HOW THE WEST WAS LOST: A FALTERING WORLD RESERVE CURRENCY
Authored by
MATTHEW PIEPENBURG - 30 MARCH 2022
The Western financial system and world reserve currency is now in open decline.
From Rigged to Fail to Just Plain Failing
Just two years ago, I wrote a book warning that Western markets in general, and US markets in particular, were Rigged to Fail.
Well, now, in real time, they are failing.
This hard reality has less to do with COVID or the war in the Ukraine and more to do with one simple force, which euphoric markets and clueless leaders have been ignoring for decades, namely: DEBT.
As I wrote then, and will repeat now: DEBT DESTROYS NATIONS, FINANCIAL SYSTEMS, MARKETS, and CURRENCIES.
ALWAYS AND EVERY TIME.
As we see below, the INFLATIONARY FINANCIAL SYSTEM is NOW FAILING because its DEBT LEVELS have rendered it IMPOTENT to grow economically, react sensibly or sustain its chronic debt addictions naturally.
The evidence of this is literally everywhere, from the Fed to the Petrodollar and the bond market to the gold price.
Let’s dig in.
THE FED: NO BEST-CASE SCENARIOS LEFT
The Fed has driven itself, and hence the U.S. markets and economy, into an all-too predictable corner and historically dangerous crossroads.
If it turns to the left (i.e., more money printing/liquidity) to protect a record-breaking risk asset bubble, it faces an inflationary flood; if it turns to the right (and raises rates or tapers UST (Treasuries) purchases), it faces a market inferno.
HOW DID WE GET TO THIS CROSSROADS?
Easy: DECADES OF ARTIFICIALLY SUPPRESSED RATES, CHEAP CREDIT and a $30 TRILLION sovereign DEBT pile of unprecedented (and unsustainable) proportions.
THE DYING BOND BULL
With so much of this unloved debt on its national back, NO ONE BUT THE FED WILL BUY Uncle Sam’s IOUs.
As a result, long-dated Treasuries are falling in price and rising in yield as Bloomberg reminds us of the worst drawdown for global bonds in 20 years. (long-dated = long tenure; 20- to 30-year US Treasury)
In short, the central-bank created bond bull of the last 40-something years is NOW FALLING to its knees.
IRONICALLY, THE ONLY PATH to more demand for otherwise unloved bonds is IF THE STOCK MARKET FULLY TANKS and stock investors flee blindly back into bonds like passengers looking for LIFEBOATS on the Titanic.
Bonds & Stocks—They Can Fall
Together Unless Saved by
Debased Dollars
But as the “Covid crash” of March 2020 painfully reminded us, in a world of central-bank-driven bubbles, historically over-valued stocks and bonds CAN AND WILL FALL TOGETHER UNLESS the Fed creates yet another multi-trillion-dollar QE lifeboat, which just kills the inherent strength of the dollar in your wallet.
Hence and again: There’s NO GOOD OPTIONS LEFT. It’s EITHER INFLATION or a MARKET IMPLOSION.
FANTASY & DISHONESTY—THE NEW POLICY
But this never stops the Fed from PRETENDING otherwise OR USING WORDS rather than growth to cover its monetary sins.
Despite almost a year of deliberately lying about “transitory inflation,” the Fed has swallowed what little pride it has left and admitted to a real inflationary problem at home.
In short, and as bond legend Mohamed El-Erian recently observed, the increasingly discredited Fed has no “best case” scenarios left.
The Fed, along with its economically clue-less politicians, have essentially devolved the once-great US of A from developed country into one that resembles a developing country.
In other words, the “American dream” as well as American exceptionalism, is being DOWNGRADED into a KIND OF TRAGI-COMEDY in real time—i.e., right now.
Nevertheless, the always double-speaking Powell is doubling down on more fantasy (lies) about rising US labor participation and growth to help “produce” the USA out of the debt and inflationary hole which the Greenspan shovel initiated many “exuberant” years ago.
But once again, Powell is wrong.
LABOR PARTICIPATION—THE LATEST FANTASY
Based on simple demographics, lack of love for US IOU’s, growing trade deficits (alongside rising deficit spending), and an over-priced USD, the US labor force participation will not be going up in time for the land of the world’s reserve currency to grow itself out of the 122% debt to GDP corner which the Fed has driven into (after decades of low-rate drunk driving).
Without increased labor force participation, the only DC option left to fight inflation is to either:
1) raise rates to induce a killer recession (and market implosion) or else
2) slash government deficits by at least 10%.
Unfortunately, cutting deficits by 10% will also kill GDP by at least an equivalent amount, which weakens tax receipts and thus make it nearly impossible for Uncle Sam to pay even the interest alone on his national bar tab, as we’ve shown elsewhere.
ADDICTS ARE PREDICTABLE CREATURES
So, what will this cornered and debt-drunk Fed do?
Well, what all addicts do—keep drinking—i.e., PRINTING EVER-MORE increasingly debased USD’s—which just creates more tailwinds for, you guessed it: Gold. (But also hard asset commodities in general, industrial equities and agricultural real estate.)
In the meantime, the Fed, the US Government and its CORPORATE-OWNED PROPAGANDA ARMS in the U.S. media will blame all this new money printing and continued deficit spending on Putin rather than decades of financial mismanagement out of DC.
No shocker there.
But Putin, even if you hate him, sees things the headlines are omitting.
DE-DOLLARIZATION and PETRODOLLAR RUMBLINGS—Uh Oh?
There are increasing signs of “uh-oh” in the world of the once-mighty PETRODOLLAR.
FROM TRIGGER HAPPY TO SHOT IN THE FOOT
As we’ve been warning in our most recent reports, Western financial sanctions in response to the war in Ukraine have a way of doing AS MUCH DAMAGE TO THE TRIGGER-PULLER AS TO THE INTENDED TARGET.
In simplest terms, freezing one county’s FX reserves and SWIFT transactions has a way of FRIGHTENING OTHER COUNTER-PARTIES, and not just the intended targets.
IMAGINE, for example, if your bank accounts were frozen for any reason. Would you then trust the bank that froze your accounts down the road once the issue was resolved? Would you recommend that bank to others?
Well, THE WORLD HAS BEEN WATCHING Western powers effectively freeze Putin’s assets, and regardless of whether you agree or disagree with such measures, other countries (not all of which are “bad actors”) are thinking about switching banks—or at least dollars…
If so, the US has just shot itself in the foot while aiming for Putin.
As previously warned, the Western sanctions are simply pushing Russia and China FURTHER TOGETHER and FURTHER AWAY from US Dollars and US Treasuries.
SUCH SHIFTS HAVE MASSIVE RIPPLE EFFECTS which Biden’s financial team appears to have ignored.
And as everyone from Jamie Dimon to Barack Obama has previously warned, that’s not a good thing and is causing the broader world to re-think US financial leadership and US Dollar hegemony as a world reserve currency.
SAUDI ARABIA: RE-THINKING THE PETRO-DOLLAR?
Take that not-so-democratic “ally” of the US, Saudi Arabia, who Biden had called a “Pariah State” in 2020…
As of March, the news out of Saudi is hinting that they would consider purchases of oil in CNY as opposed to USD, which would signal the slow end to the Petrodollar and only add more inflationary tailwinds to Americans suffering at home.
One simply cannot underestimate (nor over-state enough) the profound significance of a weakening Petrodollar world.
It would have devastating consequences for the USD and inflation, and would be an absolute boon for gold.
Already, Xi is making plans to negotiate with Saudi Arabia [in April], which is China’s top oil supplier. Meanwhile, Aramco is reaching out to China as well.
WHAT CAN SAUDI DO WITH CHINESE MONEY?
Some are arguing that the Saudi’s can’t purchase much with CNY. After all, the USD has more appeal, right?
Hmmm.
Considering the fact that US Treasuries offer zero to negative real yields, perhaps “all things American” just aren’t what they used to be…
Saudis have now seen that the US is WILLING TO SEIZE US Treasuries as a form of FINANCIAL WARFARE.
Saudis (like many other nations—i.e., India and China) are certainly asking themselves if a similar move could be made against them in the future.
Thus, it’s no coincidence that they too are LOOKING EAST rather than West for future deals, and Russia could use its new Chinese currencies to buy everything from NUCLEAR PLANTS to GOLD BARS in Shanghai—just saying…
CONTINUE...
