Declining Dollar Dominance

Today's show was delayed by a widespread power and internet outage in Ottawa as a result of an ice storm.

There has been a lot written in recent weeks about the US dollar and the potential loss of the reserve currency status. Rumors of the BRICS nations forming their own crypto currency between their trading block has been making news headlines.

I’ve actually held off in publishing a podcast on this topic. Merely repeating what you can read in the WSJ and on Bloomberg would not be adding value. I would need to provide an angle that would bring something new to the dialog.

If the US dollar were to lose confidence on a global basis, it would be devastating to the US economy. The result would be a drop in demand for US Treasuries. But since the US government is the largest debtor of all, they will need buyers for those treasuries. In order to attract buyers, they will need to raise the interest rate relative to other offerings in the market.

For the last three decades of globalization, the US has exported its inflation. The manufacturer who sells Christmas ornaments to Walmart collects US dollars from Walmart and then takes those dollars to the bank to exchange into Yuan. The bank then turns those dollars to the Chinese central bank who have an excess of dollars. Rather than sit on those dollars, the Chinese central bank used those dollars to purchase other commodities like oil which they need to fuel their economy, or they use the dollars to buy US Treasuries. In so doing, the US successfully exported it’s inflation.

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Host: Victor Menasce

email: [email protected]