by Wolf Richter
Dismantling the dollar hegemony one yuan at a time.
I’ve been asked many times about the impending “death of the dollar.” I know some folks who expect the dang thing to die. They’re already envisioning the spectacle. An entire industry has sprung up to prepare and equip people for the moment when the dollar dies. It’s like insurance, the theme goes: hopefully you’ll never need it.
But the dollar is a human creation, a fiat currency. It doesn’t have a life of its own. It’s managed, rigged, and manipulated. It’s an accounting entity, a (lousy) store of value, and a means of handling transactions so you don’t have to barter your first-born for a Lexus.
As longs as it’s useful, the powers that be are going to keep it around. But over the long term, the dollar will do what it has done since the Fed was put in charge of it 100 years ago: it will lose value.
And the “strong dollar” these days? Ah, the irony!
It’s causing mayhem in the emerging markets where governments, corporations, and even consumers borrowed in dollars to save on interest. Now that their currencies are collapsing against the dollar, it’s getting very expensive to service these dollar debts, and they’re going to explode, and the holders of these debts are going to eat some big losses, unless they get bailed out again.
This “strong dollar” dents US exports and boosts imports. US corporations use it liberally as an excuse for their sorry revenues and earnings.
This is the value of the dollar in relationship to other currencies. These relationships are rigged to the nth degree. They go up and down and react to a million things, including central bank jawboning and monetary policies.
The actual value of the dollar? Don’t look!
It’s expressed in what the dollar can still buy in the US. And it’s terrible.
In terms of consumer goods and services, a single dollar isn’t buying much anymore. It used to buy a night in a hotel. After decades of inflation, Motel 6 came along and offered standard rooms for $6 a night. That was in the seventies. Now people don’t even remember where the name came from.
In my entire life, there were only three quarters – during the Financial Crisis – when the published data indicated that the dollar actually gained value in terms of consumer goods and services. The rest of my life, the dollar lost value, sometimes at a breath-taking pace, other times more leisurely.
In terms of assets, the dollar is more quixotic. It can lose value even faster. It now takes $1.2 million to buy a median home in San Francisco, likely a two-bedroom apartment in a so-so neighborhood. In 1993, the same median home in the same neighborhood cost around $250,000. It’s not that apartments have gotten bigger or better. It’s that the dollar has plunged in value against other assets.
Same thing happened in stocks, bonds, classic cars, art: the dollar buys hardly anything anymore.
But the dollar has a vicious way of suddenly reversing course and soaring in value against assets such as stocks or real estate. This makes people nervous. They call it a “crash,” and they try to get out of these assets, and in the process, the dollar becomes the most desirable asset out there, and suddenly you can buy stuff with it again [The Bull Market in Cash Is On].
Waning dollar hegemony in international trade.
The dollar has dominated the world as an international trading currency. The Petrodollar is an example. The euro was created in part to break the dollar’s hegemony and knock it off its pedestal as sole trading-currency superpower.
In 2005, the Eurozone was still abuzz with possibilities. Soon, it would price the oil it would buy from Saudi Arabia in euros. Trade would be de-dollarized. It didn’t take all that long before the euro debt crisis put the kibosh on those ambitions, but the euro has nevertheless become the second-largest trading currency in the world.
In its September 1 report, SWIFT noted that in July, 43.6% of global payments were in dollars; 28.5% were in euros. These percentages are very volatile, and there were months when the euro beat out the dollar. Number three was the UK pound at 8.7%. Number four, the Japanese yen at 2.9%. And number five, the Chinese yuan at 2.3%. Yuan use has been climbing, particularly in Asia, but it’s still just a tiny speck.
So the “de-dollarization” of trade is happening. But it’s happening at a glacial pace. Even when the dollar gets knocked off its perch as the number-one trading currency years down the road, it will remain, given the size of the US economy, among the top three.
The buck was never the sole reserve currency.
Reserve currencies are those that are held in large enough quantities by governments and central banks as part of their foreign exchange reserves. The IMF tracks this, and there are many of them. The dollar is number one and the euro number two.
The currency composition of official foreign exchange reserves in Q1 2015 put the dollar at 64.1% and rising from its recent low of 61% in 2013. But in the halcyon days of the mid to late 1990s at the eve of the euro, it accounted for about 71%.
The euro dropped to 20.7% in Q1, down from its peak in 2009 of 27.6%. The debt crisis did more than just destroy the economy of Greece. It destroyed the once growing confidence in the euro among central banks! If the debt crisis hadn’t happened – if pigs could fly – the euro would by now be at rough parity with the dollar. That was the pipedream of the euro architects.
The Japanese yen rose to 4.2%, highest since 2002, somewhat ironically as the Bank of Japan has vowed to devalue the yen, and then has proceeded to do so very successfully. In 1995, the yen still accounted for 6.8%. The UK pound was in fourth position at 3.9%. The Canadian dollar and the Australian dollar share fifth place, at 1.9% each.
The Chinese yuan is not among them. But it will eventually be anointed a serviceable reserve currency. Gradually, it will begin to show up on central bank balance sheets. These changes happen at a glacial pace. But they do happen, and eventually, inevitably, the yuan will play a major role as reserve currency.
One thing is certain: in the foreseeable future, neither the euro nor the yuan can knock the dollar off its perch as number one reserve currency.
But the buck stops here.
Real cash-in-fist, however, is on the way out. The war on cash has been declared. And younger folks don’t even carry cash. Electronic payments dominate. The anonymity of paying with cash, so dear to folks like me, means nothing to them. And putting hundred-dollar bills under the mattress makes the bed uneven. So someday, the dollar as cash-in-fist will be truly dead.
But for the remainder? A former colleague called me during the market turmoil in August, apparently to network. It’s been a while, so I asked her how she’s doing. “Like the Dow,” she said. “Everything’s still there, but a lot lower.”
And that will be the long-term fate of the dollar.
The dollar isn’t a harmless toy, however. Read… World Is Now “More Exposed than Ever” to Explosive Dollar