Calling EJ - Time to ressurect Itulip! The US dollar reserve status is at risk.

[Adeptus]

Hello all, it's been a while!So I'm sitting here trying to put myself in China's shoes with them wanting to invade Taiwan but sitting on $3 Trillion is USD! Well, they might now reconsider attacking Taiwan, right? Simultaneously, they may seriously start to de-dolarize. The question is into what? Commodity backed currency? Which commodities? Russia will surely be willing to sell them lots. Gold backed digital Yuan? Bitcoin (haha...ha?).

One thing is clear to me, the US just told all its non-friendly countries around the world that their US dollar reserves are NOT guaranteed anymore. So is this the beginning of the end of the US dollar? I'm seriously wondering. The question is what happens next? Do we end up with a multi-reserve currency world? Does the world bregrudgingly shift to some decentralized crypto stable coin, perhaps backed by Bitcoin and Gold... this would effectively translate to "The separation of Money and State". I'm thinking this is more how this ends, rather than how it begins. No country in their right mind would give up the control of their currency, unless it had some huge benefit (i.e. EUR countries).

china has offsetting dollar liabilities, so that net net i believe their actual exposure is de minimus. they borrow dollars and use them along with their trade surplus to fund their belt and road loans and so on.

i agree with you basic point, though. i think the world is bifurcating, and the 2 blocs will use different reserve currencies, while likely settling Iinter-bloc balances with a neutral reserve asset like gold. crypto is out- not close to ready, not big enough, and for the moment outlawed in important domains like china. CENTRAL BANKS AROUND THE WORLD HOLD GOLD. CENTRAL BANKS HAVE BEEN NET BUYERS OF GOLD for quite a while now. there is a reason for this behavior.

i have been saying for a long time, over a decade i suspect [though i'm not willing to put in the work of searching old threads], that the financial/economic world was going to split into 2 or 3 blocs. the u.s. dollar would not be replaced by a new global reserve currency. instead the dollar would become A reserve currency instead of THE reserve currency.

[Adeptus]

Interesting 15 minute take on all of this: (audio)

https://nlwcrypto.libsyn.com/inside-...-the-us-dollar

[shiny!]

I agree. It sure would be nice to hear from EJ again.

[lakedaemonian]

Hello all, it's been a while!

I'm sure most of you here caught it about a month ago but the US froze/confiscated/stole around $100 Billion USD of Russias reserves!

So I'm sitting here trying to put myself in China's shoes with them wanting to invade Taiwan but sitting on $3 Trillion is USD! Well, they might now reconsider attacking Taiwan, right?

Simultaneously, they may seriously start to de-dolarize. The question is into what? Commodity backed currency? Which commodities? Russia will surely be willing to sell them lots.

Gold backed digital Yuan? Bitcoin (haha...ha?).

One thing is clear to me, the US just told all its non-friendly countries around the world that their US dollar reserves are NOT guaranteed anymore. So is this the beginning of the end of the US dollar? I'm seriously wondering. The question is what happens next? Do we end up with a multi-reserve currency world? Does the world bregudgingly shift to some decentralized crypto stable coin, perhaps backed by Bitcoin and Gold... this would effectively translate to "The separation of Money and State". I'm thinking this is more how this ends, rather than how it begins. No country in their right mind would give up the control of their currency, unless it had some huge benefit (i.e. EUR countries).

We need EJ to resurrect iTulip and bring back all the brilliant minds we had on here to try to figure out how this is likely to play out.

When I think of the US government using the US Dollar as a weapon against Russia, I’m reminded of the Paris Gun used by Germany in WWI:

https://en.wikipedia.org/wiki/Paris_Gun

What’s interesting about the Krupp built Paris Gun is that it causes so much wear and tear damage on the gun that each shell had to be cast slightly wider in diameter.

Every time the US Dollar is weaponised, while it may be effective, it ultimately damages the US dollar.
——-
Post 9/11 Patriot Act et al legislation that may have deterred a few terrorists, ultimately curtailed the financial freedom of all.

Russian targeted sanctions may shape Russian behaviour(the jury is out), but future sanctions automatically and granularly targeted potentially curtail the financial freedom of all.

Action around democracy, authoritarianism, and totalitarianism are incredibly important, but perhaps the focus on polity needs to include currency?

Creeping authoritarianism and totalitarianism in our currency is of increasing concern.

I’m not yet sold on Bitcoin and Ethereum, I choose gold, property, cash, privately held business, and small stake venture investing.

China’s e-cny didn’t get the reach China hoped at its Olympic international debut, likely due to decreasing global trust at the individual level in China’s government.

The late to the party noise on Digital Dollar from the US is of similar concern on the back of Patriot Act unintended consequences, current Russian sanctions that could be individualised and targeted towards Digital Dollar holders, which is ultimately a lack of trust.

While we have a shortage of advanced semiconductors coming out of TSMC in Taiwan(which will disrupt/deter Chinese designs on Taiwan), and soon to be food/energy shortages(price accessibility), we have a far greater and even more dangerous shortage of trust at the local, national, and international levels.

To me, crypto prices such as BTC/ETH may be an inverse barometer of institutional trust.

[thriftyandboringinohio]

Every time the US Dollar is weaponized, while it may be effective, it ultimately damages the US dollar.

I suppose. But one might ask what good is it to have a tool if you refuse to use it?

It's reasonable to assume that our adversaries were already working at top speed to remove the dollar as the global reserve currency. It's not clear this round of sanctions will urge them to move faster.

A greater threat to the dollar status may be the creeping erosion of the rule of law in the US.
Sanctity of contract and fair jurisprudence have been the bedrock that the special status of the dollar stands upon.

[shiny!]

I suppose. But one might ask what good is it to have a tool if you refuse to use it?

It's reasonable to assume that our adversaries were already working at top speed to remove the dollar as the global reserve currency. It's not clear this round of sanctions will urge them to move faster.

A greater threat to the dollar status may be the creeping erosion of the rule of law in the US.
Sanctity of contract and fair jurisprudence have been the bedrock that the special status of the dollar stands upon.

EJ always said a collapse is a process, not an event. Somewhere around here is a sequential list he once wrote of the things that have to happen in that process. The last item was "breakdown of the rule of law". At the time, I imagined that to mean crime and rioting in the streets. Now I see it means breakdown of the rule of law at the TOP.

[kbird]

EJ always said a collapse is a process, not an event. Somewhere around here is a sequential list he once wrote of the things that have to happen in that process. The last item was "breakdown of the rule of law". At the time, I imagined that to mean crime and rioting in the streets. Now I see it means breakdown of the rule of law at the TOP.

We have seen a breakdown in law and order from top to bottom over the last several years. But it always starts at the top.

Has anybody caught the news that the Russian central bank is buying gold at 5,000 roubles at the same time as it is requiring that natural gas be purchased in rubles?

First, I guess that means that the rouble is as good as gold now.

Second, I think this all means the dollar is no longer good as gold for oil (or gas).

Are we in a balance of payments crisis? I think the Treasury market might be suggesting that we are.

[jk]

We have seen a breakdown in law and order from top to bottom over the last several years. But it always starts at the top.

Has anybody caught the news that the Russian central bank is buying gold at 5,000 roubles at the same time as it is requiring that natural gas be purchased in rubles?

First, I guess that means that the rouble is as good as gold now.

Second, I think this all means the dollar is no longer good as gold for oil (or gas).

Are we in a balance of payments crisis? I think the Treasury market might be suggesting that we are.

the strength of the dollar lately would indicate that we're not in a balance of payments crisis YET.
also note that at the current exchange rate, 5000 rubles equals about 63-64 dollars. if we're talking 5000 rubles per GRAM, then for a troy ounce the price is $1999/oz, or roughly the market price. so the ruble is as good as gold only in the sense that you can use rubles to buy gold on the open market.

[kbird]

the strength of the dollar lately would indicate that we're not in a balance of payments crisis YET.
also note that at the current exchange rate, 5000 rubles equals about 63-64 dollars. if we're talking 5000 rubles per GRAM, then for a troy ounce the price is $1999/oz, or roughly the market price. so the ruble is as good as gold only in the sense that you can use rubles to buy gold on the open market.

I don't know whether I would say that the dollar is strong. The dollar has not weakened against other currencies, but IMO only because monetary policy has been tightening and interest rates have been rising at an almost unprecedented rate. What happens when the Fed implements yield curve control? Why is gold not plummeting in price with interest rates rising like they are?

Regarding rubles and gold, $1999/ounce and $1936/ounce (current price) hardly seem roughly the same. An enterprising arbitrager should be buying gold on the open market in rubles and selling that gold to the Central Bank of Russia for an easy 3.2% profit. Maybe the capital controls put on by the West will keep this from happening, but then again maybe they won't.

[jk]

the dollar is weak against STUFF, and that weakness is accelerating- it's the "inflation" that is currently big news. but dxy is near the high end of its recent range, and the trade weighted dollar [available at fred] is in the middle of the range since 2017, so hardly a balance of payments crisis signal.

also if i'm not mistaken the $1936 quoted is in the spot market based on 400oz standard bars. if you want to buy 1 oz from a dealer it's currently $2021. so russia is offering to buy at 5000 rubles per gram. from whom is it buying?

[thriftyandboringinohio]

...Has anybody caught the news that the Russian central bank is buying gold at 5,000 roubles at the same time as it is requiring that natural gas be purchased in rubles?

First, I guess that means that the rouble is as good as gold now....

Help me understand how RU actually pulls this off. Buying gold at near market price does indeed get gold bars into RU vaults and offloads a truckload of rubles, but it doesn't make the ruble good as gold. It's a very clever method to dispose of rubles you expect will be worthless soon and turn them into bars of gold that have value forever, but it does not make the ruble good as gold.

To do that RU needs to sell gold. Lots of it.
Every time a person shows up at the gold window RU accepts the stated amount of rubles and hands over the stated amount of gold. Every single time for years and years and years, turning those nice gold bars back into truckloads of rubles.

The United States did exactly that for decades until 1971, when France and other European nations called the bluff and exhausted America's willingness to exchange every bar of gold in Fort Knox for stacks of federal reserve notes. Nixon gave up the charade and shut the gold window.

The US is a vastly larger, richer and stronger economy than Russia, both back then and now.
I can't see how RU would really be able to peg the ruble to gold by selling RU physical gold a billion dollars at a time to western governments and institutions who show up with rubles.

[kbird]

Help me understand how RU actually pulls this off. Buying gold at near market price does indeed get gold bars into RU vaults and offloads a truckload of rubles, but it doesn't make the ruble good as gold. It's a very clever method to dispose of rubles you expect will be worthless soon and turn them into bars of gold that have value forever, but it does not make the ruble good as gold.

To do that RU needs to sell gold. Lots of it.
Every time a person shows up at the gold window RU accepts the stated amount of rubles and hands over the stated amount of gold. Every single time for years and years and years, turning those nice gold bars back into truckloads of rubles.

The United States did exactly that for decades until 1971, when France and other European nations called the bluff and exhausted America's willingness to exchange every bar of gold in Fort Knox for stacks of federal reserve notes. Nixon gave up the charade and shut the gold window.

The US is a vastly larger, richer and stronger economy than Russia, both back then and now.
I can't see how RU would really be able to peg the ruble to gold by selling RU physical gold a billion dollars at a time to western governments and institutions who show up with rubles.

Hi Thrifty,

My view is pretty much 180 degrees the opposite of yours.

First, if you look at the rouble, it is hardly at risk of being worthless. Its exchange rate value is greater now than it was before the invasion and all of the sanctions. Its exchange rate has risen due to a combination of capital controls, much higher interest rates, and the fact that Russia is insisting that Europe buy its gas in roubles, which means that Europeans who want gas have to open up a Russian bank account in roubles, convert their Euros, and buy gas. So Europe has to buy roubles with its Euros.

Why does Russia need to sell gold? In my opinion, it doesn.t. First, it has a current account surplus. Second, the West doesn't want to sell anything to Russia.Third, countries like India and China are happy to sell goods to Russia using local currencies.

Why would Russia buy gold? Russia has a current account surplus. Where should it store the surplus with respect to its foreign currency reserves? Not in US Treasuries. Not in Euro denominated debt. The only two remaining candidates are Chinese Yuan and gold.

If you look, you will see that Russia has been accumulating gold for years, at a very rapid rate. They have been doing the opposite of what the United States did for decades until 1971. Their currency is backed by more gold per unit of base money than any other country in the world currently.

And again Russia is not looking to sell at a pegged rate. It is looking to buy at a pegged rate.

The relative size/wealth/etc. of the economy of the United States and Russia is irrelevant to this discussion in my opinion.

[thriftyandboringinohio]

Hi Thrifty,

My view is pretty much 180 degrees the opposite of yours.

First, if you look at the rouble, it is hardly at risk of being worthless. Its exchange rate value is greater now than it was before the invasion and all of the sanctions. Its exchange rate has risen due to a combination of capital controls, much higher interest rates, and the fact that Russia is insisting that Europe buy its gas in roubles, which means that Europeans who want gas have to open up a Russian bank account in roubles, convert their Euros, and buy gas. So Europe has to buy roubles with its Euros.

Why does Russia need to sell gold? In my opinion, it doesn.t. First, it has a current account surplus. Second, the West doesn't want to sell anything to Russia.Third, countries like India and China are happy to sell goods to Russia using local currencies.

Why would Russia buy gold? Russia has a current account surplus. Where should it store the surplus with respect to its foreign currency reserves? Not in US Treasuries. Not in Euro denominated debt. The only two remaining candidates are Chinese Yuan and gold.

If you look, you will see that Russia has been accumulating gold for years, at a very rapid rate. They have been doing the opposite of what the United States did for decades until 1971. Their currency is backed by more gold per unit of base money than any other country in the world currently.

And again Russia is not looking to sell at a pegged rate. It is looking to buy at a pegged rate.

The relative size/wealth/etc. of the economy of the United States and Russia is irrelevant to this discussion in my opinion.

Thanks for the kind reply kbird, that's the insight I was looking for.

[Chris Coles]

What many seem to have discounted, is that Russia must have used a substantial portion of it's armed force structure to mount their attack on Ukraine. That Putin seems to have assumed that by presenting such a force, there would not be any serious opposition . . . that they would all troupe into Ukraine with banners waving singing Russian songs of success; Job Done! Whereas, in fact, their war is ongoing with substantial losses so far and no serious expectation of an eventual win. If that does eventually occur, there is surely good reason to believe that that moment will register as a substantial reinforcement of the stature of the $US ? Food for thought?

With regard to others here responding to the debate with references to the ongoing retreat for the rule of law applying to what one regards as the "Top", I had placed this up on https://scheerpost.com/2022/03/15/gr...-is-authentic/ a month ago:

Surely, the underlying crime must be, at the least, described as; actions by identified corporate leadership persons clearly intent upon perverting the course of justice; which is, certainly here in the UK, a criminal offence? Yes, subject to the possibility of a court defining a prison sentence being required action against such criminality. So, again, in a civilised nation founded under the rule of the law; all it will take is for a United States citizen to file the charge with the United States Department of Justice, for the required action of investigation, and instruction to send to a court of the law to be initiated. However, the problem being . . . that even a British citizen can clearly observe; the United States Department of Justice, has no intention; whatever; of ever setting such an investigation into motion. Agreed, the D.o.J. might follow their recent practice of defining a monetary fine; being it's current standard method, at this moment in the history of the rule of law within the United States . . . of applying the rule of law to all higher level corporate leadership . . . except that anyone with half a brain can see; ensures no one at such a level within their nation's corporate echelons ever . . . EVER; faces the possibility of being, as the saying goes . . . sent to jail. All this tells us is the simple message; the United States is no longer a civilised nation founded under the rule of the law. That anyone, at the level of senior corporate leadership, may breach the law with absolutely no personal consequences. That wonderful headline; Leaders of the free world; just got flushed down the proverbial toilet. And, please, do not try and blame me for making the obvious statement of fact; Speaking Truth to Power! Here I am not the miscreant; that honour lays with the current leadership, Sic! within the United States Department of Justice.

[jk]

the strength of the dollar lately would indicate that we're not in a balance of payments crisis YET.
also note that at the current exchange rate, 5000 rubles equals about 63-64 dollars. if we're talking 5000 rubles per GRAM, then for a troy ounce the price is $1999/oz, or roughly the market price. so the ruble is as good as gold only in the sense that you can use rubles to buy gold on the open market.

to really create a gold-backed ruble the russians must have an offer price, not just a bid price. i.e. they can say that they'll buy gold at 5000 rubles/gram, but they must also say that they'll SELL gold for e.g. 5250 rubles per gram. that fixes the ruble vs gold. just a bid price is not sufficient. it only establishes a FLOOR for gold in rubles.