Concerns over bank runs in the US continued to move markets this week. But there’s a much bigger run going on beneath the surface. A run on an entire currency itself. And it’s the most important currency of all — the US dollar.
It’s a familiar story that is back to rear its ugly head. But this time, the outcome could look very different indeed. So let’s remind ourselves how we got here before we ponder where we’re going.
In the wake of the Second World War, the world agreed to use the US dollar as the global trading currency. International transactions would be in US dollars, even between countries that didn’t use the currency. The US dollar, in return, was convertible into gold. By governments, anyway…
This system worked quite well, especially for the Americans. They could print money to buy imports while the rest of the world first had to sell something in order to get the US dollars needed to buy imports.
The French called this an exorbitant privilege — a phrase made famous by Charles de Gaulle, who liked to rant and rave about it. Eventually, his successor, Georges Jean Raymond Pompidou, decided to call out the arrangement by staging a bank run on the US dollar. He converted France’s dollars into gold and sent a French warship to New York Harbor to collect France’s gold.
Once the UK joined the queue, signalling a serious bank run was underway, the US responded by defaulting on the arrangement and ended the US dollar’s convertibility into gold.
Instead, as agreed with Saudi Arabia not long afterwards, oil would be priced in US dollars. If you wanted to buy oil, you had to get US dollars first. Thus, the Petrodollar Standard replaced the Bretton Woods system. Dollars went from being good as gold to being good as oil.
And so, the French run on the US dollar ended up failing miserably in the end. The new system only reinforced the US dollar’s dominance and importance in the world.
Over the years, the Americans haven’t just been abusing their exorbitant privilege by printing money for nothing and buying their imports for free. They’ve also used the US dollar as a weapon.
In 2012, they confiscated US$20,000 from a Danish policeman who tried to buy Cuban cigars from Germany. But this was just a warning shot — a proof of concept. In 2022, they sanctioned Russian trade and froze US$300 billion in Russian central bank assets.
The trouble is, by sanctioning Russia, the US also sanctioned Russia’s trading partners, just as they sanctioned German cigar shops and Danish policemen when they sanctioned Cuban cigars. It was an act of economic war on Russia’s trading partners as much as Russia.
Even French President Macron recently complained about it. He declared that Europe should reduce its dependence on the ‘extraterritoriality of the US dollar’ to avoid becoming ‘vassals’ for lack of control over their own financial autonomy.
But the Europeans are one step behind. Much of the world is already creating solutions rather than complaining about being the Americans’ vassals. Here are some recent media headlines covering the run on the US dollar:
- ‘China and Brazil reach accord to trade with their own currencies, avoiding the US dollar’
- ‘Ghana plans to buy oil with gold instead of US dollars’
- ‘Iran, China agree to eliminate dollar in transactions’
- ‘Brazil’s Lula calls for end to dollar trade dominance’
- ‘Lula Backs BRICS Currency to Replace Dollar in Foreign Trade’
- ‘“Petrodollar” at risk as [French company] TotalEnergies sells LNG to China in yuan’
- ‘Dollar Dumped: How the first China-UAE gas deal in yuan is a big blow to US’
- ‘Malaysia, China to Discuss ‘Asian Fund’ to Cut US Dollar Dependency’
- ‘Russia and Iran are working on a gold-backed cryptocurrency to take on the dominant dollar, report says’
- ‘South America’s “Common Currency” Is Actually about De-dollarization’
- ‘Russia Positions Itself to Move the Ruble to a Gold Standard’
- ‘Rise of the Petroyuan: The End of the Petrodollar’s Reign and the Impact on Global Markets’
The list of nations declaring that they don’t want to be beholden to a US controlled trading system is growing fast. As is the list of solutions those nations are creating — viable alternatives to the US dollar in trade.
As in 1971, central bankers are increasingly selling US dollars and buying gold instead. This time, the conversion of US dollars into gold is not happening in practice in the US via a Bretton Woods-style system, but via global financial markets.
Central bank gold holdings are at a 50-year high after soaring since 2022 and tripling as a percent of global gold demand. Meanwhile, the US dollar’s share of central bank holdings is falling.
Policymakers like the European Central Bank’s Christine Lagarde and the US Treasury’s Janet Yellen have recently remarked that the US dollar’s role is in danger as a result of its weaponisation.
So the run on the dollar is well underway. Just like the leadup to the Nixon Shock, countries once again have the gall to get the gold their dollars are allowed to buy. This only makes sense if they question the US dollar’s value, or its usability in global trade. If they expect dramatic change. And even the world’s leaders are worried enough about the issue to admit it.
But what does it all mean for you?
Australia is in a bit of a pickle because its list of geopolitical allies and its list of trading partners is not exactly a perfect match. We could be caught in the crossfire, having to choose between the two priorities.
China may soon demand to do trade in yuan or some other measure it creates. The US doesn’t treat nations which abandon the US dollar very nicely, historically speaking…
Another consideration is that the US dollar’s decline tends to buoy other assets. So, if the selling pressure on the US dollar persists, that should be good for risky assets, like these.
It should be especially good for commodities too because those commodities are likely to be priced in US dollars amongst the US’s remaining allies. A falling dollar means rising commodity prices. Which is good for our terms of trade.
But the real question is whether the French and their allies succeed this time. Whether they manage to undermine the US dollar by creating viable alternatives…or does the US hold on to its exorbitant privilege once again?
We don’t know the outcome, but we do know the system is being challenged and a run on the US dollar has begun again.
Until next time,
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Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend
