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February
01
2019

The Plan to Ditch King Dollar
Jim Rickards

When critics point to Japan’s debt-to-GDP ratio of over 200%, Japan’s defenders are quick to say that most of the Japanese debt is owned by the Japanese themselves in insurance companies, banks, pension plans and personal portfolios, not to mention the Bank of Japan.

There’s truth in this. Japan has a highly homogenous culture.

The Japanese are all in the same lifeboat rowing in the same direction. As long as no one rocks the boat, the debts can keep piling up.

But it’s not the same for the US.

In the US treasury market, foreign ownership has remained constant as a US dollar amount but has dropped as a percentage as the market itself has grown.

No one wants greenbacks

Foreign ownership of US treasuries has dropped from almost 50% to just over 40% in the past six years.

Foreign participation in US treasury note auctions has also dropped, leaving the US treasury to rely more on buying by US banks than end-user demand.

These trends are made worse by the fact that overall, US Treasury note issuance is expanding in line with higher US deficits. And Fed-buying has moved in reverse as part of the Fed’s ‘quantitative tightening program’, which involves burning money instead of printing it.

US treasuries will always find a buyer; the Fed can force US banks to buy them if necessary.

But if these ‘hands off’ policies of foreign buyers continue, interest rates will rise and liquidity will dry up.

This opens the door for slower economic growth and possible flash crashes in the US treasury market.

Conditions could get even worse if China uses the US treasury market as a weapon in the ongoing currency and trade wars.

The US treasury may end up as its own worst enemy for failure to get deficits under control.

Putin speaks. You can’t say you weren’t warned

Compounding the US dollar woes is Russia.

Russia’s President Vladimir Putin has expressed his disdain for the global US dollar-based payments system so many times that few are still paying attention.

The problem is that every time Putin speaks, his position grows stronger from the time before.

Russia is buying about 30 tons of gold per month and has increased its gold reserves from 600 tons to 2,000 tons over the past 10 years.

Russia is also working with some of the world’s most sophisticated software developers to build a heavily encrypted state-of-the-art digital distributed ledger that can support a Russian-backed cryptocurrency, possibly backed by gold.

These efforts are done in conjunction with similar efforts by the Chinese.

The endgame is an alternative global payments system that will substitute for SWIFT and be controlled by Russia and China with participation by countries including Turkey, Iran, North Korea and possibly many others.

This alternative system will exclude the US and US dollars, finally creating a way for nations to trade and settle balance of payments without using dollars, and without relying on portals such as SWIFT and Fedwire that are controlled by the US.

In turn, this means that US economic sanctions will no longer be effective because countries will have an easy way around them using this new non-dollar system.

Putin is insistent on this new system and is close to achieving it.

When the new system is rolled out, you won’t be able to say you weren’t warned.

All the best,

Jim Rickards,
Strategist, The Daily Reckoning Australia

James G. Rickards is the global strategist of Jim Rickards’ Strategic Intelligence, the flagship advisory newsletter from Agora Financial Australia.

He is a lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He was the principal negotiator of the rescue of Long-Term Capital Management by the US Federal Reserve in 1998.

His clients include institutional investors and government directorates. His work is regularly featured in the Financial Times, Australian Financial Review, Evening Standard, New York Times, The Telegraph, and Washington Post, and he is frequently a guest on BBC, RTE Irish National Radio, CNN, NPR, CSPAN, CNBC, Bloomberg, Fox, and The Wall Street Journal.

He has contributed as an advisor on capital markets to the US intelligence community, and at the Office of the Secretary of Defence in the Pentagon. Rickards is the author of The New Case for Gold (April 2016), and three New York Times best sellers, The Death of Money (2014), Currency Wars (2011), and The Road to Ruin (2016) from Penguin Random House.

 

 

 

www.dailyreckoning.com.au