe that the West can craft sanctions that maximize pain for Russia while minimizing financial stability risks and price stability risks in the West, you could also believe in unicorns," he said.
Pozsar sees the People's Bank of China (PBOC) playing a pivotal role here — it can sell Treasury bonds and buy Russian commodities or pursue quantitative easing (QE) to buy Russian commodities. According to the report, either of those will cause higher inflation in the West.
Originally published on Kitco News.