Economic Predictions for H2 2022, Part 2: The Great Currency War for Global Dominance

This article is part of series of economic predictions I am making about the remainder of the year. My patrons got the first part of the series. I’m going to make every other part available to all readers as I lay out the trends I see happening in the economic news that I read daily, which you can now read with me each day in “The Daily Doom” section I just added to my website.

Over the days ahead, my forecasts will cover the rest of the barrage of troubles and bubbles I listed in my article “An Apocalypse Upon Us: How much more can we take?” Patrons at or above the $5 level are the only ones who will get to see the whole list of predictions because I need patron support more than ever now that I’ve decided to retire early in order to focus exclusively on The Great Recession Blog because I think we have already entered a new epoch in global history that will continue to become much different than the pre-pandemic world we knew, which changed for the worse in the aftermath of the Great Recession.

We’ll see if readership and support can build to a level where I can afford to continue to give this site and my writing on economics full dedication and perhaps move on to develop a new site with these kinds of writings, but targeted more to the new epoch we’ve entered than to the Great Recession. As many know, this has generally been an avocation. Now, I’m going all or nothing. If it takes off as I give it an all-out dedicated effort and I find enough support to keep me from having to go back out of currently unpensioned “retirement,:” I’ll keep running with it. If it doesn’t, I may have to end it later in this year. It’s all or nothing.

The first article in this series, which all patrons past and present received access to (write me with your old patron name or email you used if you’re a past patron who didn’t receive the password), provided an in-depth forecast about where inflation is going from here and why and what the Fed will do in response. This article will lay out for everyone what I believe we’re going to see in global currency wars, particularly as we move into 2023. The next one, after that, will deal with the battle from currency alternatives like cryptos, gold, and central-bank-digital currencies … for patrons only.

The war of national currencies for global dominance is on

Doug Nolan, author of Credit Bubble Bulletin, makes the following observation about how it is the investments and nations that exist on the periphery to the main economic streams that have the most risk and see the first de-risking when things begin to crumble:

When the cycle inevitably turns, the maladjusted “Periphery” is vulnerable to even subtle shifts in risk tolerance and financial conditions. Losses, de-risking/deleveraging, and waning liquidity gain momentum, leading to contagion effects that over time gravitate from the “Periphery” to the “Core.”

This dynamic attained robust momentum during Q2. Powerful de-risking/deleveraging took hold throughout the emerging markets, with currencies and bond markets under heavy liquidation. The unwind of levered EM “carry trades” fueled a self-reinforcing dynamic of dollar strength, waning liquidity and intensifying de-risking/deleveraging. To support their faltering currencies, EM central banks resorted to aggressive rate hikes, along with sales of Treasuries and other international reserve holdings. It all fed a dramatic tightening of global financial conditions for a world that until recently had the semblance of endless liquidity abundance.

Credit Bubble Bulletin

Flight of capital occurs. Dollar denominated debts become major burdens for businesses and governments. So, we see developments like the euro crisis. It won’t just be the eurozone having a crisis this time around. China’s currency and economy are deeply troubled due to its insane Covid lockdown policy and due to sanctions. Russia’s ruble has been similarly hit. While the ruble appears to have recovered, don’t be fooled. That is partly due to taking extreme measure as China has done to stabilize its currency, but, more importantly, a currency that can’t trade with more than half the world because it is locked out of financial markets is effectively also isolated from a lot of currency trade pricing. If you lock it up in a little vault all by itself and then declare it has a lot of value, the natural question is “to whom?” Only the people inside the vault. Few people praising the “recovery” of the ruble event stop to think about the fact that it is now a tiny island, locked out of much of the world’s trade.

The BRICS nations (Brazil, Russia, India, China, and South Africa) are working hard to shore themselves up with Russia and China leading the way in an effort to turn some version of their combined currencies into a replacement for the dollar to end US hegemony. We have yet to see exactly what that currency will be.

“The issue of creating an international reserve currency based on a basket of currencies of our countries is being worked out,” Vladimir Putin said at the BRICS business forum last month. (RT)

It hasn’t become a financial fact in the world yet, and their currencies have far deeper troubles than the dollar has or that the euro has. The BRICS will crumble as will emerging markets that have major dollar-denominated loan defaults as the dollar continues to hold strong. As the prettiest corpse in the graveyard, the dollar will rise above all others due to flight to safety. Most of the nations that do start banking with the Russia-Chinese replacement will still use dollars with nations that accept dollars.

National crises in some of these smaller nations can develop suddenly out of the blue, as we saw in Sri Lanka. Most of the world has no idea how bad the stresses in some nations are. Then one day it blows up, and everyone knows. Expect more of those surprise breakdowns under the intense pressures of all the conditions I described in “An Apocalypse Upon Us: How much more can we take?“

Certainly the BRICS will find solidarity among themselves in weathering the sanctions regime, which has likely become longterm change in how the world does business because these nations don’t ever want to return to dollar hegemony or reliance on the West for trade.

Putin continued, stating last month: “Contacts between Russian business circles and the business community of the BRICS countries have intensified. For example, negotiations are underway to open Indian chain stores in Russia [and to] increase the share of Chinese cars, equipment and hardware on our market.”

In June, Putin also accused the West of ignoring”the basic principles of [the] market economy” such as free trade. “It undermines business interests on a global scale, negatively affecting the wellbeing of people, in effect, of all countries,” he said.

Quoth the Raven

There is no question Xi feels the same way about avoiding a return to US hegemony, and Pelosi upping the amperage over Taiwan at a time like this certainly didn’t help; but the Chinese are practical and won’t throw away all that trade with the West if they can avoid doing so. Russia doesn’t have to consider that because the West has already thrown away trade with Russia for the most part, except over energy, and it is working hard on doing that in a way that won’t destroy itself, which it may well end up doing. Russia started readying itself to de-dollarize when the sanctions over Crimea went into play, and the US finalized that decision when it kicked the ruble out of SWIFT. Xi, however, walks a different road, kicked out of nothing, where he will want to have his pie and eat it, too.

Xi, however, is hamstrung with serious detriments weakening his financial power to do anything financially right now. His housing market is in full meltdown with mortgage owners on strike, refusing to pay. Major real-estate companies have gone bankrupt. Banks are struggling. It’s a mess. And a mess does not make a good foundation for a new global currency where one of the most important qualifiers is that you have a large and stable economy. So, there is little immediate risk of the crippled yuan and ruble in rubble being strong contenders to replace the dollar anytime soon. They have a lot of heavy lifting to do to even become as strong as the euro.

China’s housing bubble is one of the largest on earth. It’s bond market is already convulsing. Crisis dynamics on a large and complex scale have a way of being managed until they can’t be. (The Fed’s in the same boat.) You hold developing crises together, but one day they just blow up all over you … and everyone else. Financial crises (like any crises) are manageable until they blow up in the public square as is starting to be seen in China or until panic sets in. China’s mortgage meltdown has turned into riots in the streets that look a lot like panic in the streets, but the problem did not begin over mortgages but over banks that ran dry and used depositor money to “bail-in” the bank. Depositors revolted by saying, “Fine, then, that’s the last mortgage payment you’ll ever get from me.”

The unraveling process commenced last week in China. The movement to halt mortgage payments was on the heels of some protests by depositors of failed banks. I believe there’s growing recognition that the Chinese people are being pushed to their breaking point. A most protracted Bubble period inflated many things, including expectations. The Chinese have been willing to tolerate increasingly brazen government repression because of confidence that a highly effective Beijing would continue to improve standards of living. This trust is being shattered. There is heightened recognition that Beijing has seriously mismanaged economic development. Zero-Covid is seen by many as terribly misguided government overreach. And I would imagine there are many questioning China’s “partner without limits” alliance with Putin’s Russia…..

The bloom is at least coming off the rose for Beijing…. A crisis of confidence is unavoidable. The degree of mismanagement – especially in regard to Credit and speculative excess, its banking system – has been shocking. And with Beijing now forcing aggressive crisis lending – including to insolvent developers – how long can confidence be maintained in China’s bloated banking system?

Credit Bubble Bulletin

If China fails to get that fully under control — and it increasingly looks out of control — there is not much chance that many people or businesses around the world will see its currency as being a stable replacement for the dollar and even less chance they’ll see some conglomeration of the yuan and ruble as an adequate replacement. The same thing can break out in the US, of course, but the point is that right now it is already breaking out in China.

As an alliance from which a reserve currency can be cobbled together from two already badly faltering national currencies, the BRICS nations look like a soccer team whose school bus just rolled down a hillside, and now stumbling out on the field, bloody and broken, to play their first game against the toughest competitor in the league. I suppose they could win that game, but it’s sure not where I’m going to place my money.

Breaking the dollar

Don’t think I’m mistakenly believing the US is a giant that can’t be brought down. I’m not. There is nothing like hubris to assure a great fall, and the Fed and US government both strike me as too overconfident. However, the BRICS team looks like there were a lot of loose bricks in their bus that tumbled around with them on their way downhill. While the Russians and Chinese may eventually build a currency that holds, it is a long road before they replace the dollar … if they ever make it that far. The US has been underestimated many times in the past, such as back in the late seventies or early eighties when everyone was wringing their hands over how Japan was going to overtake the US economy. Hah! Not even close. Why? Because all these other nations are just as full of their own flaws they have to deal with and because, typically, at som point the US wakes up and makes some corrections.

There has been a lot of handwringing in the alternative press — a little too eager I think to see the dollar die so gold or cryptos or something else replaces it — over the BRICS replacement of the dollar. I think most people have no idea how high the bar is for becoming the global trade currency. It is an almost impossible bill to fill. Rather than lay out all that is required, I’ll refer you to Charles Hugh Smith’s article that lays out all the requisite qualifications, showing how truly high the bar is, and how no nation currently comes close, should you want to dig deeper into that: “Cancel the Funeral for the US Dollar: The ‘Patient’ Just Leaped Out of the Coffin.”

There are a lot of levels described in Smith’s article that China and Russia combined would have a tough time passing even in good times. My prediction is that they will emerge with a new currency before the end of the year or by early next year that they can announce; but that just starts the arduous journey of holding it together long enough to clear all the bars. Look at how long the euro has competed to replace the dollar with a lot more cultural and historic solidarity behind Europe than likely exists between the BRICS, and the euro is still a fairly distant second to the dollar because of its internal troubles.

Right now emerging markets face a flight of capital where investors are running like rats toward the dollar — not the euro, not the ruble, not the yuan, but to the currency that is still the best-smelling tomato in the compost heap. Even within the eurozone, the periphery is under stress with the ECB having to create special vehicles to try to prevent fracturing between nations that is resulting from the central bank’s attempt to tighten monetary policy, which is hitting the nations with the weaker economies harder, driving their sovereign-debt financing rates up more than other nations within the bloc. A BRICS-built common currency is going to face even bigger hurdles.

Mari Draghi

With Italy and Greece particularly back under the pressure of another euro crisis, Mario Draghi, former head of the ECB, resigned as Italy’s prime minister and dissolved parliament. Entire governments can fall apart over crises that develop along the fractures of a currency. That wasn’t the entire picture of Draghi’s fall, but it was a big part of it. What the US has going for it is that, for now, its states still somewhat get along and don’t have their own central banks. The BRICS don’t have that advantage any more than the eurozone. The euro will break up well before the BRICS come together with anything that looks like a serious global competitor. (Not that I am predicting a euro breakup for the time period covered in these predictions.)

That said, the US cannot just rest on its laurels or keep weaponizing the dollar if it wants to maintain its advantage, and none of this means the Fed cannot over time continue to undermine the dollar with its manifold massive mistakes; but in the near-term that isn’t going to happen. Something big is coming up soon for the dollar, though the dollar is not going to die; it’s going to transition. The Fed will replace the dollar as we know it with a central-bank digital currency, but that will still be a dollar. Many think a CBDC is a central-bank crypto currency. It is nothing of the sort. The digital dollar’s value will not be set by blockchain miners or speculative plays but by the same central bank making the same kinds of decisions it has for decades. It will just transition to a dollar that has no physical form (bills and coins) anymore; but that’s a subject for my next Patron Post.

Some of the talk by gold bugs and others is that ruble-yuan conglomeration will prevail over the dollar because it will be backed by gold or by commodities. It will not be backed by either. It may be pegged to gold or to a basket of commodities, but as valued in what? Dollars? How do you peg it to gold valued in the new currency? That is to peg it to itself unless they do as the US did long ago when it mandated a legal price in dollars for gold and then required itself to only issue as many dollars as it had gold (at first, but they strayed far from that over time, even before the gold standard ended).

The new currency will certainly not be “backed” by any of those things. That is to say, no banks are going to give you gold in exchange for your ruble-yuans or whatever the new hybrid currency becomes called. No bank is going to give you barrels of oil or bushels of wheat, and that is what backing means — you can demand gold or silver or whatever the backing is in exchange for your currency or can, at least demand some portion of your currency as in gold or whatever is said to “back” the currency.

There will be no return to the gold standard

I know those who invest a lot in gold strongly feel gold will rule again and want it to, but most people in the world truly could not care less if their currency is backed in gold or pegged to commodities. All they care about is that the currency works and is dependable. They don’t even think about what it is backed by or what makes it work, and the dollar has a long history of being the most dependable currency on earth in the present time.

While we love to hate the Fed (or, at least, I do), fact is the dollar has been more stable than any currency for decades now, and its strength RELATIVE TO OTHER CURRENCIES is currently growing; i.e., the dollar index is rising. So, while a return to the gold standard is highly desirable to gold bugs, there is no broad public drive in that direction. That’s the reality. It’s a gold bug’s pipe dream … or some kind of dream.

More importantly, however, there is zero chance of banks doing that to themselves in today’s world. Central banksters are never going to limit themselves to such constraints again, having been entirely freed of them half a century ago. You just don’t strap yourself into stocks and bonds. In fact, banks never really held tight to to a gold standard for half a century prior to that.

There is tremendous power in control of fiat currencies, and people in power do not give up their power just so they can have a more stable currency. Does anyone seriously think banksters care more about their currency than they do about themselves? They ultimately care more about their power and wealth. In fact, they only care about their currency because it’s making them money and giving them power. As Henry Kissinger said, “Who controls the money controls the world.”

It’s a mistake to think banskters care more about their job of creating a more stable currency than they do about their power in this world or their personal wealth. If you own the nation’s only legal money-generating machine — the goose that lays the golden egg that isn’t made of gold but spends like it is — you’re not going to give it up and use gold to limit your powers. To think otherwise, is to be naive about human nature.

The value of a gold-backed currency for the general public is that gold controls the money. Bankers can’t print it at will. They can only print as much as they have gold to back … or they cheat as the US did for decades and print some set multiple of the amount of gold they have. There is no chance in human nature they strip themselves of power to “control the world,” and they have the government so rigged it is highly unlikely the government forces them to do that either. Instead, they will have various persuasive arguments if the dollar does start to fail as to how it only means they need to go to a digital dollar for better control.

That’s where this is headed. To read more on that, become a supporter of the writing that happens here at the $5/month level or above. And, thank you, again, to those who already have. I have kept going at this because of your commitment because you prove it actually matters a little to someone. Remember, you’re not just subscribing to get a few extra articles. You are the ones who keep ALL the articles here flowing. If support grows to become a minimal pre-pension retirement income, I’ll be able to continue to put all my effort behind this as I have now begun to do (financing the shortfall out of my own savings long enough to find out if that will work).

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