Roth: De-dollarization may be a conspiracy, but it’s not a theory

U.S. Treasury Secretary Janet Yellen, who tends to be wrong on just about everything (remember her good old "there will be no inflation problem" prediction, among many others), has made a new statement for us to be concerned about. As reality tends to directly oppose her words, there should be more concern about her recent congressional testimony, in which she stated that she expects the dollar to remain dominant.

Her testimony came within days of NPR running an article on whether the dollar was at risk of losing its reserve currency status, something that Glenn Beck and I, along with other commentators, have been talking about for a while.

Some have called this a conspiracy theory. While there may be elements of conspiracy at play, this is certainly not just a theory. As I researched for my upcoming book, "You Will Own Nothing," the movement away from the dollar has been coordinated by various countries around the globe and is a reality, not theoretical.

Yellen’s comments around King Dollar included, “We should expect over time a gradually increased share of other assets in reserve holdings of countries — a natural desire to diversify." But it isn’t nature that is driving the change — it’s the United States' actions, and other countries are capitalizing on the Fed's and government’s destructive policies.

For the privilege of being the world’s reserve currency, which includes the cheap financing that the government has exploited for its own growth, the Fed is supposed to keep the U.S. dollar stable for the good of the global economy. As expressed in noted economist Robert Triffin’s eponymously named Triffin dilemma, that can cause the central bank to have to make decisions at times on whether to support the interests of the domestic economy or of the global economy. Amazingly, in recent decades, the Fed and government policy have managed to do neither.

While transferring wealth from Main Street to Wall Street and destroying the dollar’s purchasing power domestically, the Fed's and the government’s policies have wreaked havoc on the countries that have also depended on dollar stability. On the global stage, when U.S. dollars become more expensive, the same U.S. dollar buys less today than it did in the past. For countries that import critical commodities like oil and food, which have been for decades priced mostly in dollars, that shift threatens their food and energy security.

This is also an issue for emerging countries around the globe that have sought debt financing in U.S. dollars as well.

The action of the Biden administration to weaponize the dollar by freezing Russia’s access to its reserves after the Ukraine invasion was a further turning point, perhaps even the point of no return, causing more urgency for countries to ditch the dollar or at least minimize dependency upon the dollar.

It’s hard to hold the world’s reserve currency when you actively restrict access to reserves at your whim. What major economies want to give the U.S. that power?

In terms of Yellen’s testimony regarding the gradual erosion of the U.S. dollar in global reserves, she’s again late to the party. An Insider headline shared, “The dollar's dominance as a reserve currency eroded last year at 10 times the pace seen in the past 2 decades.” That’s an odd definition of “gradual.”

Quoting analysis from Eurizon SLJ Asset Management, Insider said that the U.S. dollar has dropped from around “two-thirds of total global reserves in 2003, then 55% by 2021, and 47% last year.” The authors called out that 2022 move, citing the research authors as saying, "This 8% decline in one year is exceptional, equivalent to 10 times the average annual pace of erosion in the USD's market share in the prior years."

In one of his firm’s recent research reports, FFTT’s Luke Gromen said that from 2014 to the present, global central banks haven’t been buying Treasury securities. Moreover, he says that when these foreign central banks have U.S. dollar needs, they have been choosing to sell Treasuries rather than gold as a mechanism to raise those U.S. dollars.

In fact, global central banks have been stocking up on gold. The World Gold Council said that in 2022, central banks increased their holdings by a record amount: 1,136 metric tons. For Q1 2023, they hit another Q1 record, adding 228 metric tons.

While central bank reserve holdings are one thing, trade is another. And in that area, the U.S. dollar continues to dominate — at least for now. Per Reuters, “The dollar was on one side of 88% of all foreign exchange trades in April last year, according to the Bank for International Settlements. The Fed estimates that between 1999 and 2019 the dollar accounted for 96% of trade invoicing in the Americas, 74% in the Asia-Pacific region, and 79% in the rest of the world.”

Given that, recent trade announcements have created new concerns. For one, it was reported that the Bank of China plans to open its first branch in the Saudi Arabian capital of Riyadh later this year.

This follows moves from China, which is the world’s largest net oil importer, to pressure Saudi Arabia and other oil exporters to allow China to pay for oil in yuan instead of dollars.

During this week’s Arab-China Business Conference, which also took place in Riyadh, CNBC reported, “Saudi Arabia and China are part of a multipolar world order, and their mutual interests are ‘strong and rising,’ minister says.”

This Saudi-China alliance has not only financial but military implications, as the Saudis have historically been dependent upon the U.S. for military protection. Shifts in trading and currency could also portend shifting of military alliances in some fashion as well.

Barron’s reported that China and Brazil made a deal to trade in their own currencies several months ago. Iraq also allowed trade with China in yuan earlier this year.

China, which has itself been loading up on gold, is also allowing for gold to be a “soft-backing” for its trades, perhaps to allay concerns about the communist-backed currency.

All of this may be bullish for gold, but not so much for the dollar.

While China’s role is still emerging and there isn’t a true full dollar rival, the shifting global financial order and its implications for the U.S. cannot be ignored.

After 80 years, history is starting to rhyme with other financial orders that have been through a decline. If the U.S. doesn’t get its financial house stabilized, it won’t be good for Americans or the global economy.

Carol Roth's new book, “You Will Own Nothing,” is available for pre-order now.