The global economic contraction described in part one and two of this series has many facets. These include supply chain dysfunctions, energy shortages, zero-COVID policies in China, the war in Ukraine, failing central bank policies, and the wilful ignorance of elites pushing the new green scam. Senile leadership in the US, revanchist leadership in Russia, and megalomaniacal leadership in China don’t help.
The economic consequences can be foreseen, and well-advised investors can preserve wealth and even profit from the resulting disruptions. Still, even the nimblest investor can be caught out by developments that percolate over decades and then overflow seemingly overnight.
One such development is a diminution in the role of the US dollar as a global payment currency. In considering this development, it’s important to distinguish between the role of a payment currency and a reserve currency.
The dollar’s role as a reserve currency involving the denomination of assets such as stocks and bonds held by central banks and finance ministries is not in immediate jeopardy, although that topic bears watching and is one we’ll return to in Strategic Intelligence Australia.
A payment currency is different. This doesn’t involve reserve positions but involves how countries pay each other for exports and imports and how they periodically settle their balance of trade. It’s much easier to launch a new payment currency than a new reserve currency.
Today, Russia is in discussions with India about selling oil for UAE dirhams. China is in discussions with Saudi Arabia about paying for oil in the Chinese yuan. The BRICS+ (Brazil, Russia, India, China, and South Africa, plus invited members including Turkey, Iran, and Argentina) are considering a new trade or payment currency tied to a basket of commodities including gold.
Two other groups — the Shanghai Cooperation Organisation (SCO) of China, Russia, and Central Asian nations, and the Eurasian Economic Union (EEU), consisting of Russia and several Eastern European and Central Asian nations — have both commenced discussions of possible regional payment currencies other than dollars and euros.
Major earthquakes are preceded by small tremors. The efforts of the BRICS+, SCO, EEU, and bilateral trading partners are still preliminary — but they all point in the same direction: an erosion of the role of the dollar and euro in global payments. Once that movement gathers steam, the eventual displacement or diminution of the dollar and euro as global reserve currencies will not be far behind.
Everyday investors who may feel uninvolved in these international negotiations can, in fact, be involved in terms of preserving wealth and staying ahead of the monetary power curve. The way to do this is with holdings of physical gold and gold mining stocks.
Commodity-backed currencies have been considered before, and the affected parties sooner or later decide that gold is preferable to the complexities of creating and weighting baskets of non-fungible commodities. (For example, there are more than 70 different kinds of oil based on sulphur content and viscosity, among other factors.) Gold is the ultimate fungible commodity and, therefore, the ultimate form of money.
What you can do to navigate these multiple storms
When British General Cornwallis surrendered to George Washington’s troops in Yorktown, Virginia, in 1781, he ordered his military band to play the song The World Turned Upside Down — at least according to legend. That title seems strangely appropriate today.
Wars, famine, commodity shortages, pandemics, recession, inflation, and weak leadership have all happened before and sometimes go together in part. Still, it’s extraordinary to find all of them occurring at once in today’s complex and densely connected world.
The war in Ukraine is by far the largest armed conflict in Europe since the end of the Second World War. The currency supply chain disruptions today resemble the conditions found in Eastern Europe during the Cold War or in the US during the Great Depression. COVID was the worst pandemic since the Spanish flu of 1918 and is still going.
Recessions come and go, but a global recession is rare. Inflation in advanced economies is the worst since the late 1970s. Weak leaders are not uncommon, but Joe Biden is senile, angry, and incompetent all at once while being the worst president in US history. The odds of any one of these conditions arising are low. The odds of all of them happening at once are infinitesimal. Yet here we are.
The key for investors is to stay well informed and remain nimble. Trying to read the future and placing firm bets can be a huge mistake, given the fact that any forecast is subject to quick reversals, and investment bets can be hard to unwind (at best) or can produce large losses when the wind shifts suddenly.
The best approach is a robust form of diversification that protects you in all conditions and offers significant potential for gains to offset the inevitable losses. This portfolio would include the following:
- Cash for liquidity, reduced volatility, and optionality.
- Real estate, gold, and natural resource stocks (in energy, mining, and agriculture) for inflation protection.
- Treasury notes for disinflation and deflation protection.
- And a slice of large-cap stocks in case the clouds part and everything turns out well.
All these scenarios are possible and can even come in rapid succession as inflation turns to deflation and supply chain bottlenecks turn to inventory gluts.
The best preparation is to be ready for anything and everything.
All the best,
Strategist, The Daily Reckoning Australia
This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.