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Can The Current Dollar-Centered Global Financial System Last?

Derek Wolfe

Updated: March 21, 2022

dollar-centered global financial system
Editor’s Note:

EDITOR'S NOTE: If economic sanctions can render Russia’s $630 billion reserves “unusable” in a matter of days, and if the value of its currency can be deliberately plunged in just a handful of trading sessions, then what stability can “fiat” offer when a large majority of hostile players in the ecosystem can redefine the value of sovereign financial holdings? Russia might have unloaded a large majority of its US dollar holdings, but perhaps they underestimated the implications of a dollar-centered global financial system. If aggressive destabilization efforts can be inflicted on Russia, they can certainly be inflicted on other countries as well; not too far down the road, this may include the US. Some analysts believe that the current sanctions may prompt other central banks to begin lightening up on the dollar in order to load up on gold and other commodities. This makes sense, considering the geopolitical vulnerabilities the dollar demands in exchange for its benefits. But is it conceivable, as some analysts forecast, that such efforts might reprice gold to  $10,000 per ounce?

Critical information for the U.S. trading day.

The shockwaves are still being felt by the incredible Western sanctions that have rendered the $630 billion in reserves the Russian central bank accumulated virtually unusable. Can the current dollar-centered global financial system last if money can be summarily cancelled?

Arthur Hayes, a former emerging markets trader and co-founder of the BitMEX trading platform, argues central banks will choose, instead of dollars, to load up on either gold, storable grains like wheat, or storable commodities like oil and copper. “In essence, the largest surplus countries’ fiat currencies will implicitly grow their gold or commodity backing,” he writes, saying gold could rise beyond $10,000 per ounce.

Luke Gromen, publisher of Forest For The Trees and a long-time dollar bear, said that shift had been happening even before the sanctions. In a podcast with Grant Williams, Gromen said that over the last eight years, global central banks have bought about $260 billion worth of gold, compared to $60 billion in Treasurys. “So there’s been this very slow, but steady and recently accelerating move toward the away from this dollar system that broke in 2005, through 2008 to this system that looks a lot like what was proposed by [John Maynard] Keynes 80 years ago,” he says.

The dollar-centered system has some disadvantages for the U.S. “The issue with this is the American version of this deal that we’re printing dollars for oil as we have since ‘73 is, and this is the downside of the deal, is you got to run the deficits to supply the dollars to the world,” he said. “Which means you got to offshore all the manufacturing. You got to offshore all the manufacturing jobs. You got to run a bunch of deficits at the government level. You got to do all these things that are really, really good for GDP growth and the economy in the short and medium term. And in the long run, they bankrupt you.”

Gromen, like Hayes, expects more gold accumulation. “So every central bank in the world is now looking at this thinking, okay, we need to not be in a position where that can happen to us. Because who knows what might happen in the future and what might get us deemed a bad actor. So presumably they are going to be looking to accumulate a lot more gold,” he said.

(It should be noted that gold has its perils for foreign central banks. In Russia’s case in particular, the central bank won’t be able to sell to any western entity directly, and bipartisan legislation introduced in the U.S. Senate would impose secondary sanctions to any American entities knowingly transacting with or transporting gold from Russia.)

Gromen expects the end of the 40-year bull market in bonds. And he sees the potential for re-industrialization. “When you see Ohio getting an Intel INTC, 0.74% fab and the CEO of Intel saying, ‘We’re going to make Ohio one of the biggest Intel manufacturing regions in the world.’ What? Ohio was ground zero of the people who took it in the shorts from 1973 to present under this deal. Another semi fab in Arizona, another semi fab in Texas,” says Gromen. “It’s not even the first inning in this reindustrialization of America, but reindustrialization was never going to happen until you changed this dollar system and removed treasuries as the primary reserve asset, replaced it with a neutral one. And here we are. We’re two weeks into it. It’s incredibly exciting.”

The buzz

Initial jobless claims fell to 214,000, the latest data show, as both housing starts and the latest Philly Fed manufacturing index improved. The Bank of England made its third rate since December, a day after the Federal Reserve made a quarter-point increase and pencilled in 11 increases over two years.

There weren’t any major developments in the Russia-Ukraine situation as of Thursday morning. Ukrainian President Volodymyr Zelenskyy spoke to Germany’s parliament and criticized its support for the now-halted Nord Stream 2 pipeline project.

Home-furnishing retailer Williams-Sonoma WSM, 1.44% rallied 8% in premarket trade as it beat earnings expectations, raised its dividend and approved a $1.5 billion stock buyback.

Berkshire Hathaway BRK.B, -1.17% continued to boost its stake in Occidental Petroleum OXY, -2.06%, according to a filing late Wednesday.

The markets

U.S. stock futures ES00, 0.61% NQ00, 1.43% were weaker following the 4.4% surge for the S&P 500 SPX, 0.54% over the last two days. Crude-oil futures CL.1, 1.45% were swinging higher, reclaiming $100 per barrel.

Top tickers

Here were the most active stock-market tickers as of 6 a.m. Eastern.

Ticker Security name
GME, 4.06% GameStop
AMC, 2.30% AMC Entertainment
NIO, 10.47% Nio
MULN, 19.88% Mullen Automotive
BABA, 9.36% Alibaba
AAPL, 1.21% Apple
HYMC, -3.00% Hycroft Mining
NVDA, 5.72% Nvidia
AMZN, 1.48%

Random reads

Irish Jews are getting a double dose of holiday fun on Thursday with the observance of both St. Patrick’s Day and Purim.

Workers rebuilding the Notre Dame cathedral in Paris have discovery previously unknown tombs.

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Originally published on MarketWatch.

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