The Bear’s Lair: Towards an un-Dollarized World

Saudi Arabia recently signed a contract with China to sell oil with payment in yuan (China’s currency, sometimes known as renminbi, for inscrutable Chinese reasons). Argentina and Brazil are proposing to use a common currency, the sur, for trade between them. India and Russia are undertaking trade in rupees and rubles. This is a gathering trend, that may eventually result in deposing the dollar as the leading international currency. It is thus worth thinking about what a de-dollarized world might look like, and where the costs and benefits would fall.

There are two good reasons why the world might abandon the dollar, if a reliable alternative could be found. The more important is the poor stewardship shown by the United States as operator of the world’s reserve currency. When the Third Reich invaded the last part of Czechoslovakia in March 1939, the Bank of England returned Czechoslovakia’s gold and sterling reserves to the German government within a few months, before war broke out between Germany and Britain in September 1939. That was only proper; the Bank was respecting the property rights of the Czechoslovaks, and the fact that in international law those rights had passed to the new government of Czechoslovakia, by right of conquest.

A reserve currency is useless if holders thereof must worry incessantly about whether the reserve currency’s government might get into a snit and confiscate the holder’s assets, leaving him without the means of settling trade and other transactions. That is what happened in March 2022, when the United States confiscated $600 billion of Russian dollar reserves, leaving the country in default on its international obligations. The property rights of the Russian people in those dollar reserves were violated, even though the United States was not at war with Russia.

The confiscation of those reserves was the action of a Biden regime for whom property rights are nugatory, as it showed on its first day of office when it “cancelled” the fully permitted Keystone XL pipeline, into which over $100 million had already been invested. The citizens of a country must live peacefully under such depredations – they were fools enough to vote for the regime, after all. There is however no reason whatever why foreign holders of dollar assets should subject themselves to the Biden regime’s Marxist disdain for property rights.

The second argument against the dollar as a reserve currency is the feckless money-printing Keynesianism the Fed has shown in the last quarter-century, pushing interest rates far below their market levels and holding them around zero, producing negative real interest rates for more than a decade. Those policies have been dictated by the imagined requirements of the U.S. domestic economy, but they have had the effect of catastrophically reducing the dollar’s value against real assets such as shares, gold and real estate, to the extent that markets have invented an entire new imaginary asset class of crypto-currencies, to avoid holding the Incredible Shrinking Dollar.

Since a reserve currency is a store of value, holders of reserves have every incentive to find a better store of value, otherwise they may find themselves in the unhappy position of those poor souls who in 1945 trusted the long-term value of the Argentine peso, which has since depreciated by a factor of 1015. (After all, it derived from a wealthy, well-managed economy with large foreign exchange reserves that had generally run balance of payments surpluses except during the worst of the Great Depression.) Even those reserve holders who have an unjustified faith that they can avoid the whims of U.S. foreign policy may thus want to look for an alternative store of value to the dollar.

Such an alternative will not be easy to find, for investors who want to avoid the dollar’s problems. Sterling, the previous global reserve currency, is now tied to an economy with persistently higher inflation than the United States, and managed by a Bank of England that consistently operates an even weaker monetary policy than the Fed. Furthermore, Britain was all-in on the Ukraine adventure, so it is unclear whether the Bank of England would follow its 1939 policy – it is indeed not the same institution as in 1939, since it was nationalized in 1946 and now dances to the tune of the public sector Blob.

At the other extreme, China’s ambitions to make the yuan a global reserve currency are frankly laughable. China still does not trust its own citizens with free foreign exchange markets, so any relaxation in its draconian exchange controls would be highly destabilizing. Politically, China is officially a Communist country, so the political wishes of its leaders will always trump any theoretical concerns about property rights, which in any case have little meaning in the Chinese system. The China that was emerging from poverty and taking over the world by free-market means in fair competition might have sponsored a true reserve currency, but that China never actually existed – it was always a bizarre globalist fantasy.

If Japan had been lucky enough to avoid a visit from Ben Bernanke in 1998, the yen would have been an excellent candidate for global reserve currency status. However, in a moment of Japanese weakness, Bernanke sold the Bank of Japan his snake-oil of perpetual zero interest rates and permanent budget deficits. (Even for the disciplined Japanese, the latter tend to accompany the former; if borrowing costs nothing, the government will think it has free money to spend.) As a result, Japan now has public debt of 270% of GDP, with a central bank that owns close to half the debt outstanding and around 15% of the stock market. Despite Japan’s inflation now rising towards Western levels, the Bank of Japan’s new governor Kazuo Ueda has stated his intention to follow his predecessor’s interest rate suppression policies, with the Bank buying government bonds to keep rates near zero. In the long run, that policy is economically suicidal; it suggests the yen may go the way of the Argentine peso. Rule Japan out, therefore.

Given that a certain economic size is necessary to act as a global reserve currency, that leaves only the EU and its shiny relatively-new-only-one-lady-owner-who-drove-it to-church currency, the euro. In its first years, I genuinely thought the euro might replace the dollar; the U.S. was faffing around in the Middle East while the euro was relatively well run under the European Central Bank’s first President Wim Duisenberg (actually, the real skill in its management was that of the great Otmar Issing, its Chief Economist until 2006 – Germany had extracted a high price in good management for its participation in the euro). Alas, Duisenberg was forced out early and the ECB’s management of the euro has steadily deteriorated thereafter, with all kinds of bond purchase schemes and bailouts of the more profligate EU members, as well as zero interest rates and a noted reluctance to increase them, even beyond the world’s other central banking foot-draggers, by the current President Christine Lagarde.

If you are a quiet bureaucratic country, with heavy social costs and an economy gently declining, the euro may be just what you want to hold in reserves – you are unlikely to annoy the ECB sufficiently to have your reserves stolen, as the bank with its strong German influence from the blessed Bundesbank will be reluctant to violate your property rights. Conversely, if you are a rapidly emerging East Asian country whose manufacturing is highly competitive, or you have a habit of selecting leaders that end up on the International Court’s Ten Most Wanted list, then the euro is no use to you.

For such countries, and for others who don’t like the value-eroding tendency of even modest inflation, there is only one alternative: gold (yes, OK silver also, if you’re Chinese and like the metal). Gold as a reserve currency has the advantage that you don’t have to hold it at a central bank; you can hold it in a private depositary in Switzerland or elsewhere. It holds its value, unlike fiat currencies, it actually exists, unlike crypto, and it has no central bank, thus can be stolen only by private-sector thieves. It is also universally acceptable as a means of payment, although you may have to haggle about its price.

Holding your reserves in gold may seem an unattractively 19th century, Forsyte Saga solution (though I remind you that the doltish Uncle Timothy swore by Consols, which did him no good at all in the long run and have now been abolished). But I would also remind you that China has been buying gold in large quantities for several years. They are probably ahead of us, as usual.


(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)