The international business and financial world has long held that independence and diversification makes good business sense. Before the word “diversification” was popularized in business schools and the economic media, the quaint folksy “don’t put all your eggs in one basket” was the simple common sense precursor.
We have diversified equity portfolios, diversified forex positions, commodities, ETF’s, multiple market funds and the list goes on. These past few years I have written about the steadily increasing discomfort a number of businesses in several countries are encountering when having to deal cross-border with an increasingly over-regulated US Dollar and its related banking/financial institutions.
While the various sanctions regimes do play a big role, the US is the absolute global record holder in initiating targeted economic sanctions. Of late, there is an obvious unipolar trend with the US sanctioning nations and/or forcing trade tariffs regardless of treaty’s, negotiated agreements or covenants. With global trade under fire from protectionist policies, or the “national security” moniker, the U.S. dollar can no longer be depended upon by other major economies as a safe haven. Even a somewhat hardened business type like myself appreciates that this is reaching a regularity beyond the absurd.
While normally my opinion pieces deal mostly with Russian business issues, as the role the US Dollar has played in Russia has been key, for better or for worse since the 1990’s. Nonetheless, this past quarter has seen Russia selling off fully 50% of its Dollar denominated US Treasury positions. Comparatively speaking, this is only a drop in the global bucket, but it is increasingly indicative of a broader awareness, even a trend towards de-dollarization worldwide.
In short, there is a notion out there in the financial world that it is nearing high time to diversify away from being over-weight in US Dollar positions, as well as the permitted or disallowed trade corridors defined by Washington and find a broader, more internationally business-friendly multipolar trading balance.
Just the other day the Dollar’s share in world currency reserves as reported to the IMF fell in this first quarter of 2018 to a fresh four-year low, while euro, yuan and sterling’s shares of reserves increased. The share of USD reserves has contracted for the past five successive quarters as the Dollar further weakened in the first three months of 2018. Despite these movements, the dollar remains the largest reserve currency by a wide margin.
The macroeconomic view indicates a trend beginning to veer away from the Dollar. In the eternal quest for universal truths defined on a quarterly basis, the microeconomic view remains volatile with short-term strengths appearing this past second quarter. This due to anxieties over a potential global trade war and the ECB not raising their rates until end 2019, or perhaps much later. Some now speculate that even the Fed may rethink its ‘tightening schedule’ for the rest of 2018 – who knows? These are short term trading knee-jerks, and do not disprove the longer term trends.
Simply said, as the U.S. buys goods from abroad, they are in essence selling dollars out of the country in return for goods. The countries that sold to America have now received dollars in return. Those same countries now must find liquid and ‘safe’ places to park those dollars. With the dollar as the world’s reserve currency and consequently the US Treasury market the most liquid, those same countries normally would take those dollars and cycle them back into the U.S. by buying bonds. As the United States is now a net-debtor nation, these inflow cycles of new funding is constantly and increasingly required to service US debt as well as outstanding funding obligations. So the treadmill continues allowing increasing US debt that foreign countries by default essentially finance.
The recent up and down surges in the volatile and now multiple crypto-currencies are an indication that something “other” is needed, and is being looked for as alternatives to the US Dollar recycle and the basket of familiarly similar fiat currencies. It is, as we have seen in the crypto sphere, no longer a ‘subtle search’ for new trade mechanisms, repositories of value and safe havens.
All things being equal, gold has been well supported despite the apparent strengthening of interest rates and measures of economic muscularity. Even Switzerland’s solidly conservative state pension fund has joined in the de-dollarization trend this year and has strongly increased its investments in bullion, switching away from paper-backed securities in US dollars.
Several countries have noticed the geopolitical shift from West to East and perhaps this is one reason why they are acquiring physical gold as value insurance rather than US dollar-based paper.
The global debt burden continues to grow, while at the same time more than 60+% percent of all monetary reserves on this planet are in US dollars. Given the historic magnitude of current US Debt (now over $21 trillion), and the unprecedented uncertainty in current world trade relations where even the role of international law via the WTO has been railroaded. It appears that diversification away from the US Dollar and its related trade policies is a prudent area to investigate further, perhaps sooner rather than later. Remember another folksy saying – “who has the money makes the rules”, works well… until it simply doesn’t.