The push to dethrone the dollar as the world’s reserve currency is gaining momentum.
It’s a trend Inside Wall Street editor Nomi Prins has been warning about in these pages. She’s shown you the effects de-dollarization will have on global trade (catch up on the latest here and here).
And as we’ll show you today, de-dollarization will also affect well beyond that.
It could impact everything from your mortgage to your car payment. It could even help trigger a credit crisis in the U.S.
That’s because the financial markets are a complex, interconnected web. Tug on one strand of the web, and the whole thing starts shifting. Pull hard enough, the web falls apart.
But if you know how to untangle that web and identify the weak links, you can prepare for what comes next.
And right now, one of those weak links is in a $24 trillion market already feeling the pain of de-dollarization. Let me explain…
Falling Demand for This $24 Trillion Market
The dollar has long been the world’s reserve currency, meaning most transactions are done in dollars. In fact, by some estimates, upwards of 90% of all global trade is settled in dollars.
That means countries that focus on exporting goods are being paid dollars in exchange for their products. That could be oil from Saudi Arabia to electronics from China.
And when another country finds itself awash in dollars, it often parks that cash in dollar-denominated U.S. Treasury bonds.
That’s a big reason why foreign nations are major holders of U.S. Treasuries. They own over $7 trillion of all the Treasuries outstanding.
That’s nearly a quarter of all the Treasuries in circulation – a market worth $24 trillion total.
But as Nomi has shown you, several countries have started transacting in other currencies. The BRICS bloc – made up of Brazil, Russia, India, China, and South Africa – is leading this charge against the dollar.
China, for example, has reportedly been buying Russian commodities using its yuan. Russia is also using the yuan to settle 25% of its trade with the rest of the world. Even India bought oil using the yuan instead of the dollar this year.
That means those countries don’t need to park as many dollars in Treasuries… removing a huge source of demand.
Not only that, but they’re also actively dumping their Treasury holdings. In the past month alone, countries among the BRICS bloc have sold $17 billion in Treasuries.
One Trigger for a U.S. Credit Crisis
How does that impact your own finances today? Two words: interest rates.
Less demand for Treasuries pushes their price lower. As the price goes down, the interest rate goes up. (It’s an inverse relationship between price and interest rates that all bonds have.)
And just in the last five months, the interest rate on the 10-year Treasury has gone from 3.58% to 4.81%. You can see that in the chart below…
That’s the highest level in 16 years.
And the pullback in foreign buying of Treasuries couldn’t come at a worse time. That’s because of the new supply of Treasuries set to hit the market as the government keeps running massive deficits.
After hitting $2 trillion this year, the deficit is projected to hit another $1.8 trillion in the coming fiscal year. So the government must borrow and issue more Treasuries to make up for the shortfall.
But at the same time, foreign ownership of U.S. Treasuries keeps trending lower. And that’s not just a recent development. It’s down to 24% compared to 33% a decade ago.
That raises the prospect of higher rates still. And that impacts your cost of borrowing for everything from houses to student loans and cars.
But it’s not just personal finances. Businesses will feel the weight of higher interest rates as well. And the most vulnerable are the issuers of high-yield debt.
Issuers of high-yield debt are already on shaky financial ground. Fitch Ratings expects default rates to more than double just this year.
And there’s over $600 billion in high-yield debt that matures in 2024 and 2025.
If rates stay high or keep rising even further, that will pose a major risk for companies’ ability to pay back their debt. That’s because higher interest rates make refinancing debt more expensive.
So you should steer clear of junk bond investments like the SPDR Bloomberg High Yield Bond ETF (JNK).
Instead, focus on companies with high-quality balance sheets that have low levels of debt. These are the kind of companies Nomi recommends at her Distortion Report advisory.
De-dollarization will be felt throughout the markets in many ways. Understanding that tangled web will be key to staying one step ahead.
Regards,
Clint Brewer
Analyst, Inside Wall Street with Nomi Prins
P.S. Most people think inflation, war, and a currency collapse are the biggest risks to our financial system. But sadly, those problems don’t even begin to explain what is about to happen in the months ahead.
Editor Nomi Prins says a dangerous plan is being rolled out across America. Originally found on page 314 of a document from the desk of former Speaker of the House Nancy Pelosi… It’s a scheme to enact enormous change to the appearance and value of our money – a total overhaul of our financial system.
If you have more than $2,500 in a U.S. bank account or retirement plan… Or if you simply collect a fixed income from the federal government… You are at risk. So don’t wait until it’s too late. Click here to learn how you can take control of your own financial future in this historic shift that’s coming.