The 2020s Global Currency Wars
Part 1- Is The US Empire The Best Analog For Late Stage Rome?
Chapters:
Introduction
Bretton Woods 3 and The Changing World Order
The Death Of The Great Petrodollar Experiment?
The Dangers Of The Double Ds
Introduction:
If I had a dollar for every time I heard someone compare modern America to the late stages of the Roman Empire, I would ask you all to call me Steve. No, not Steve Irwin, Steve Mnuchin.
As we near the pointy end of what I believe will be the world’s largest sovereign debt crisis in monetary history, I thought it would be timely to pick up the proverbial pen once more and attempt to add another contrarian perspective, surrounding the modern-day currency wars we’re living through today in the 2020s.
2022 was a year of two tales. The first half of the year was dominated by the proclamations and predictions of doom, from the dollar doomsdayers. So far, the second half of 2022 has been a reality check, as the US Dollar wrecking ball has wreaked havoc upon the entire world.
As the petrodollar system continues to crumble, I believe that most macroeconomic analysts are viewing the recent escalation in the breakdown of globalization through the wrong lens.
Many assume the US and the west is going to be drastically affected by this breakdown of globalization. Many assume that the United States is even going to lose its grip on the world reserve currency as the 250-year American experiment fails.
However, with the dollar wrecking ball currently wreaking havoc on our financial system, literally bankrupting governments all around the world who’re starved of US Dollars, I thought it would be timely to revisit this quote I made in mid-2021.
That quote originated from an article I published in a series of 3 pieces titled ‘’Bitcoin The Big Bang To End All Cycles.’’
Let’s investigate whether the mighty United States empire is about to fall, and if so, which country is going to take its place.
Bretton Woods 3 and The Changing World Order
The vocal Dollar Doomsayers have had their pontifications supported after the emergence of two popular economic theses, that’ve gone mainstream in 2022.
The first was proposed by Ray Dalio, with the release of his recent masterclass of a book, titled ’’The Changing World Order.’’ In it, Ray projects the coming decline of the US empire and the rise of a Chinese superpower.
The second economic theory to permeate mainstream circles, was proposed by economist Zoltan Pozsar, who birthed the concept of a ‘’Bretton Woods 3 era.’’ Through a number of thought-provoking articles, Pozsar outlines how he envisions the increased importance and use of commodity backed money. Pozsar believes that US dollars, and other fiat currencies being used as a reserve asset in the treasuries of nation states will decline as we move further into this new ‘’Bretton Woods 3 era.’’
I believe that both Dalio and Pozsar are correct in saying we’re on the precipice of significant change in our current monetary system. Significant change in our monetary system is something I’ve always thought would happen this decade, after we seemed to cross what I like to the call as the ‘’2020 monetary chasm.’’
However, the change I envision is different and will occur on a far more rapid timeline.
Let’s first start breaking apart, and explaining both Dalio’s and Pozsars’ theses for anyone who might have missed them. If I’m going to debunk both popular economic frameworks in this piece, I feel obligated to at least briefly explain them both first.
Starting with Dalios book that was released in November 2021, he studied the rise and decline of 10 great empires over the past 500 years and noticed MANY similarities amongst all of these great empires.
The 10 greatest empires since 1500 have generally gone through a cycle of rise and decline, over a 250-year timeframe. Dalio interestingly observed how the dominant empire would begin declining as it reached the end of an 80-year long term debt cycle. Sound familiar to today?
When one empire is in a decline, a smaller and rising potential empire notices this decline, and challenges the power of the reigning global hegemon. Dalio believes we’re watching one of these transitions as we speak, and frames the US as the declining empire, about to be overthrown by the rising Chinese empire.
Throughout history, these transitionary periods are generally punctuated with wars and drastic changes in the global monetary order, which result in reserve currency changes.
This short video, brilliantly highlights this process that occurred in the 20th century.
Now, brilliant analysis by Ray, however I’ll outline why I disagree with his conclusions shortly. Let’s quickly explore the thesis by the man with a name fit to be a movie star, ‘’Zoltan Pozsar.’’
The events of early 2022, and the transition into what Zoltan Pozsar has coined ‘’Bretton Woods 3,’’ has thrown the conversation of nation state treasury reserves front of mind for most people.
Here’s some words from Pozsar from a March 2022 essay, titled “Bretton Woods III”:
From the Bretton Woods era backed by gold bullion, to Bretton Woods II backed by inside money (Treasuries with un-hedge able confiscation risks), to Bretton Woods III backed by outside money (gold bullion and other commodities).
After this war is over, “money” will never be the same again…
…and Bitcoin (if it still exists then) will probably benefit from all this.
Zoltan correctly gets a lot right by identifying the balance sheet issues facing sovereign nations, now that holding fiat reserves was shown to no longer be safe, after the Russian Central Banks reserves were frozen.
However, in my Newsletter,(Subscribe, it’s FREE) I’m going to take a deep dive and explain why I don’t believe nation states will revert to stacking gold. This is a monetary Evolution after all, reverting to a gold standard would be a monetary de-Evolution.
So, coming back to the present, what’s next for the dollar?
Due to globalization and international trust breaking down, the petrodollar system is seemingly whittling away ….. for now…
The Great Petrodollar Experiment
For many reasons I’ll keep this section brief, there have been so many great articles detailing how the petrodollar system is fraying apart already. The main point I want to make here is that just because the petrodollar breaks down, this doesn’t automatically mean the US Dollar loses its global reserve status. Who says the mighty US empire, (arguable the greatest ever) doesn’t have a few wildcards stuffed up their sleeve…..
I understand the world’s superpowers are transitioning away from the US dollar.
Yes, China, Russia, India, Israel, the middle east and other countries and regions all around the world are ALL transitioning away from the US dollar. By all metrics we can see that faith is being lost in the global reserve currency. The BRICS nations have recently announced their working on a new global reserve currency.
The BRICS nations are an economic powerhouse, and their breakaway from the petrodollar poses a daunting threat to the west.
Then to make matters worse, more and more countries are applying to become a part of the BRICS partnership.
If all of a sudden, no one wants to use the US Dollar, then who is going to buy the United States debt? To make matters worse for the US, they have trillions of debt maturing in the next 4 years.
I believe this will only increase the growing trend of debt monetization, This became more pronounced in the aftermath of the 2008 Global Financial Crisis, as countries like China and Russia, slowed, and in Russia’s case, sold all of their US Dollar debt.
I wouldn’t be shocked to see a Fed balance sheet north of $50 trillion by 2030, as I believe they will have to monetize, not only a large portion of the United States debt, but also be forced to consume the offshore Eurodollar market, which is estimated to be in the tens of trillions of dollars.
This isn’t a problem just isolated to the United States.
The Bretton Woods 3 crisis we’re watching unfold isn’t just a loss of faith in the US Dollar. It’s a loss of faith in ALL fiat currency reserves.
In saying all of that, and despite all of these signposts, the US Dollar still represents 59% of foreign reserve holdings, in the treasuries of central banks around the world.
So what’s next for the dollar?
I recently created a video detailing and analyzing this breakdown of the Petrodollar system and BRICS nations in more detail here on the ‘’ Bitcoin Made Simple’’ YouTube channel, which I’m a co-host of.
The Dangers of Not Respecting The Deadly Double Ds
Now the double D’s I’m referring to here are ‘’Deglobalization and Demographics.’’ I can however throw ‘’Debt’’ into the mix for a trifecta of ‘’Ds,’’ for my Total Recall fans.
I’m sorry, I couldn’t help myself, let’s dive into exploring the deadly ramifications of debt, demographics, and deglobalization.
Now, I agree with Pozsar, the freezing of Russian treasury reserves is an ENORMOUS event, that will lead to significant change. We don’t know what the breakdown of a multi-century trend of globalization will mean for our globally interconnected 21st-century world. However, I believe many are jumping to the assumption that this will lead to a continued breakdown of the petrodollar system, and subsequent decline of the United States' economic and geopolitical power.
It can be awfully compelling to observe the Chinese Belt & Road initiative, and trade partnerships China is making with other global superpowers and projecting this recent trend to continue into the 21st century.
Ray Dalio and many other ‘’Dollar doomsdayers’’ are expecting these partnerships to yield the rise of a new global superpower; ‘’The Chinese empire.’’
We’re only ever shown rosy charts like these, predicting the inevitability of the global Chinese empire.
This is where I strongly disagree.
Many of these prophecies and predictions of doom surrounding the United States simply aren’t accounting for the phase shift that occurred in 2020. Our world is changing, trust is lost, and nations are withdrawing from international cooperation as our worlds trend of rapid globalization breaks down. I believe the United States is actually the country that will benefit MOST from this breakdown of globalization.
Let’s not forget, which country dominated innovation and productivity and global GDP in the early 20th and entirety of the 19th century when our world was more fractured and decentralized….?
This is the kind of world I believe we are reverting back to. One where productivity, geographical location, and food and energy security is once again important. The tide is going to wash out, and we’re about to see what nation states have been swimming naked.
When central planning is left alone and isolated in a decentralized, deglobalized world, it is exposed for what it really is. A leech, a parasite, an ineffective form of organization that relies on sucking the blood from more productive nations. In a deglobalized world, the United States will no longer have the incentive to offshore it’s manufacturing base, to enable the leeches in the East to feed and grow economic and geopolitical influence.
We learned many lessons from the 20th century, where our world was more decentralized, and central planning and communism was left alone to do what it does best. I will allow the following images to make my point, and explore the perils of central planning and communism in a future piece.
‘’Trust me, I’m a central planner with a 5 year plan.’’
In the 1930s Russian famine, 7 million soviets(4.3% of their total 160 million population) starved between the years 1932–1933, as a result of Stalin’s flawed and devasting policies tucked inside his 5 year plan, which is now known as ‘’ Stalin’s forced famine.’’
30 years later, The Chinese dictator Mao said, ‘’hold my beer, I also have a 5 year plan.’’
In 1958 China embarked on ‘’The Great Leap Forward,’’ which was a 5-year plan to transition from an agrarian economy to an industrial society. The results speak for themselves.
Between 1958–1962 around 45 million Chinese citizens, (5% of their 600 million population at the time) died due to starvation, once again caused by the policies of central planners.
Central planning always fails. Communism always kills. I’m shocked at how rapidly we’ve allowed mainstream media outlets wash our brains and made us forget what we fought world wars for in the 20th century.
However, there are also MANY other important metrics about China, that will also provide headwinds to their plan of global domination. These metrics are the ugly, unwashed, pungent Chinese genitals, that’re about to be exposed when the globalization tide washes out.
China has some of the worst demographics in the world, and this inconvenient fact goes largely unnoticed by most. Their demographics are so horrendous that their population is projected to half by 2050.
Let’s break down what poor demographics looks like. They’re represented by the ‘’negative growth’’ column on this chart. Notice how a large percentage of the population is over the age of 40.
Many demographic experts claim the real reason Russia invaded Ukraine in 2022, was because if they waited any longer their population would be too old to fight a war.
Anybody want to say a prayer for our friends in Taiwan?
Turning our attention to the economics of poor demographics, older people simply save more money, and this is seen as a bad thing for economic growth and economic activity. In today’s inflationary monetary system that requires consumption at all costs, our favourite central planners are concerned about people not taking on more debt, framing responsible financial decisions, like saving, as a bad thing.
They call it a ‘’SAVINGS GLUT.’’
This demographics crisis has caused China to reverse course on both its one child policy in 2015, and then go one step further and reverse its 2-child policy recently in 2022.
China doesn’t like to show weakness, but reversing these laws show how desperate they are to revitalise population growth in the country.
Then to make matters worse, China is experiencing an energy and water crisis!
80% of China’s power capacity comes from coal, hydro and nuclear power sources.
Coal, hydro, and nuclear power generation, all require huge amounts of water in order to function efficiently. This heavy reliance on coal makes its power grid very one dimensional and fragile. The rest of the world is currently reducing their consumption of fossil fuels like coal, because countries have agreed to move to more ‘’renewable’’ energy sources.
Not China though. They can’t afford to decrease their coal consumption, and they’re currently increasing their output to record highs in 2022, despite the rest of the world demonizing the fuel source.
China is HEAVILY reliant on coal, and subsequently water for their energy grid….. so wouldn’t it be an issue if they didn’t have large water reserves?
Well, China is currently suffering from a water crisis! They have 20% of the world’s population but only 7% of the world’s freshwater resources. This chart shows us that as of 2014, over 15 states in China are defined as ‘’experiencing severe water scarcity.
This problem has only been exacerbated as China has drained its critical aquifer water reserves, reserves that won’t replenish themselves anytime soon!
These energy and water-related challenges manifested themselves in 2021, when China’s energy grid began failing.
This chart shows all the provinces in China that are rationing power and energy usage due to this crisis.
From aluminium smelters to textiles producers and soybean processing plants, factories are being ordered to curb activity or, in some instances, shut down production altogether.
Even Apple, the world’s largest company and $3 Trillion giant, has had to restrict energy usage at it’s factories in China due to the energy shortage.
The typical smartphone requires 3,000 gallons of water to produce.
The country that produces over 65% of the smartphones in the world, may have to make a difficult decision in the future if they want to provide their 1.5 billion citizens with clean water to drink.
Agriculture accounts for approximately 60% of China’s water consumption, and the impending water crisis threatens future food crops. Could this suggest why China has stockpiled 60% of the worlds grains supplies in 2021?
Turning our focus to their economic struggles, China’s debt burden is in a worse position than the US and any other country around the world.
Their economy is also currently suffering under the weight of a real estate market that’s corrected over 70% in 2022.
China’s real estate market, was the single largest asset class in the world before this enormous crash.
Then worst of all, their treasury reserve holdings look like a national security risk waiting to happen. China is sitting on the world’s largest pile of worthless foreign fiat currency reserves and is the largest holder of US treasuries.
The freezing of Russia’s CB reserves rightly shocked the Chinese. Yu Yongding, a prominent economist and former adviser to the People’s Bank of China said the following in 2022.
The fact China has a closed capital account makes the possibility of the Chinese Yuan becoming the next rising superpower and global reserve currency hegemon very unlikely.
Their economic and geopolitical model is built for the old world, not the world we’re moving into. I could talk about the host of issues facing China for hours, let’s move on and try to wrap this thing up.
The next largest economic competitor to the United States' grip on the global reserve currency, is Europe. After attempting to quasi-replicate, the US in 1999 with the formation of the Euro, the project looks to be about to fracture apart as they deal with the same debt, demographics, and energy issues facing China.
This recent video of Christine Lagarde trying to explain how she’d shrink the ECB’s balance sheet is emblematic of just how dire the economic situation is in the EU.
For the reasons I’ve mentioned above, I don’t believe the Euro, the Yen, or even the Chinese Yuan are viable replacements for the US Dollar. I think its interesting to notice that the two countries that have the most bankrupt banking systems, and are also the most energy impoverished, are both aggressively fighting Bitcoin….
Bitcoin, is ‘’freedom money,’’ first and foremost, but also ‘’energy money.’’ It is no surprise to see two of the most communist and energy-deprived regions in the world oppose this technology.
Conclusion
So, in summary, I disagree with the conclusions made by both Zoltan and Dalio. I do believe commodities are going through a Supercycle and will play a key role in a nation’s security as we deglobalize our world. I however think attempting to back money with commodities and metals isn’t the solution to the problem we’re experiencing today.
I believe the US dollar will be the last fiat currency to hyperinflate, and I actually expect them to hold onto the reserve currency status through the conclusion of this 80-year long-term debt cycle.
To go one step further, I actually think there’s a strong possibility that the United States will be the LAST nation-state to ever hold the title of ‘’global reserve currency holder’’ on planet earth…… if they play their cards right.
This short little rip is actually the precursor to a longer article where I’m going to explore the Dollar Milkshake thesis and how the USD wrecking ball is causing carnage on the global economy. I’ also going to explore where Bitcoin fits into this dollar milkshake thesis, and explore the geopolitical battle between our global superpowers in more detail.
If any of that sounds mildly interesting, keep your eyes peeled, and subscribe to my FREE newsletter. I will also post highlights and snippets of that longer form article on Twitter, so give me a follow here. Feel free to ask me any questions or simply tell me why I’m wrong over on Twitter.
