Time To Buy Dollar Insurance
Death by a thousand paper cuts is still death.
Which brings me to a few headlines I want to share today:
- Brazil, China Ditch US Dollar for Trade Payments, Favour Yuan—News.com.au (an Aussie news site)
- India’s Oil Deals with Russia Dent Decades-Old Dollar Dominance—Reuters
- Why Saudi Arabia Is Following Iran to Join China and Russia’s Security Bloc—Newsweek
- TotalEnergies and CNOOC [China National Offshore Oil Corporation] complete first LNG transaction in Chinese currency—Upstream (an energy-industry publication)
As headlines, all of those events might seem trivial. And in some ways, they are. Trade between China and Brazil, two giant countries with a combined 1.6 billion citizens, amounts to about $171 billion annually, a measly 0.66% of all global trade in a year (based on 2021 data).
That’s nothing.
And yet it’s everything…
Flash floods always begin with a trickle. By the time you realize what’s going on, you’re stuck in a crush of raging water, clinging to anything for dear life, wishing you’d prepared better for this moment.
As those headlines make clear, countries have had enough of an America-centric world in which Uncle Sam’s dollar reigns as king.
A coup is underway.
And while it might seem a small plot orchestrated by a handful of court jesters, the truth is harder for America and Americans in general to swallow: that the dollar is a dead currency walking, whether we want to believe that or not.
To fully grasp the ramifications, one must understand that the dollar does not exist in an American vacuum. We’re not the only spenders of dollars in the world.
Thanks to the post-World War II financial order, the entire planet has been using the dollar for nearly 80 years. Governments and businesses from New Zealand to Norway to Namibia demand dollars to execute global trade, particularly in oil and gas, even if they’re trading amongst themselves.
So it is, then, that the buck lives and dies based entirely on global demand for greenbacks.
Demand stays steady or rises, and the dollars remains steady or rises.
Demand trails off… and the dollar declines.
At a practical level, decline in demand means that the dollar is losing value against other currencies… which then means pretty much everything we buy in America is more expensive because so many of our consumer products and factory inputs have a foreign origin priced in some local currency.
As the dollar declines in value, the price tag for those items rises in dollar terms because it takes more and more dollars to buy enough foreign currency to afford the item.
This is where the world is going because this is what a lot of the world wants, particularly China, which has reached such economic heft that it can dictate terms to others in the world and no longer concern itself with D.C.’s hurt feelings.
And, frankly, “dictate” is the wrong word. It implies other countries are loath to trade outside the dollar but are forced beyond their will to do so at economic gunpoint.
Absolutely not true.
Many—many!—countries are ready and willing participants in this coup.
They, too, are fed up of the unfair economic advantages afforded America by having a currency the entire world has to buy, unnecessarily in their view.
Consider that headline about China and Brazil now trading directly in yuan.
A Brazilian sugar cane grower can now sell processed sugar to a Chinese confectioner and take yuan as payment instead of having to transact through the dollar.
Cutting the dollar out of the loop reduces currency conversion costs and time required for a trade to occur between the two companies, making companies more profitable and more efficient. Moreover, it ensures that America cannot use sanctions to bully China or Brazil financially, given that America has been using the dollar as a cudgel in recent years as it seeks to impose its desires on various global situations.
But what’s good for the Chinese and Brazilian geese, is horrible for Uncle Sam’s gander since diminution of the dollar on the global stage weakens the greenback permanently and, little by little, drives down its value.
Of course, trading in sugar is one thing. Trading in oil is something altogether more damaging.
The petro-dollar—the idea that all oil trades are priced in dollars—has been a massive stimulus plan for the greenback for decades. In overly simplistic terms, the world consumes roughly 100 million barrels of oil per day. Assuming oil is $75 per barrel, based on the various global averages, that’s $7.5 billion in daily oil trades, or more than $2.7 trillion per year (more than 40% the size of America’s annual budget).
That’s a ton of dollars sloshing through globally commodity markets out of sheer necessity.
Now, start chipping away at that.
Take India out of the equation. It’s the #3 buyer globally at about 4.26 million barrels per day.
Take China out of the equation. It’s the #2 buyer globally at nearly 6.7 million barrels per day.
That right there is 10% or 11% of daily global demand… which would be something like $270 billion a year of rupees and yuan that don’t first demand conversion into greenbacks. (Again, all that is very rough math and nowhere near accurate, but it gives you a ballpark idea of the magnitude we’re talking about.)
If/when other countries decide it makes a lot more sense for them to buy oil—or trade goods and services—outside a dollar framework, then significant problems begin to mount for America and American pocketbooks.
Death by a thousand paper cuts.
But you and I don’t have to die because of this.
We can prepare.
The best protection, as I always urge, is owning non-dollar assets as insurance against this kind of inevitability. I note all the time that I own a small boatload of Swiss francs, gold and silver, and bitcoin… and not because I see them as investments.
I see them the same way I see the insurance policies that I own: Kinda useless at the moment and seemingly a waste of good money. But a day will come when I have to call on those policies to protect me from what’s going down.
And in that moment, I will be comforted by the fact that I was wise enough to buy lifestyle insurance back in the day.