This is an excerpt from the DKI July letter:
There’s a big argument happening in the financial community right now regarding the status of the dollar as the world’s reserve currency. The BRICS countries (Brazil, Russia, India, China, and South Africa) are expanding their coalition which now includes more than half the population of the planet. Those countries are actively looking to save and trade in a currency other than the US dollar. They are also openly talking about creating a new gold or commodity-backed currency to compete with the dollar.
Doomsayers are saying it’s “game over” for the dollar. Supporters are insisting that no one would trust a currency backed by Russia and China and trade in a non-dollar currency isn’t realistic. DKI thinks the most likely outcome is continued erosion of the dollar’s use as the world’s reserve currency as opposed to an event that results in a quick change in status. We also think people are too quick to dismiss the possibility for a BRICS competitor.
We’ve written extensively on the petrodollar before and it’s effectively dead now. The Saudis believe the White House has violated the agreement to provide military support and they have also expressed open distain for Joe Biden. As a result, Saudi Arabia has started to allow other countries to pay for oil in currencies other than the dollar.
In addition, the BRICS coalition includes the two most populus countries in the world (China and India), and two of the three largest oil and gas producers (Saudia Arabia and Russia). China, Russia, and India all have huge gold reserves, and China is the largest producer of many other rare commodity resources. It’s easy for Americans to say that no one will trust the Russians or the Chinese, but more than half the population of the world are actively looking to trade in something other than dollars.
When it comes to stewardship of the reserve currency, the US hasn’t always been a reliable trustworthy partner either. Rosevelt forced all US citizens to sell their gold for dollars and then immediately devalued the dollar. Over the following decades, the US printed paper dollars far in excess of its gold holdings forcing Nixon to close the gold window in 1971. Every country in the world that was holding dollars in 1971 had been told those dollars were exchangeable for gold. One day, that was no longer true.
Since then, Congress has continued to overspend and through every Presidential administration (Democrats and Republicans) debt continues to grow. The US has expanded the money supply debasing the currency. This was never sustainable:
As the US created dollars, the value of the dollars held by others decreased.
As the supply of dollars grew, the value of dollars held by others was debased. Other countries don’t like this dynamic, and to make things worse, these countries are affected by the actions of the Federal Reserve. When the Fed changes interest rates, it affects the relative value of the dollar and changes the price of oil in other countries’ local currency. This is not ideal if you want to import energy which every country on the planet does. Even friendly nations in our hemisphere like Argentina have started to conduct trade in currencies other than the dollar. The trend might have been started by China, Russia, and the Saudis, but other countries are joining.
This translates to manipulation of the currency. Some countries want to insulate themselves.
Finally, as part of the anti-Russian sanctions, the US confiscated the dollar reserves of Russia. On the surface, this seemed like a good way to prevent the Russians for using that money to conduct war against Ukraine. The problem is that it communicated to the rest of the world that the US could and would confiscate the dollars of a country not in the good graces of Washington DC. That’s a problem when control of the government changes hands every 2-6 years and our foreign policy is inconsistent from one administration to the next. It’s ok to be against the Russian invasion of Ukraine and to see that our response hurt the value of the dollar as a reliable reserve currency.
The trend we’re forecasting is consistent with the long-term trend as well. This graph from the IMF shows the dollar’s share of the market falling from 71% to 59% between 1999 and 2021.
The most recent data shows that the dollar’s share has fallen to 55% in the last two years. Whether BRICS succeeds in solving the significant problems inherent in creating a new currency or not, the dollar has been losing share for decades and the rate of decline is accelerating.
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