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Since no one's posting...
The dollar is done dude. It was nice while it lasted. But I believe that the U.S. dollar's reign as a universal reserve currency has ended. Over time fewer countries will hold U.S. treasuries and do business in U.S. dollars.
But why?
The dollar is a bad investment. How would you feel about holding a currency that is controlled by the government of a foreign country? You'd feel pretty bad if that country is $35 trillion in debt and will need to print trillions more every year to have any hope of even making the interest payments.
China is dumping U.S. treasuries and buying gold instead. It just makes financial sense.
U.S. treasuries are suffering their worst bear market possibly ever. Let's say you bought TLT (a long-term treasury ETF) at its peak in 2020. Today, you'd be down by more than 50% in real terms. What is supposed to be a "safe" investment becomes very unsafe in the presence of inflation.
The long-term picture isn't much better. Since the end of the gold standard in 1971, gold has outperformed U.S. treasuries. Simply buying and holding a lump of rock is better than holding the debt of the U.S. government. And the government was actually in good financial health for most of those years, unlike now.
The U.S. is not a trustworthy partner. Before Russia invaded Ukraine, Russia held about $600 billion in currency and gold reserves. About half of those reserves, $300 billion, were held in the West. After the invasion, those reserves were frozen. Now, they are now likely to be given to Ukraine.
Because of this, there is no reason for a country like China (or any other country for that matter) to store their wealth in the West, or to hold U.S. dollar-denominated assets. It's all conditional on U.S. allegiance.
For most countries, trade with China is more valuable than trade with the U.S. China now dominates most of the world's industries, and the trend continues to point in that direction. Third world countries often have much stronger trade ties with China than they do the U.S. They export natural resources and import Chinese goods. Increasingly, they can do without U.S. goods and services. Do what we say or otherwise you can't have our, um, Microsoft Excel licenses...
As this process strengthens, China will be able to lean on these countries to do business in Yuan, or perhaps in some resource-demoninated currency.
Okay, so the dollar is done. What comes next? Probably nothing major. I don't think that the Yuan will become the reserve currency, or that we'll move back to the gold standard (although global reserves will be held increasingly in gold). But the U.S. dollar will no longer be the uncontested reserve currency. The world will once again be multipolar, with the U.S. just one of multiple competing forces, and not necessarily the strongest one.
In the long run (10+ years) I expect gold to significantly outperform treasuries.
I know you won't respond, but several of your justifications are humorous.
Your long-term picture argument is what undermines the broader point. If gold has outperformed US treasures for nearly 50 years, and yet US treasuries have been a preferrable investment for nearly 50 years, that in and of itself is an indication that there are factors other than performance vis-a-vis gold (or other rocks) that are driving decisions of what makes something a good or bad investment. Some of these aren't mysteries- there are reasons that no one is trying to go back to a gold standard currency, let alone China.
Your next argument also undermines the specific supporting argument of China. China isn't dumping U.S. treasuries in favor of gold because gold is a better performer- again, your 1971 gold performance argument undermining the point- but because China is preparing itself financially for a conflict with the United States to mitigate sanctions risk, despite the demonstrated preference for the sanctions risk options instead of gold when the future sanctions risk was lower.
Ultimately, the value of an investment isn't in its own return, which your argument here focuses on, but in relation to the context and the alternatives. Even an investment that loses money can still be the preferable investment if the others would lose more. This is why the 35 trillion number of US debt is a big scary number used in isolation, but less so in relation to GDP (the nominal ability to pay), and even less so in like-to-like comparisons of total debt-to-GDP ratio comparisons with other prospective poles. It's not that it's a good metric- it's that while the US is in a league of its own in the ability to have debt, it's not in a league of it's own in managing debt, especially with peer economic poles. (The PRC debt-to-GDP ratio beyond government debt, for example- the whole property market financial crisis.)
The counter-points to this is that the Americans and Europeans have been sanctioning state and non-state actors for decades now, and seizing assets of parties who declare themselves in general conflict for centuries. Anyone surprised by the Ukraine War seizures was not paying attention, either to contemporary geopolitical finances in conflict or to historical contexts.
There is nothing new about it, and just as the threat of seizure in the west for reasons of crossing Western government red lines never went away, the reasons why countries would keep wealth in the west vis-a-vis somewhere else remain the same as they did a year ago- which is to say, it's a better system to store in at scale, unless you foresee yourself coming into direct conflict with the Western countries.
Big surprise, don't park your funds with people you may go to war with, or with whom you are trying to economically blackmail with energy cutoffs. The question isn't whether the US or West would do this- they have and did- it's who you think won't do this on equivalent or even less grounds.
Both of these China proposals ignore the limits of China's abilities.
For a resource-denominated currency, the core issue here is that if you have a resource-denominated currency, you need to be able to provide it in scale at demand, which is precisely what cracked the gold standard repeatedly and broke it in favor of fiat currencies. The global financial system is too large in scale for any reasonable value-resource to be actually stockpiled and providable on demand in case of bank runs, and China in particular is a demonstration of that if you look at the recent property crisis, and then consider what would have happened if the Chinese government was legally obligated to provide X-ounces of Whateveronium.
What they'd do- or rather, what they wouldn't do- goes into the other main challenge in Chinese currency, which is the lack of liquidity due to the capital controls. China tries to lean on other countries to do business in Yuan, it makes loans more favorable on the condition that their in Yuan, but the issue with Yuan is that China runs a marcantile trade policy and makes it very hard to move capital wealth outside of the country at scale vis-a-vis using it in China to buy something for export or to reinvest. That's fine and dandy for bilateral trade, but that's antithetical to a reserve currency, which serves as a medium for countries doing trade NOT with the reserve currency country, but to move it in and out and outside of it.
A transition to a more multipolar geopolitical order is precisely what will continue to bolster the power of the American Dollar's role in the global ecosystem as the main reserve currency, while crushing the viability of a gold standard reserve currency.
Trading currencies are at the most risk if they are engaged in conflict zones, as the countries backing them have their economic environments shaped by the risk perceptions not only of the country, but what it takes for the supply chains to reach the country. The more potential conflict zones there are to intercept those links, the less stable the supply chains, and the more the capital needs somewhere relatively stable to wait.
A more multipolar world order is not a more peaceful one, and the more the Eurasian rim is broken apart by pole-on-pole conflicts, like we saw with the Suez Canal route being decimated by the broader Israeli-Iran conflict, the more the capital looks for somewhere relatively more stable. There's only one integrated continental economy with minimal external resource dependencies in the world, and that's in the north-western hemisphere.
At the same time, however, the more conflict-engaged currency blocks will run into the costs of financing and funding more conflicts, which goes to the same issue that gold-backed countries had with the much smaller economies of a century ago. WW1 costs of war and related debts snapped the gold-standard currencies, and the US dropped a gold standard because of the costs that came with having to honor that conversion while being a reserve currency.
You can be a reserve currency, or a gold-standard currency, but you can't be both unless you can actually provide the gold on demand. The US at the height of its financial supremacy over the non-Soviet block couldn't afford that for long. A financial pole of the multipolar order who tries will quickly be drained until it's no longer a meaningful pole, or it drops the option.
Can I just post a link to a dollar vs. anything chart without that being considered rude? The dollar is as strong as it has ever been. This was a lot of wasted digital ink.
It would be rude, yes.
You'd be better off asking the question: "if the dollar is so weak, why does it compare like chart?"
It would also be odd, since not only was the strength of currency not particularly relevant to the argument, but the strength of a currency and the strength of an economy are two separate items, and have been for many a century.
No argument from me.
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