Dismantling the dollar hegemony one yuan at a time.
I’ve been asked many times about the impending “death of the dollar.” I know some folks who expect the dang thing to die. They’re already envisioning the spectacle. An entire industry has sprung up to prepare and equip people for the moment when the dollar dies. It’s like insurance, the theme goes: hopefully you’ll never need it.
But the dollar is a human creation, a fiat currency. It doesn’t have a life of its own. It’s managed, rigged, and manipulated. It’s an accounting entity, a (lousy) store of value, and a means of handling transactions so you don’t have to barter your first-born for a Lexus.
As longs as it’s useful, the powers that be are going to keep it around. But over the long term, the dollar will do what it has done since the Fed was put in charge of it 100 years ago: it will lose value.
And the “strong dollar” these days? Ah, the irony!
It’s causing mayhem in the emerging markets where governments, corporations, and even consumers borrowed in dollars to save on interest. Now that their currencies are collapsing against the dollar, it’s getting very expensive to service these dollar debts, and they’re going to explode, and the holders of these debts are going to eat some big losses, unless they get bailed out again.
This “strong dollar” dents US exports and boosts imports. US corporations use it liberally as an excuse for their sorry revenues and earnings.
This is the value of the dollar in relationship to other currencies. These relationships are rigged to the nth degree. They go up and down and react to a million things, including central bank jawboning and monetary policies.
The actual value of the dollar? Don’t look!
It’s expressed in what the dollar can still buy in the US. And it’s terrible.
In terms of consumer goods and services, a single dollar isn’t buying much anymore. It used to buy a night in a hotel. After decades of inflation, Motel 6 came along and offered standard rooms for $6 a night. That was in the seventies. Now people don’t even remember where the name came from.
In my entire life, there were only three quarters – during the Financial Crisis – when the published data indicated that the dollar actually gained value in terms of consumer goods and services. The rest of my life, the dollar lost value, sometimes at a breath-taking pace, other times more leisurely.
In terms of assets, the dollar is more quixotic. It can lose value even faster. It now takes $1.2 million to buy a median home in San Francisco, likely a two-bedroom apartment in a so-so neighborhood. In 1993, the same median home in the same neighborhood cost around $250,000. It’s not that apartments have gotten bigger or better. It’s that the dollar has plunged in value against other assets.
Same thing happened in stocks, bonds, classic cars, art: the dollar buys hardly anything anymore.
But the dollar has a vicious way of suddenly reversing course and soaring in value against assets such as stocks or real estate. This makes people nervous. They call it a “crash,” and they try to get out of these assets, and in the process, the dollar becomes the most desirable asset out there, and suddenly you can buy stuff with it again [The Bull Market in Cash Is On].
Waning dollar hegemony in international trade.
The dollar has dominated the world as an international trading currency. The Petrodollar is an example. The euro was created in part to break the dollar’s hegemony and knock it off its pedestal as sole trading-currency superpower.
In 2005, the Eurozone was still abuzz with possibilities. Soon, it would price the oil it would buy from Saudi Arabia in euros. Trade would be de-dollarized. It didn’t take all that long before the euro debt crisis put the kibosh on those ambitions, but the euro has nevertheless become the second-largest trading currency in the world.
In its September 1 report, SWIFT noted that in July, 43.6% of global payments were in dollars; 28.5% were in euros. These percentages are very volatile, and there were months when the euro beat out the dollar. Number three was the UK pound at 8.7%. Number four, the Japanese yen at 2.9%. And number five, the Chinese yuan at 2.3%. Yuan use has been climbing, particularly in Asia, but it’s still just a tiny speck.
So the “de-dollarization” of trade is happening. But it’s happening at a glacial pace. Even when the dollar gets knocked off its perch as the number-one trading currency years down the road, it will remain, given the size of the US economy, among the top three.
The buck was never the sole reserve currency.
Reserve currencies are those that are held in large enough quantities by governments and central banks as part of their foreign exchange reserves. The IMF tracks this, and there are many of them. The dollar is number one and the euro number two.
The currency composition of official foreign exchange reserves in Q1 2015 put the dollar at 64.1% and rising from its recent low of 61% in 2013. But in the halcyon days of the mid to late 1990s at the eve of the euro, it accounted for about 71%.
The euro dropped to 20.7% in Q1, down from its peak in 2009 of 27.6%. The debt crisis did more than just destroy the economy of Greece. It destroyed the once growing confidence in the euro among central banks! If the debt crisis hadn’t happened – if pigs could fly – the euro would by now be at rough parity with the dollar. That was the pipedream of the euro architects.
The Japanese yen rose to 4.2%, highest since 2002, somewhat ironically as the Bank of Japan has vowed to devalue the yen, and then has proceeded to do so very successfully. In 1995, the yen still accounted for 6.8%. The UK pound was in fourth position at 3.9%. The Canadian dollar and the Australian dollar share fifth place, at 1.9% each.
The Chinese yuan is not among them. But it will eventually be anointed a serviceable reserve currency. Gradually, it will begin to show up on central bank balance sheets. These changes happen at a glacial pace. But they do happen, and eventually, inevitably, the yuan will play a major role as reserve currency.
One thing is certain: in the foreseeable future, neither the euro nor the yuan can knock the dollar off its perch as number one reserve currency.
But the buck stops here.
Real cash-in-fist, however, is on the way out. The war on cash has been declared. And younger folks don’t even carry cash. Electronic payments dominate. The anonymity of paying with cash, so dear to folks like me, means nothing to them. And putting hundred-dollar bills under the mattress makes the bed uneven. So someday, the dollar as cash-in-fist will be truly dead.
But for the remainder? A former colleague called me during the market turmoil in August, apparently to network. It’s been a while, so I asked her how she’s doing. “Like the Dow,” she said. “Everything’s still there, but a lot lower.”
And that will be the long-term fate of the dollar.
The dollar isn’t a harmless toy, however. Read… World Is Now “More Exposed than Ever” to Explosive Dollar
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Yes, many people may dream of the day the dollar crashes and burns, but what exactly would replace it? As bad as things are here in the US things elsewhere are so much worse. Japan has a demographics nightmare with an economy that never recovered from their bubble and one of the most indebted countries in the world relative to the size of their economy, the bad debts generated from that time are still on the books of their banks. In Europe the crisis was never resolved and frankly the Euro has even less backing it than the dollar, so not only is there lots of bad debt there’s no fiscal union. And China? The biggest debt bubble in history with loads of bad debt just waiting to go off. It’s very telling that it’s huge FX reserves are draining in order to support their currency.
I don’t look at this as the death of the dollar so much dollar revitalization, making it MORE valuable and not less. Credit bubbles have always lead to deflation with the dollar gaining value, I don’t think this time will be different.
Please. Go travel outside of the US for a little bit of perspective. Many countries in Asia are a LOT better than the US in terms of infrastructure, etc. The US too has a nightmare of debt load if you include future liabilities. In fact it’s a lot worse in terms of dollar value. Most US Investment Banks probably have a ton of undeclared derivatives waiting to blow up.
When Japan collapses, you know what will happen? Some social disruption, but nothing more. Just look at Fukushima and compare that to Katrina. No looting, etc.
There’s a cottage industry in America on survival gears, kits, etc. You know why? Because when this country finally collapses, it’s pretty much Mad Max for a while.
By the way if you want to taste how great America is, please come over to SF. The homeless, the smell of piss and shit on Market Street should make you heady with possibilities about the future of the country. Not to mention the frequent BART and Muni delays.
I read an interesting article once that argued that Japan, while modern, has a long and well-understood history of being non-modern Japan — an entire identity that it can fall back on. The US really doesn’t, it’s cutting edge, modern, up-to-date, and there’s nothing else if that fails.
I’ve sometimes wondered if this plays out on a human scale in how people behave when they fall out of society. In Thailand, homeless people still bathe, still behave decently, still conform to some orderly expectations. If you’re going to do something for homeless people, you can trust them to organize themselves on their end. Not so much in the US — social service organizations basically operate on the principle that their clients can’t be trusted to do so much as stand in line.
In the US the war on poverty is a jobs program for middle class professionals, social workers, teachers, etc. It has nothing to do with actually helping the poor. If they wanted to help the poor they could give them money.
Oh I’ve been to Asia, but seriously you can’t compare them to the US. Realistically there’s very few countries that are well developed, for every South Korea there’s a North Korea and a Burma. Even for those that are very prosperous, almost all of them are very very small like Singapore which makes building infrastructure far far easier. And even taking all of that into account there’s still the fact that their infrastructure does not yet have the aging problem that ours does simply because none of it existed 40 years ago. Even in larger nations like China, more often than not infrastructure development is often focused in a few developed cities while the villages often have very little and often do not even have modern agriculture. And as for China specifically, a lot of its new infrastructure will not age nearly as well as ours has and I’d be surprised if most of it lasted more than 30 years, it’s very very poor quality and often major corners are cut so the officials can line their pockets. But make no mistake, China will be at the center of the next crisis as it’s banking system continues to rack up NPLs.
I don’t believe Japan will totally collapse, but the supposed social harmony of Japan is more of a myth that you’d think, they can riot and have done so in the past. http://www.nytimes.com/1990/10/07/world/rioting-laborers-disrupt-osaka-in-protests-over-police-corruption.html
But realistically yes, there was no looting after Fukashima, however almost all of the looting that was done in Katrina is a small subset of the population. It’s true Japan doesn’t have that inner city gangsta thug culture and that is of some benefit, but the cohesion comes at such an extreme cost I don’t think it’s worth it. Japan leads the developed countries in suicide rates and treats it’s women appallingly, domestic violence wasn’t even illegal until about 10 years ago.
And yes, San Francisco is full of homeless people, but you see that in a lot of left leaning cities because the leadership there is much more interested in carrying out grand social experiments than actually helping the people that really need it. This has more to do with failure of political leadership than lack of real capability.
Yeah, but you are cherry picking and doing a poor job even at that. The US is a country and Europe is a continent. And then you pick one example of one riot in Japan to say something is a myth. People are what they repeatedly do, one or two examples don’t make a trend.
Why not pick the advanced countries in Europe/Asia and compare those to the US?
“This has more to do with failure of political leadership than lack of real capability.” In the end, they are both the same. And who elected these leaders in the first place? The problem with America is lack of real accountability and it’s not just political, it’s everywhere from business, academia, etc.
I agree with you. This is a competition to see which currency is the worst, and it’s certainly not the USD.
No one is going to take the Yuan seriously. The Chinese government clearly has no idea what it’s doing with it’s economy. The Euro is laughable – it’s fundamental flaw is that it’s a monetary but not a fiscal union.
What else can replace the USD? The Yen? Japan’s story is long finished.
Replacement will come in a system which operates in multiple currencies. There is a strong possibility that they will be tied up to golen standard. The rest is history.
They wont be tied to a gold standard as gold has become over 300% overpriced since it diverged from silver and copper.
Gold is now FUD and insanity priced. It is useless in its physical form to anybody but hoarders and the lunatic the world is ending and gold will rule fringe.
The only use it has it to make a lot of market manipulators rich in the paper gold trade market.
A metal standard, yes quiet easily.
Not gold any more, it is a lunatics unrealistically price, toy, it goes the way of beads and shells….
Just remember: the practical joker who tells you that wanting to use cash is so passe also plans to take a little piece of every transaction out of your pocket. And the joke is on you also when the card reader fails to recognize your debit card, or the bank computer informs you you have no balance.
Yep, the financial times featured an op-ed, by a cowardly ‘unknown writer’, called the end of a barbaric relic
Let me just say this, to which I totally agree, 99% were disgusted and relentlessly attacked the article across so many fronts.
The problem is the young – we must tell them why this is an attack on their freedom. They are too busy getting smashed at bars, on credit and paywaves, to give two hoots!
I do not doubt the push towards “cash-less” society, but there are problems for the corrupt insiders as well.
Assuming cash was totally outlawed (and non-existent) tomorrow … how does a junkie buy heroin? On their debit card? Does the dealer have one of those little ipad things with the CC attachment? Dude, your declined. Got another card?
Drugs, as an industry, has fueled the “black ops” market for years. Not going away. I don’t want to sound all conspiratorial or anything, but the black market becomes the white market in a true “cash-less” system. No one can buy a hooker. No one can hire a hit man. No one can buy drugs. No one can bribe an official. And those funds can’t fund things that aren’t supposed to be funded.
Cash-less society is a joke. It is another pipe dream of economists because all animals are equal.
I think central planners are starting to run out of road, so the more extreme options are being floated. But it doesn’t mean they are BETTER ideas than the last set of solutions everyone thought would work.
Another sign post on the way down hill …
“…but there are problems for the corrupt insiders as well.”
Not really. See how Hillary has that angle covered. $100’s of Millions received as “donations” to her “charitable foundation” from Arab despots, shady Eastern European businessmen and various nefarious agents such as outsourcing companies and Wall Street behemoths. All run and managed by her spooky daughter.
But as you say, small timers will find cashless economies very hard to get around.
Nice take, cooter. Agree and appreciate all your opinions over the course of following this site, all the way from the land of oz.
When they take the cash away, they will be shooting holes in both their feet.
People will simply use something else.
probably silver and copper again, as they want to do the transactions that need. A physical exchange medium..
It wont take long for small food suppliers, and hospitality places to start accepting this medium.
The cashless society operators then have a huge problem, as their tax take, and transaction tax take, evaporates.
The only time a cashless society could come close to working would be in a high tech Communists/Dictatorship model. Like the older china where the common man couldn’t steal a bicycle spoke, and get away with it.
That cashless thingy will work fine until the networks are hacked and everyone with a cell phone loses a good chunk of their ‘numbers’ … and will wait and wait and wait to get them back.
The electric grid cannot be taken for granted, either. Paper burns but it does not disappear with the lights go out.
As for dollar ‘worth’, it is set millions of times every single day at gas pumps around the world, directly (in the US) and indirectly (overseas). As dollars become a proxy for fuel instead of fuel waste, the dollar will indeed take on value, become a collectible and hoarded as a consequence.
You might want to read ‘Glory And The Dream’ to find out what happens when dollars are collectible and are hoarded.
Steve, thank you for all the thoughtful commentary you have provided, I feel the IDEa of conservation by any means has been worth my following.
What do you think about the chances of a change to a technocracy, with a system based on highly regulated resource usage, in a socialist framework would be?
This may render cash, useless, outside a raging black economy.
I read a bit on it from this guy:
Anyone? Is he for real, or a kook?
“Cash-less society is a joke. It is another pipe dream of economists ”
CrazyCooter, the war on cash, and the resulting cashless society, is not only very real, it is already in force. If you don’t believe that, try to buy a new car or a house with actual cash. You can’t do it.
What’s devalued the dollar, more than anything else, is financialization. When I first went to the University of Hawaii, my tuition for one semester was $117. Today I would have to pay $15,348 for those credit hours. The first new house my parents bought, a simple 3bdr/1bth rancher, was purchased for $17,000. That house sold two years ago for $489,000. That is because both houses and college educations are bought through leveraged debt. If houses and tuitions couldn’t be bought with leveraged debt, they would be far less expensive, and, consequently, the dollar would be far stronger.
Medical care is even a better example, because it is not only purchased with leveraged debt, but through insurance, which adds even more cost. Take the cost of drugs, for instance. The hepatitis C drug called Sovaldi was developed by Gilead Sciences. The manufacturing cost is $150, but the price you pay is $84,000. Again, if there was no leveraged debt or insurance involved, the cost of Sovaldi would be far lower, and Gilead Sciences wouldn’t be making insane profits.
However, I believe that the only time the dollar actually gained value, for a sustained period of time (a few years), was during the Great Depression. Real estate prices were hit the hardest. US real estate prices actually crashed two years before the stock market did,. They crashed in 1927. It took another 27 years, until 1954, for those prices to fully recover. Could something like this happen again? It could. With a derivative meltdown and a credit crash, the dollar would appreciate. Deflation is not a matter of ‘if’, but a matter of ‘when’. Once folks have lost their purchasing power (because automation will seriously deflate the value of human labor capital), prices will go down and the dollar’s value will go up. If people have a limited amount of money with which to buy things, they will buy fewer things, and the prices of those things they do buy, with their limited discretionary funds, will go down. During the Great Depression, had it not been for farm price supports, the low prices for food would have bankrupted most farmers. One has to wonder how low food prices would be today without credit buying, Social Security benefits, and food price support through the SNAP card program.
Cash vs cash-less is not about paying cash for everything, such as a house or a car, but access to paper notes of sufficient face value to handle daily transactions (e.g. grocery shopping, utilities, fuel, etc) without being overly burdensome.
Ever since banks came about, people trade the paper claims instead of the actual gold assets. Writing a check (which I still do to pay bills) works just as fine.
Many people prefer the features of debit cards, credit cards, and the like, so they use them. Not as many people use cash anymore (which I do). I am not arguing that trend. And if, over time, cash is abandoned, that will be a choice made by all its users, just like we finally got rid that pesky penny because everyone hates them.
What is a joke and what will fail, and this was more my point, is the morons in the ivory towers who screwed everything up, and whose only solution at this point is NIRP, must declare cash dead and illegal so they can use a ruler to draw a line and predict the future. These are the idiots who now realize they have to push this cashless idea all of a sudden.
If society slowly gives up on cash over 30 years, I wouldn’t be overtly surprised to be honest. In fact, the first mile marker on that road will be the elimination of the penny. Make sense, no? Do you hear the deafening sound of banks, mints, businesses, and consumers demanding the removal of the penny? Right.
Cashless ain’t going to happen next year due to some idiots passing a law to enforce NIRP. And I really think that is the point at issue, at least as far as the parts of the OP that addressed it.
I just bought a new car with cash. That’s a lie.
If you did (assuming it was in the US and the car cost over $10K), you were reported to the government by the dealer and by the dealer’s bank.
Cut this guy a break.
“New” to him doesn’t necessarily mean “new off the dealer showroom”,
He might have bought a fairly clean used car for $8K from a used car dealer.
No report, no problem.
The “Cashless Society” will work out about the same as the “Paperless Office”.
“Paperless office” was the big thing in the 1980s. All it ended up doing was boosting demand for printers and paper, as people were printing the electronic stuff. But gradually things changed. And for the past 8 years or so, 30 years after “paperless” had become a hot topic, my office is essentially paperless.
I can still use paper. But I don’t. It’s no longer useful.
Cash will go the same way. I’m attached to cash. And I will continue to use it to the max possible. But the possibilities will shrink, and in the end it will be hard to do anything useful with cash.
The cashless society is like the leisure society, a nice idea that will never happen. The underground economy can run on any fiat it wants. It can decide to use other currencies or their own. When America goes cashless I will be able to get Yuan at the atm in the Chinese restaurant delivered to my house, as an example. Anybody that doesn’t understand this has never seen an underground economy in action.
My info to Wolf ect..
the under ground economy in a war is a good example..of a “cashless” society..(I worked for the UNHCR in ex Yugoslavia 1993-95)
First in March 1993 I got 88.000 dinars for 100 Dmarks at the local bar in Zagreb/Croatia where we were stationed, as there was no real war there anymore…but 50 km south in Bosnia.
We would take 1-2 day Convoys with food/blankets ect in Bosnia where the hard currency was…Cigarettes..!!..first they were very hard to get and they were consumed even by the poor workers undloading our trucks..
(Man 8×8 v8 2xturbo diesel…converter slutch…6 gears..could start in 6th gear and crawl to 90km/hours in 90 seconds…unreal monster)
They tried to sell us eggs at 1 Dmark each…but you could buy Hand granads for 2 Dmarks or a Kalashnikof for 20 Dmarks..
They were short on Coffee,cigarettes and fuel.
Their own Bosnia or Serbian Dinars were even less desireable..they scapped 6 zero.s of the the notes about 1994….
When I left Zagreb after 3 months in late may 1993, I got 188.000 Dinars for my daily pocket money of 100 Dmarks….almost 100 % more in just 3 months.
Nowhere & NObody ever mentioned gold or silver as a store of value, but locals wanted Dmarks to preserve their savings/purchasing power.
My understanding is that they’re STILL holding a lot of D-marks as a store of value.
In some countries, cash is already going the way of the buggy whip:
“Denmark is inching closer to becoming the world’s first cashless country after the country’s government proposed that retailers should be allowed to only accept mobile and plastic payments.
This month, the Danish government unveiled a series of initiatives that included plans to eradicate laws that require stores to accept physical cash.
If parliament gives the go-ahead, clothing retailers, restaurants and gas stations could go cash-free by January 2016.
Cards already dominate payment in Denmark, according to a report by payment processing company WorldPay. By 2012, 84.2 percent of Danish transactions were made using cards, with e-wallet payments facing significant growth, the report said. That same year, Ireland was the only other European country that topped Denmark in terms of card payments.
Supporters of the program say less cash at the register will help boost in-store security and cut out resources required for counting and storing coins and bills.
“Cashless environments will make it possible to test new innovative store concepts and payment without having to incorporate the very cost-intensive measures are required when handling cash,” Danish Chamber of Commerce CEO Jens Karskov said in a press release.”
I agree with Cooter and Petunia re cash. I am a rural dweller. We will always have some kind of cash to trade around. Certainly, you can’t stay at a Comfort Inn while traveling without a credit card to slap down, but there are always little mom and pop motels that are pleased to take cash. My son got rid of his credit card in order to remain on the straight and narrow and avoid debt. He finds it more difficult but has adapted. Certainly, his mortgage is deducted from account and being thirty he always expects email transfers, but he still packs cash.
If anything, and many will disagree with this, I think there will be continuing efforts to outlaw cash but they will fail. I look for a resurgence ‘on the way down’. You trust your bank? I am on a first name basis at my Credit Union, but still prefer cash transactions. This summer I withdrew a few thousand dollars to buy some cedar shingles direct from the shake mill. Guess what? The owner liked cash as well, and even helped me load up. Imagine that!!
A country that cannot control/outlaw auto-matic assault weapons and high capacity magazines will never be able to out law cash. Never happen.
You cant say something like a cashless society will not happen because it doesnt work. Since when does that stop ANY idea that increases the power of The State? cf. Obamacare where house and senate members, the president, and the supreme court are exempt. “All animals are equal, but some animals are more equal than others” Ya know?
I asked some younger friends if they had ever heard the expression “as sound as a dollar.”
They sort of looked at eachother, then at me, then shrugged.
In a cashless society, there will be no run-on-the-bank, at least not like in 1929. Where do you put your electronic bits when every bank is going bust. Maybe that is the idea.
Some would say that a cashless society is the product of the banking industry. The banks get a cut of every transaction. That’s sort of like the mafia making a buck on every deal. Not so with cash.
“The currency composition of official foreign exchange reserves in Q1 2015 put the dollar at 64.1% and rising from its recent low of 61% in 2013. But in the halcyon days of the mid to late 1990s at the eve of the euro, it accounted for about 71%.
The euro dropped to 20.7% in Q1, down from its peak in 2009 of 27.6%. +++
The Japanese yen rose to 4.2%, highest since 2002, somewhat ironically as the Bank of Japan has vowed to devalue the yen, and then has proceeded to do so very successfully. In 1995, the yen still accounted for 6.8%. The UK pound was in fourth position at 3.9%. The Canadian dollar and the Australian dollar share fifth place, at 1.9% each.”
The Dollar replaced Sterling as the trade currency of choice due to US force post WWII.
Yet Sterling is still in the SDR and Still in forth position as a reserve currency 65 years later.
Sterling may or may not be in its death throws in that position, but it still isnt dead as a major global financial player.
Baring huge catastrophes that rock the global financial system, like the modern system has never been rocked in its history.
The dollar will be around for along time yet.
The current financial and stock market upheavals in china show that CNY is far from ready to enter the system at the SDR level. And will be far from ready for some considerable time, unless china can find a big enough gun to hold to the head of the IMF.
Should the IMF bow to the chinese gun, before the rest truly consider china is ready, what may happen before the collapse of the dollar is the implosion of the IMF SDR System.
The Ruble is not in the SDR, and neither should CNY be, for a very long time.
I agree with Cooter and Petunia. I just cover all the bases.