Is the US dollar at risk of losing its global currency status?

Everybody, Peter Zeihan here coming to you from Colorado where our eight inches of snow turned into 16 to 18. Because you know, mountains. Now, today, I wanted to talk to you about global currencies. Every few months, to a couple of years, a new conventional wisdom takes hold of the United States is in its final years, if not final months, and some big political thing is going to happen that is going to dethrone the US Dollar as the global currency. And all American power will unwind with that.

There is no part of that logic chain that has ever been correct. But these stories keep persisting because there is no shortage of people out there in the world who are anti-American and can’t do math and have no sense of history. So here we are one more time.

Step one, U.S. power is not a result of its position as the global currency, it’s the other way around. The global currency has to be able to impose by force if necessary, some sort of pacts on the trading system to allow trade to happen in the first place. 

And right now, the US Navy is more powerful than that of all other navies combined by about a factor of seven. And if you consider that the world’s second and third most powerful expeditionary navies are the Japanese fleet and the British fleet, and you throw them in as American for this force production factor, you’re now talking in excess of 12 to one. 

So honestly, there’s never been any math there. And there’s no danger to the US position from a strategic point of view. From an economic point of view, the idea is that people,  countries will just stop using it. And the scuttlebutt of the moment is that a number of countries are negotiating, or at least talking about publicly, joining the BRICS group. 

Now, BRICS is a group of four large developing economies, Brazil, Russia, India, and China. It’s a grouping that was put together by some finance guy back in the 2000s. And all he meant by it was, hey, look, these are four big countries with big bond markets, we might want to consider trading these as a group. That’s all he’s ever thought about it. But the leaders of the BRICS countries do get together from time to time to shop.

No meaningful policy has ever come out of it. Because these countries don’t really trade. I mean, they all trade with China, of course, but they don’t trade with one another. So there’s a reason to caucus with Beijing, but the rest of it is just kind of fluff, always has been. And so when I see stories about other countries, such as South Africa, or Argentina, or now Saudi Arabia, starting to join them like, this is really boring, because these countries really have nothing in common. But anyway, as the conspiratorial logic goes, if they stop using the US dollar then the US is doomed.

Well, they’d have to start using something else. And none of them, none of them, want to use each other’s currencies, because that would give that country a leg up. So like, you know, the Russians have always said that the ruble should be the global currency, which makes everyone, everyone laugh, because nobody wants rubles, especially Russians. And the same goes with the Chinese yuan. And the South Africans, for rand, and so on.

There’s an idea that you will have a jointly managed currency, something that’s maybe launched off of the International Monetary Fund’s secure deposits there, their SDS are what they call, but that’s not a currency, that’s not even a unit of exchange, that’s simply an accounting fiction that has been created. Because the money that comes into the IMF comes in from several dozen locations. 

They need some sort of central accessing. In terms of volume, STS would have to expand by at least a factor of 1000, in order to manage global trade. And now we’re getting into kind of the guts of what you really need. If you want to have a global currency, it has to be huge, it has to be able enough to lubricate the Global Exchange mechanisms, which at last check was in the 10s of trillions. 

And that doesn’t mean that your currency has to be in the 10s of trillions, that means you have to be able to lubricate the exchange of 10s of trillions. Your currency needs to be even bigger. Which gets us to probably the single biggest constraint on being a global currency. You have to not care what happens to the value of your currency on any given day. Because if there’s a trade surge and demand of your currency goes up, then all of a sudden the supply of your currency has plummeted, you’re dealing with very real economic distortions at home. So your currency has to be so huge that you don’t care that the global exchange rate is moving around every day. 

And that means you also need to be able to run a persistent trade deficit, because you have to be able to provide currency for everyone who wants to trade everywhere at any time, and you cannot sign off on each individual transaction. 

That makes the list down to one already, because the Europeans couldn’t do it because they have to run a trade surplus because their demographics are so age, they will never be net importers again. It can’t be the Chinese. The Chinese are the most manipulated currency in human history. They print two to five times as much currency every month as the US Fed did at the height of our monetization programs in 2007 to 2008 and then again during COVID. 

It’s everything that everyone says is wrong with the US dollar is actually wrong with the yuan by a factor of 10 more. And every time the Chinese start to loosen up their capital controls in an attempt to have a bigger role for their currency internationally, a half a trillion to a trillion dollars of private savings floods out of the countries in a matter of months. And they have to slam that window shut again. 

So there is no reason to expect the US dollar to go anywhere. In fact, let me put this in historical terms, the need to have a large liquid stable currency maintained by a country that doesn’t care what happens, whatever it is, is so huge. It’s so central to trade, that even at the height of the British Spanish confrontations in the late colonial period, the Brits were using almost exclusively Spanish currency to lubricate their slaves, rum finished goods, trade triangle between the Caribbean colonies, the American colonies and the British mainland. 

Another good example, at the height of the Vietnam War, the Vietnamese were using the US dollar in their international exchange because there was no option. You want a more recent example, look at what’s going on with Russia. The Russians are under financial constraints right now – sanctions put on them by the Americans, the Europeans and others – and so they tried to pull a lot of their petroleum earnings, which comes in in euros and dollars, and they tried to push it into Chinese yuan as kind of a stick it to the west. Well, a few months later, they tried to then pull it out the Chinese like, Well, no, we really don’t want these Yuan back. And so the Russians just lost 10s of billions of dollars. 

There is simply no example at any point through human history of the unit of exchange for global trade being that of anything other than the global hegemony and the largest economy writ large. It’s just not possible. 

I don’t mean that to sound pro-American because the Americans have been on the other side of this. During the War of 1812, when the Brits were very close to destroying the United States as a country, our unit of exchange internally was the British pound. And if anything, as the world continues to be globalized, you should expect the American position to entrench because as global trade breaks down and goes into regional trade, you’re going to have a series of regional hegemonic who have tried to impose a bit of a pacts on their own neighborhood and they will try to force everyone in their neighborhood to use that currency. 

But all of those countries will have a vested interest in not doing that. And as long as the US dollar is available, you’ve got a more liquid, less politically problematic currency that doesn’t swing wildly, that is not actively manipulated to achieve trade advantages. And that is going to be used instead. So I mean, for example, think about the eastern Mediterranean, we’re nearing a world where Turkey is going to be the central hub for all things in the caucuses and the Middle East and the eastern Balkans. They’re going to try to get everyone to use the lira. But not everyone is going to want to use it because the Turks will will will use that authority in order to bind all these other economies more closely to them. Anyway, like I said, at the very beginning, there’s no shortage of people who don’t like Americans who have no sense of math or history who are always going to trot this up every few months, and it means as little today as it did then. Alright, that’s it for me. Until next time.