Everyone who has grappled with the world’s current monetary system knows what happened on the 15th of August in 1971 and what it meant for the global monetary order. On this day, President Richard Nixon temporarily closed the gold window and ended the dollar peg to gold.
Thanks for this article! I'm always sceptical when someone predicts the imminent demise of the dollar, because it just shows how much they fail to appreciate the complexity of the monetary system. We're talking years or decades here: to assume the status quo can continue like this forever is foolish as well. The truth is somewhere in the middle and probably best defined by the timeframe we attach to it.
And being sceptical is what you should be, but not on your short/mid-term view about the dollar :) - What the crisis that is currently unfolding shows is that investors do what they always do when the shit hits the fence -> the dollar gets bid. Could be that this is the turning point, but wasn't everyone talking about how QE is the turning point about 10 years ago? Nothing happened, but the system got more fragile.
The best thing one can do, in my opinion, is to think about possible signals and potential outcomes and to act accordingly when they happen. Until then, we should be sceptical ;)
Fabian, this is such a fascinating subject and I think Luke makes some excellent points. objectively, there is no doubt that the Russians seem to be playing a far stronger hand than the West assumed. and ironically it was Angela Merkel and the European hatred of President Trump that helped them deal that hand to themselves. but the cards are what they are and now they must be played.
Ultimately though, the acceptance of a neutral reserve asset will be a long time coming I fear, as those countries that don't have it before the declaration will fight tooth and nail to allow it. whether that is oil or gold or a basket, commodity importers are going to be screaming to prevent such an outcome. Which takes us back to the dollar, as you aptly describe the cleanest dirty shirt in the laundry. I feel a little discussed consequence of being the reserve currency is that the US is effectively required to print them to satisfy the rest of the world's needs.
FWIW, which is probably not much, I feel like the first major step will be a debt jubilee of some sort, reducing the amount of leverage outstanding in the world. only then can a neutral asset with limited ability to be expanded be acceptable to the bulk of the world.
To me that argues that real assets remain the hold of choice and debt instruments are going to be a problem going forward.
It's indeed, Andy. The biggest irony of all that is that the German dependence on Russian gas happened because after Fukushima, Angela Merkel made a sudden U-turn in her energy policy and pushed for an end of nuclear energy in Germany. The plan was to substitute the Energy from nuclear (and coal) with renewables. But renewables need a reliable energy source as a foundation because wind and solar energy is fluctuating. With a lack of options, as nuclear was blackmailed, gas was the only situation left. So, their weakness for becoming a pioneer of renewables put them in this mess and now the EU as a whole thinks that renewables will get them out of this mess, while many countries still oppose the use of nuclear energy. Plus, because of regulation and lack of resources those renewables will be produced in China, and they use coal energy. From one dependency into the next, I might say, and it will have no effect on CO2.
Regarding the neutreal reserve asset you are correct, it might take some time. However, if I was an energy importing country, I'd still embrace it, because if you process those imports into goods you export again, you will end up like the Germans when they had the Deutsche Mark. If you import energy and commodities and export goods, your currency might appreciate which is making your imports cheaper. I think that it's a widespread fallacy that countries with a strong currency cannot be exporting countries. For the population it would be beneficial anyway, because a strong local currency means that you have a high standard of living.
I am not so sure about the debt jubilee, to be honest. More likely (in my opinion) is that they will not turn away from the path they have striked already, which is inflating the debt away, bring debt/GDP levels down and then (maybe) adopt a new system with a neutreal reserve asset. Countries never chose default, they always choose inflation.
Agree on your last point. My thesis is that hard assets (gold, commodities, bitcoin(?), etc.) will be the best performing asset class this decade. Yes, debt instruments will be a problem, but not if you inflate the debt away.
Thanks for this article! I'm always sceptical when someone predicts the imminent demise of the dollar, because it just shows how much they fail to appreciate the complexity of the monetary system. We're talking years or decades here: to assume the status quo can continue like this forever is foolish as well. The truth is somewhere in the middle and probably best defined by the timeframe we attach to it.
And being sceptical is what you should be, but not on your short/mid-term view about the dollar :) - What the crisis that is currently unfolding shows is that investors do what they always do when the shit hits the fence -> the dollar gets bid. Could be that this is the turning point, but wasn't everyone talking about how QE is the turning point about 10 years ago? Nothing happened, but the system got more fragile.
The best thing one can do, in my opinion, is to think about possible signals and potential outcomes and to act accordingly when they happen. Until then, we should be sceptical ;)
have a great weekend!
Fabian, this is such a fascinating subject and I think Luke makes some excellent points. objectively, there is no doubt that the Russians seem to be playing a far stronger hand than the West assumed. and ironically it was Angela Merkel and the European hatred of President Trump that helped them deal that hand to themselves. but the cards are what they are and now they must be played.
Ultimately though, the acceptance of a neutral reserve asset will be a long time coming I fear, as those countries that don't have it before the declaration will fight tooth and nail to allow it. whether that is oil or gold or a basket, commodity importers are going to be screaming to prevent such an outcome. Which takes us back to the dollar, as you aptly describe the cleanest dirty shirt in the laundry. I feel a little discussed consequence of being the reserve currency is that the US is effectively required to print them to satisfy the rest of the world's needs.
FWIW, which is probably not much, I feel like the first major step will be a debt jubilee of some sort, reducing the amount of leverage outstanding in the world. only then can a neutral asset with limited ability to be expanded be acceptable to the bulk of the world.
To me that argues that real assets remain the hold of choice and debt instruments are going to be a problem going forward.
have a great weekend
It's indeed, Andy. The biggest irony of all that is that the German dependence on Russian gas happened because after Fukushima, Angela Merkel made a sudden U-turn in her energy policy and pushed for an end of nuclear energy in Germany. The plan was to substitute the Energy from nuclear (and coal) with renewables. But renewables need a reliable energy source as a foundation because wind and solar energy is fluctuating. With a lack of options, as nuclear was blackmailed, gas was the only situation left. So, their weakness for becoming a pioneer of renewables put them in this mess and now the EU as a whole thinks that renewables will get them out of this mess, while many countries still oppose the use of nuclear energy. Plus, because of regulation and lack of resources those renewables will be produced in China, and they use coal energy. From one dependency into the next, I might say, and it will have no effect on CO2.
Regarding the neutreal reserve asset you are correct, it might take some time. However, if I was an energy importing country, I'd still embrace it, because if you process those imports into goods you export again, you will end up like the Germans when they had the Deutsche Mark. If you import energy and commodities and export goods, your currency might appreciate which is making your imports cheaper. I think that it's a widespread fallacy that countries with a strong currency cannot be exporting countries. For the population it would be beneficial anyway, because a strong local currency means that you have a high standard of living.
I am not so sure about the debt jubilee, to be honest. More likely (in my opinion) is that they will not turn away from the path they have striked already, which is inflating the debt away, bring debt/GDP levels down and then (maybe) adopt a new system with a neutreal reserve asset. Countries never chose default, they always choose inflation.
Agree on your last point. My thesis is that hard assets (gold, commodities, bitcoin(?), etc.) will be the best performing asset class this decade. Yes, debt instruments will be a problem, but not if you inflate the debt away.
Ok, this got longer than I thought :)
have a splendid weekend!