Dethroning the Dollar, Part 1

My motto has long been that “wealth” is anything that gives you choices.

A second passport, for example, gives you the choice of which country to live in, which document to travel on, and where to work or do business. The worth of that second passport is defined by the value of those options to you.

Holding U.S. dollars is a form of wealth, in two senses.

First, the dollar is a stable form of purchasing power. If you have a lot of it, you have the choice of buying many different things with it. Whether your fancy is a new plasma screen TV or a beautiful home overlooking the sea in a foreign country, dollars can get it for you.

But that’s not the only way that dollars represent wealth. That’s because dollars give you more options than any other currency on the planet.

For example, imagine I go on holiday to Buenos Aires, capital of Argentina. The country’s annual inflation rate is 114%. For that reason, many Argentine businesses prefer to be paid in foreign currency.

Do you think they would accept the South African rands I might have in my wallet? Almost certainly not. That’s because nobody else would accept those rands from them. Their only value would be if someone wanted to import something from South Africa, which isn’t likely.

Pull out a handful of U.S. dollars, on the other hand, and you’ve got yourself a deal.

In Argentina, as in other countries where the local currency is highly unstable, the dollar is the de facto currency. People know that everybody else will take dollars in payment for something, so they’ll gladly take them for you.

In other words, holding dollars gives you options that holders of other currencies don’t have.

That applies to the United States as a whole, too.

Let’s say an Argentine clothing manufacturer wants to buy some cotton textiles from an Egyptian exporter. The Egyptian is obviously not going to accept Argentine pesos. She’ll want dollars, which she can use to import the things she needs to run her own business. The same is true for every major international market—especially energy.

This is the way the global economy has worked since World War II. Because it’s the de facto global currency, exporters and importers in every country want dollars. That demand for the dollar helps to inflate its value vis-à-vis other currencies.

Issuing the world’s global currency gives the U.S.—and every American—powerful advantages.

We’ve seen that people in foreign countries are much more likely to accept dollars than other money. Tourists and investors carrying dollars have stronger purchasing power than locals. Domestically, a strong dollar makes imports cheap, keeping the U.S. cost of living significantly below what it would be if the dollar were just another currency.

And preventing other countries from using dollars is a powerful sanction. That’s exactly what the U.S. government did after Russia invaded Ukraine.

The Russian government had nearly $700 billion in foreign banks. The U.S. government announced that transactions with Russia using dollars were prohibited—something it is legally able to do since it is the issuer of that currency. If foreign governments, banks, and businesses ignored this prohibition, they would be cut off from the dollar-based financial system. That effectively froze Russia’s foreign assets and expelled it from much of the global economy.

Other countries with rocky relationships to the U.S. took careful note.

For example, the so-called BRICS countries—Brazil, Russia, India, China, and South Africa—announced that they intended to develop their own currency for trade amongst themselves to avoid dependence on the dollar. The Chinese successfully negotiated with the Saudi Arabian government to pay for oil in renminbi. Populist leaders in some countries questioned why they had to do business in dollars in the first place.

©iStock/lvcandy

The mainstream media has taken note as well. Although they rarely explain the mechanics, they note that if the dollar were knocked off its perch, every American would face economic hardship. The cost of imports would rise, spurring rapid inflation. The purchasing power of any financial investment denominated in dollars would collapse. The U.S. would have difficulty obtaining critical commodities if those selling them demanded to be paid in other currencies.

All this would be a catastrophe for the U.S. and its residents. But what would it take to make it happen, and how likely is it?

I’ll answer those questions next week.

Ted Baumann is International Living’s Chief Global Diversification Expert. He’s traveled to nearly 90 countries and is a dual citizen of the United States and South Africa. Ted has been published in international research journals, as well as in media outlets such as Barrons, Forbes, and Cheddar. Learn more about Ted Baumann here.

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