Welcome to our Friday mailbag edition!
Every week, we receive some great questions from your fellow readers on our recently published essays. And every Friday, I answer as many as I can.
We have lots of ground to cover this week, so let’s get right to it…
First up, some of your fellow readers are worried about the U.S. dollar’s reserve currency status… and what might replace it…
Nomi, I am one of those who has been concerned about the U.S. dollar losing reserve currency status. When the U.K. lost reserve currency status, it had a very negative impact on its economy.
The reserves of central banks held in U.S. dollars has steadily declined over the last 30 years. Ballpark 80% down to roughly 60%.
Short of a really stupid move on the part of the U.S. (always possible), is there anything likely to replace the U.S. dollar in, say, the next 10 years?
– Ernie B.
China desires its currency to be a reserve or partial reserve currency. This is no different from when the U.S. supplanted the British pound as the reserve currency. Time moves on and things change for a reason.
– Lyndon B.
Hi Ernie and Lyndon, thanks for your thoughtful emails.
There is so much conversation out there about the imminent destruction of the U.S. dollar, which seems to be at the crux of both of your notes.
But I don’t think we need to be concerned about the U.S. dollar losing its reserve currency status… not in the next 10 years, or in my lifetime…
It has had a massive head-start in the global currency stakes, since the end of World War II. The U.S. supplied the Allies with arms and got paid in gold.
The Bretton Woods System, established in 1944, pegged all currencies to the U.S. dollar. That propelled the dollar’s supremacy.
Before that, from the Industrial Revolution of the 1800s until World War I, the British pound Sterling was the dominant international currency. The French franc was dominant through the 1700s and early-1800s.
Prior to that, it was the Dutch guilder from the mid-1600s to early-1700s. And from the mid-1500s to early 1600s, it was the Spanish currency.
For the most part, each of these currencies held the top spot for about a century, while their countries dominated world trade.
On that basis of longevity, the U.S. dollar should be on its way out… or starting its decline.
But although the Bretton Woods System collapsed in the 1970s, the U.S. dollar reigns as the primary reserve currency to this day. And it shows no signs of slowing down…
I’ll get to that in a moment. But first, for a few reasons, the dollar should be much weaker compared to other currencies.
The huge amount of debt the U.S. has is one. The colossal amount of money the Federal Reserve has fabricated since 2000 is another.
As you may know if you’re a regular reader, these have created an irreversible distortion between the markets and the real economy.
However, the dollar’s safe-haven status remains dominant compared to other currencies. Be that in times of financial crisis, war, or economic angst.
This remains the case even as central banks around the world lower their dollar reserves relative to other currencies.
This safe-haven status is why the dollar has continued to strengthen relative to other currencies, especially since the pandemic. And since Russia invaded Ukraine.
I wrote about the rise of the U.S. dollar… and how to take advantage of it… in a recent essay.
Now, earlier, I mentioned the typical 100-year cycle for reserve currencies. And how, given the dollar’s decades-long history as a reserve currency… you might think it’d be on its way out.
But because of the Great Distortion between the markets and the real economy we are living in now… the dollar is likely to retain top spot for longer than historical patterns would indicate.
Now, to answer your question about what could replace the dollar…
Let’s assume for a moment that I’m wrong about the above, and that the dollar is, in fact, on its way out. The next logical currency on deck would be the Chinese yuan.
Yes, China wants the yuan to become a major reserve currency. And in the wake of the 2008 financial crisis, it saw an opportunity to exert itself on the world stage.
Back then, central banks around the world were concerned that the U.S. Federal Reserve had let Wall Street get away with too many shenanigans.
China was very vocal in criticizing the Fed (and rightly so). You can read about this in the excerpt of my book Collusion that I shared with you recently.
This was one way China elevated its currency globally relative to the dollar. This strategy didn’t fundamentally weaken the U.S. dollar, but it did offer the Chinese yuan more of a global role.
But I see no danger of it becoming THE reserve currency and supplanting the U.S. dollar in our lifetimes.
In fact, inspired by your questions, I may write about this in more detail in a future essay. So keep an eye out…
Will China Become the World’s Supreme Superpower?
Next, China is on reader Deleta’s mind, too. But it’s not just the future of the U.S. dollar Deleta is concerned about… it’s the future of the whole nation…
China has been trying to undermine the U.S. dollar for many years now. This country has made China the economic mogul it is now… by outsourcing virtually all our manufacturers’ needs.
China is a real threat to us. If it succeeds, this country will never be the same. It will stoop and perhaps never rise again. I pray their goal does not ever come to fruition, for the U.S.’ sake.
– Deleta R.
Hi Deleta, it’s true that China has been angling to take the world’s pre-eminent superpower title away from the United States.
China is a superpower, there’s no doubt of that. It has a large population and a government that rules with an iron fist, so to speak.
One way China has been raising its prominence in the world is by cultivating trading relationships around the world that don’t rely on the U.S. dollar.
Trade relationships are as much about the currency they take place in as they are about geopolitics. For instance, China and Russia have established currency relationships between their respective banks.
These relationships enable the two countries to make payments to each other for goods and services, without using the U.S. dollar.
Right now, China is Russia’s biggest trading partner. In 2021, total trade between the two countries amounted to nearly $150 billion. About $25 billion of that was conducted in Chinese yuan.
But its trade with Russia accounts for just 2% of China’s total trade volume.
Of course, if more trade in the world happens without the dollar, the influence of the dollar in trade will decline. That said, we’re a long way from any major decline.
Also, in more recent years, China has provided cheap loans to regional countries for development. In return, it has received an economic stake in those developments. This has certainly helped its standing geopolitically. I discussed this in much detail in Collusion.
One way to curtail China’s global economic power grab is for the U.S. to cultivate these sorts of trading relationships as well.
But the more we can strengthen domestic manufacturing and production, as well as fair trade relationships with other countries, the better for our economy.
This is why I focus on what the U.S. is doing in the Infrastructure and New Energy spaces. It’s where China had an edge. Now, it’s where the U.S. needs to concentrate in order to retain global dominance.
The Powers Behind the Scenes
Now, moving from East to West… In a recent essay, I mentioned the Bank for International Settlements (BIS).
Most people have never heard of this Swiss-based institution. And yet, it plays a key role in international finance. This reader wants to know more about it…
Dear Ms. Prins, I am sure many of your readers would like to know… who are the owners (names) of the BIS’ shareholders? And what are their predominant political and cultural ideologies and associations?
– C E.
Hi C, that’s a great question. The BIS was established in 1930, primarily to handle the German reparations after World War I.
Today, the BIS is supposed to be a neutral body acting as the central bank to central banks. It is owned by 63 central banks around the world that together represent 95% of global GDP.
This includes the four major central banks – the Federal Reserve, the European Central Bank, the People’s Bank of China, and the Bank of Japan.
The BIS used to have publicly traded shares, but since 2001, it has been a fully private institution. Its shares are exclusively reserved for central banks.
It facilitates gold and foreign exchange transactions amongst member banks and holds central bank reserves.
I dug into the origins of the BIS in my book, All the Presidents’ Bankers. And I shared an excerpt of that with you recently.
One thing is clear… the BIS most likely wouldn’t have come into being if it hadn’t been for the wealthy Wall Street bankers of the time…
The BIS was partially funded by the Morgan Bank (at the time run by JP Morgan’s son, Jack Morgan).
But the connections to Wall Street don’t end there…
One interesting story is that leading up to the Great Crash of 1929, a prominent banker named Albert Wiggin was Chairman of Chase Bank (now JPM Chase). The Rockefeller family owned the bulk of Chase shares at the time of his appointment.
Wiggin was shady, though. For example, he shorted 42,000 shares of Chase stock (using a Canadian shell company) before the crash, while publicly advocating investors to buy it.
Wiggin was replaced at Chase in 1930 by Winthrop Aldrich. Aldrich had connections to the Rockefeller family.
But Wiggin then went on to help establish the BIS that year.
The first head of the BIS was Gates McGarrah. Prior to that, McGarrah had been head of the New York Federal Reserve, in the heart of Wall Street.
So clearly, the BIS had strong ties to Wall Street from the get-go.
As to who has the most influence over each of the 63 central banks involved in the BIS today, well, that depends on the relationship between the central bank, its government, and the major private banks of that country. That’s something I cover in general in Collusion.
How Can We Make Russia Pay?
And speaking of reparations… Fred has an interesting suggestion for how Russia could be made to pay for the destruction in Ukraine…
What’s the possibility that the offshore Russian central bank frozen accounts could be liquidated as reparation?
– Fred E.
Thanks for reaching out, Fred. I’m not sure about the “reparations” (since it’s still an ongoing war). But I read a recent op-ed in The New York Times on this.
In it, the authors suggested the Biden Administration liquidate the billions of dollars of Russian central bank assets frozen by the U.S. in order to assist Ukraine in its war effort. These aren’t isolated voices.
Though I admire the desire to help the Ukrainian people, this is probably not the way to do it. For one, this particular course of action is probably unavailable legally.
The International Emergency Economic Powers Act (IEEPA) – under which these billions of dollars were frozen – does not permit any government to take ownership of the assets.
This means that liquidating Russia’s frozen central bank assets would likely require new legislation. I honestly don’t see Congress considering (much less taking) such an action any time soon.
Thankfully, the U.S. doesn’t depend on these funds to help those affected by the war in Ukraine.
And that’s it for this week’s mailbag. Thanks again to everyone who wrote in.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition. I do my best to respond to as many of your questions and comments as I can each week.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
In the meantime, happy investing… and have a fantastic weekend!
Editor, Inside Wall Street with Nomi Prins