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Just because I’m on vacation this week, doesn’t mean the rest of the team at Money & Crisis are slacking off.
I’ve asked some of my colleagues, as well as some industry experts, to fill in for me while I’m gone. These folks know more about crisis, money and personal liberty than anyone I’ve ever met. So you’re in good hands.
Today’s issue comes to you courtesy of Jim Rickards, economist and author of New York Times bestseller Currency Wars.
All the best,
Editor, Money & Crisis
P.S. Jim Rickards was one of the few big name economists who actually predicted the 2008 financial crisis. For a limited time, you can grab a free copy of his new book The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis as a reader of Money & Crisis. In it, Jim reveals the powerful strategies you can take to protect your money and your family from the next crisis. Claim your FREE copy now.
The World Is Ganging up Against the Dollar
The U.S. has been highly successful at pursuing financial warfare, including sanctions. But for every action, there is an equal and opposite reaction.
As the U.S. wields the dollar as a weapon more frequently, the rest of the world works harder to shun the dollar completely.
I’ve been warning for years about efforts of nations like Russia and China to escape what they call “dollar hegemony” and create a new financial system that does not depend on the dollar and helps them get out from under dollar-based economic sanctions.
These efforts are only increasing.
In the past four months, Russia has reduced its ownership of U.S. Treasury securities by 84% and has acquired enough gold to surpass China on the list of major holders of gold as official reserves.
Russia has almost 2,000 tons of gold, having more than tripled its gold reserves in the past 10 years. This combination of fewer Treasuries and more gold puts Russia on a path to full insulation from U.S. financial sanctions.
Russia can settle its balance of payments obligations with gold shipments or gold sales and avoid U.S. asset freezes by not holding assets the U.S. can reach.
Leading by Example
Of course, Russia is not the only country engaged in financial warfare with the United States. China and Iran are leading examples, but we can also add Turkey to the list after its latest currency crisis.
Russia is providing these and other nations with a model to achieve similar distance from U.S. efforts to use the dollar to enforce its foreign policy priorities.
Take China and Iran. China is the second-largest economy in the world and the fastest-growing major emerging market.
China has a voracious appetite for energy but has little oil of its own. Iran is a major oil producer, and China is Iran’s biggest customer.
But oil is priced in dollars and dollars flow through the U.S. banking system.
Trump’s Iran sanctions make it impossible for China to pay Iran in dollars.
If U.S. sanctions prohibit dollar payments for Iranian oil, then Iran and China have no choice but to transact in yuan.
Allied Support Dwindles
Meanwhile, Europe has remained a faithful partner to the U.S. and has gone along with sanctions against Iran, for example.
That’s because European companies and countries that violate U.S. sanctions can be punished with denied access to U.S. dollar payment channels.
But now Europe is also showing signs it wants to escape dollar hegemony.
German Foreign Minister Heiko Maas recently called for a new EU-based payments system independent of the U.S. and SWIFT (Society for Worldwide Interbank Financial Telecommunication) that would not involve dollar payments.
SWIFT is the nerve center of the global financial network. All major banks transfer all major currencies using the SWIFT message system. Cutting a nation off from SWIFT is like taking away its oxygen.
The U.S. had previously banned Iran from the dollar payments system (FedWire), which it controls, but Iran turned to SWIFT to transfer euros and yen in order to maintain its receipt of hard currency for oil exports.
In 2013, the U.S. successfully kicked Iran out of SWIFT. This was a crushing blow to Iran because it could not receive payment in hard currencies for its oil.
This pushed Iran to the bargaining table, which resulted in the Iran nuclear deal with the U.S. and its allies in 2015.
Now Trump has negated that U.S.-Iran deal and is putting pressure on its allies to once again refuse to do business with Iran. And Congress is again pushing to exclude Iran from SWIFT as part of a sanctions program.
The difficulty this time is that our European allies are not on board and are seeking ways to keep the nuclear deal alive and work around U.S. sanctions.
Europe’s solution is to therefore create new nondollar payment channels.
In the short run, the U.S. is likely to enforce its sanctions rigorously. European businesses will probably go along with the U.S. because they don’t want to lose business in the U.S. itself or be banned from the U.S. dollar payments system.
But in the longer run, this is just one more development pushing the world at large away from dollars and toward alternatives of all kinds, including new payment systems and cryptocurrencies.
It’s also one more sign that dollar dominance in global finance may end sooner than most expect. We are getting dangerously close to that point right now.
Editor’s note: For more of Jim’s insights into developing financial crises, check out his new book The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis. Right now, it’s free to readers of Money & Crisis. Click here to get a hardback copy delivered straight to your home.