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Is the US Undermining the Dollar’s Credibility?

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The credibility of the dollar is taking some self-inflicted blows. And the world is watching.

Could this hasten the end of the greenback as the world’s reserve currency?

It started long before recent events in Ukraine. The Federal Reserve printed trillions of dollars out of thin air in response to COVID-19. This devalued the dollar as evidenced by the surge in prices over the last year. This was the predictable result of creating money out of thin air and handing it out to spend. More money chasing the same amount (or with governments shutting down economies fewer) gold and services will always lead to a general rise in prices.

The only reason the US can get away with this policy to the extent that it does is its role as the world reserve currency. There is a built-in global demand for dollars that helps absorb the money printing. But what happens if that demand drops? What happens if China and other countries decide they don’t want to hold a currency that is losing value every day?

That could happen sooner rather than later as the rest of the world watches the US use the dollar as an economic weapon.

After Russia invaded Ukraine, the US cut some Russian banks, including the central bank, off from the SWIFT payment system.

SWIFT  stands for the Society for Worldwide Interbank Financial Telecommunication. The system enables financial institutions to send and receive information about financial transactions in a secure, standardized environment. Since the dollar serves as the world reserve currency, SWIFT facilitates the international dollar system.

SWIFT and dollar dominance gives the US a great deal of leverage over other countries.

And the US went a step further. In an unprecedented move, the Federal Reserve froze Russia’s dollar reserves. In effect, Russia’s dollar assets are valueless to the country. It can’t use them at all.

Even if you think Russia deserves these draconian economic sanctions, it’s important to remember that they could come at a cost.

The world is watching.

Russia had been preparing for this for years, working to minimize its exposure to the dollar. The Russian central bank aggressively divested itself of US Treasuries, selling off nearly half of its US debt in April 2018 alone. In June 2021, Russia announced plans to completely eliminate dollars and dollar-denominated assets from its sovereign wealth fund.

Russian de-dollarization was never a threat to dollar stability. The Russians didn’t hold a lot of Treasuries. But imagine if China started dumping the greenback.

And make no mistake, the Chinese are watching US actions closely. They realize that whatever the US can do to Russia, it can do to them.

If you were a Chinese policymaker, wouldn’t you be wary of holding too many dollars?

In fact, Sen. Marco Rubio is already rattling economic sabers at the Chinese. On March 7, Rubio announced he is working on legislation to impose sanctions on the Chinese “if we catch trying to use their Cross-Border International Payments System (CIPS) to help Russia get around SWIFT sanctions.”

And that reveals another problem for the US dollar. For several years, China, Russia and other countries have worked to create alternatives to SWIFT and the dollar system. CIPS is the Cross-Border Interbank Payment System. It’s an alternative payment system outside the reach of the US government.

Russia also developed its own payment system for internal use several years ago.

You might be tempted to say, well, this is just Russia and China. So what? But it’s unlikely that the rest of the world will stop doing business with these two countries long-term just because the US says so. India would likely join in an alternate system in order to continue trading with China. This is a huge population of people who could suddenly find they have no need for dollars.

And it’s not just America’s enemies that are wary of US economic warfare.

After Donald Trump pulled the US out of the Iran nuclear deal,  the EU announced the creation of a special payment channel to circumvent US economic sanctions and facilitate trade with Iran. EU foreign policy chief Federica Mogherini made the announcement after a meeting with foreign ministers from Britain, France, Germany, Russia, China and Iran. She said the new payment channel would allow companies to preserve oil and other business deals with Iran.

Speaking of oil, when President Biden recently reached out to Saudi Crown Prince Mohammed bin Salman and the UAE Sheikh Mohammed bin Zayed al Nahyan to talk about gas prices, they reportedly refused to talk to him.

Again – a wary world is watching.

Credibility and its status as the reserve currency is the only thing the US dollar has going for it. Take that away and the dollar isn’t a whole lot better than the ruble. US policymakers should beware.

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About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
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