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April 12, 2023

Wednesday Morning Rant [Joe Mannix]

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Dollars

Economic pressures are mounting. Big news in wonk circles last month was that the BRICS countries overtook the G7 countries in GDP in terms of total aggregate purchasing power. This is a big deal, but I don't think it's as big a deal as many of the pundits make it out to be. Yes, it is a major change and a big indicator of the fading economic power of the west, but the BRICS face many tremendous problems themselves. Demographic problems, debt, resource availability, corruption, etc. - all are endemic in the BRICS.

But there's more than that going on. The Chinese are finding (well, making) a market for Yuan settlement of international trade, at least among some of the BRICS. This will not get firm legs under it and the Yuan is not going to replace the Dollar for international settlements, but it is a major crack in the international system and it is much more important than the GDP move. Although I don't think that the Yuan will replace the Dollar, the Dollar will not remain the standard. It will take years to play out, but something else (likely many something elses - I doubt there will be a single "reserve currency" when all is said and done) will be used.


And that is what likely spells doom. The use of the Dollar - and usually only the Dollar - for international trade has allowed us to play outrageous games. We get to sequester a lot of our inflation overseas because of constant, structural international demand. We get to define most banking standards. We get to dictate terms. America's vast military power (which is waning but still significant) has only ever been part of the equation. Money was the other. Both are on the way down.

Kicking Russia out of SWIFT, expropriating the assets of Russian citizens, refusing Russian access to insurance or banking, etc. all forced some important countries to seek - and make - alternatives. This has likely dealt a mortal blow to the Dollar as the reserve currency. The treatment of Russia went well beyond normal sanctions and we did it without being in a state of war to provide cover. This administration's decision to forcibly eject a major economy from the international system may well go down as the greatest foreign policy error of the postwar era.

Regardless of cause, as the use of the USD for international commerce falls off and is replaced with other things, our game-playing gets a lot harder and a lot more expensive. We will no longer have the rest of the world as a buffer to moderate the consequences of our policies. We will no longer be able to crack the whip and have the rest of the developed world fall into line. The tool - sometimes a weapon, but always a tool - that is the Dollar is being blunted in real time. Couple that with the hangover from the financial crisis and COVID response - rising interest rates, a spendthrift government that can't quit, abject political corruption, etc. - and rough seas are ahead.

Increasingly serious problems await us. As we go broke, the government will try to stave off collapse by looting everything until it's empty. The rumored "Digital Dollar" is a good way to do that if they can pull it off. By the time we get to that point, however, we're no longer a meaningful international player. That's end-stage looting.

The death of an empire is is usually preceded by the empire's destruction of its money. Our money is dying, and our empire will die with it.

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posted by Open Blogger at 11:00 AM

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