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Death of the Dollar Theories Circulate Endlessly

Every 2-3 years we hear the same foolish talk about a major Chinese sell-off USD reserves and how it will be the death of the dollar.
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Yet Another Death of the Dollar Story

It's that time again.

And of course it never happens (and never will) says Michael Pettis in a Tweet Thread.

  1. ...government debt holdings” would somehow “spell trouble for the US government bond market at a time when Washington is significantly ramping up new issuance”. The idea that the US needs foreign buyers of its bonds is based on a misunderstanding of both the balance of payments.
  2. ...dynamics and the role of the Fed. The US economy would actually benefit if foreigners reduced their holdings of US assets. Second, and more importantly, the claim that the PBoC will reduce its holdings of USG bonds begs the question in exchange for what? No other developed...
  3. will accept the current account impact of massive PBoC purchases, and while there are many developing countries that would be eager to receive the inflows, China’s experience of developing-country lending has been so bad that it will probably try to reduce flows to...
  4. ...the developing world as fast as it can without undermining the BRI story. Alternatively China could stockpile commodities in exchange for a small portion of its USD reserves, and it is probably doing that anyway, but given China’s impact on the price of these commodities...
  5. ..this would result in an even more inverted balance sheet. The only other option is for China to accept a sharp reversal of its current account surplus into a large current account deficit – or, as one person cited in the article suggests, to “sell its US Treasury holdings...
  6. ...for yuan, seeking to engineer a collapse in the US dollar to end its status as the ruling currency” – but you only have to state the option to realize how painful it would be for the Chinese economy (and of course, contrary to what that person claims, it would do absolutely...
  7. ...nothing to end the USD status as the ruling currency). So what else could Beijing do to protect itself if they are worried (about what is anyway just foolish electioneering talk)? The most likely is to exchange direct holdings into indirect holdings through disguised...
  8. ..street accounts, but that would have to be done slowly and carefully if they don’t want to incur large trading losses.

As I see it Pettis only has two things wrong, both minor.

  • The stories don't circulate every two years, it's more like once or twice a year, with slight variations.
  • I would not use the word "Never".

The stories all have these things in common.

  • Higher US interest rates 
  • End of the US dollar as the world's reserve currency 
  • Death of the dollar.

The rationale varies but this is the first time it has been Pandemic-related. 

Recirculating Ideas

  • Petro Yuan
  • Gold-Backed Yuan
  • Crypto-Backed Yuan
  • US Deficit
  • US Debt
  • SDR Scheme of Some Sort
  • War
  • Pandemic (new to this list)

With all these ideas in play, there is no way to hold the stories to once every two to three years. 

SDR stands for "Special Drawing Rights" which is the way the IMF lends money. 

SDRs are not even a currency. They cannot be used in transactions and there is not even a market for them or a way to trade them. Rather, SDRs are valued as a basket of currencies that can potentially be converted to any major currency.

SDRs are IMF loans that total 0% of transactions.  But that does not stop nonsensical hyperinflation articles. 

Get Ready Get Ready for World Money 

Get Ready for World Money said Jim Rickards in his latest nonsensical  hyperinflation rant regarding SDRs on March 25. 

The task of re-liquefying the world will fall to the IMF because the IMF will have the only clean balance sheet left among official institutions. The IMF will rise to the occasion with a towering issuance of special drawing rights (SDRs), and this monetary operation will effectively end the dollar’s role as the leading reserve currency.

"The replacement of the dollar could happen almost overnight," says Rickards. 

Yeah right. In what century?

Rickards is Full of Laughs

Please recall my September 2017 article: Rickards: “Next Financial Crisis 6-8 Months Away” Got Popcorn? Gold?

"Got popcorn?" was my sarcastic comment. 

That urgent "please buy my book" financial crisis idea was based on nuclear war with North Korea within 8 months. 

Today the insurmountable threats are the Pandemic and SDRs. 

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Next it will be oil, the Euro, sunspots, or Martians. Who knows? But I guarantee you it will be sooner than two years,

Petroyuan's Crash at Birth

Anyone recall how the petroyuan was supposed to crash the dollar? 

To refresh your memory, please see Petroyuan's Crash at Birth April 21, 2018.

Meanwhile, in the real world, let's discuss what it takes to to be the world's global reserve currency.

Reserve Currency Status Requirements

  1. Floating Currency - China Fails
  2. No Capital Controls - China Fails
  3. Large Liquid Bond Market - China Fails 
  4. Property Rights - China Fails
  5. Willingness to Run Trade Deficits Sacrificing an Export-Based Economy - China Fails 
  6. Global Trust - China Fails 

China fails in six out of six requirements. 

Perhaps some day China will meet all of those requirements but until then, do yourself a favor and go back to sleep. 

For those keeping score, SDRs fail 1, 2, 3, 4, 5, and 6 as well.

Heck, SDRs are not even a currency. 

Necessary Conditions

A reader just asked "Mish, instead of the demise of the dollar, I'd like to hear your thoughts on the demise of the $USD's reserve currency status, that is, what sorts of conditions and trends that would require?"

I listed 6 conditions that any country would have to undertake, or have forced on it.

Who wants them?  Consider the EU - would it run deficits? Who else is big enough?

Those are points 3 and 5.

Inflation or Deflation?

If you believe all this printing will soon result in a huge outbreak of inflation, you are mistaken.

For discussion, please see Inflation or Deflation? Collapse in Demand Trumps Supply Shocks

Amusingly, Hyperinflationists Come Out of the Woodwork Again.

Understanding the Problem

The Fed's seriously misguided efforts to force inflation into a system begging for deflation is the problem.

The Problem is Not Deflation, It's Attempts to Prevent It