Ditching the Dollar — US Dollar Collapse Exaggerated — Eurodollar Volumes — Junk Bond Strength — Insider Buying Strength - [04-02-2023]

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THIS WEEK’S EDITORIAL

DITCHING THE DOLLAR:  Doom and Gloom articles which are in abundance these days have been forecasting the collapse of the US Dollar and, recently, the collapse of the US banking system. Last week, BOOM explained that the US banking system did not seem to be on the verge of collapse. The rationale for this was based upon the delinquency rate of US bank loans being at a 40 year low.

BOOM also commented on the narrative of demise of the US Dollar as the dominant global “reserve” currency, suggesting that it may be a 50 – 100 year process before true currency multi-polarity can occur. But BOOM also warned that “it may be much shorter if the US continues to threaten other nations and isolate itself”. This begs the question – how much shorter? This week, we will examine the dynamics of the US Dollar to answer that question.

It is true that more nations are losing enthusiasm for using US Dollars in trade settlements. The global oil trade is worth looking at, in particular, where the so-called “Petro-Dollar” has ruled supreme. India, for example, which has a population of 1.5 billion people, has been steadily growing its trade with Russia in the last 12 months since the beginning of the war in Ukraine.

They are now importing more than 1.6 million barrels of oil per day from Russia. Meanwhile, India’s oil imports from the US have fallen by 38%. Surprisingly, it is the third largest importer of crude oil in the world after China and the United States. Some (but certainly not all) of the oil taken from Russia is being paid for using the currency of the United Arab Emirates, the Dirham. In the past, such trade would have all been settled using US Dollars.

That all sounds ominously consequential for the US Dollar. However, bear in mind that global demand for crude oil amounts to about 100 million barrels per day. Thus, 1.5 million barrels is just 1.5% of global demand.

Think of it the other way, 98.5% of global oil trades that occur outside India are not easily switched to currencies other than the US Dollar. The volume is the problem, both the volume of the oil being traded and the volume of a readily available trusted currency to be used for settlement.

At a US Dollar price of $75 per barrel, 100 Million barrels of oil per day is equivalent to US$7.5 Billion per day of currency settlement. In annual terms, that is US$2,737 Billion per year, or US $2.737 Trillion. There is that problem again – the volume problem.

And 100 Million barrels of oil a day, in annual terms is 36 billion barrels per year. Does that sound like another volume problem? Yes, it does.

US DOLLAR COLLAPSE INSIDE THE US:  Despite these realities in relation to the energy trade, many commentators and “experts” continue to predict the rapid collapse of the US Dollar, both in settling external, global trade transactions and inside the US itself.

BOOM is not a fan of such forecasts as they simply defy reality. Inside the US economy, there is no other currency in circulation apart from the official one. Thus, currency collapse inside the US simply cannot happen. For that to take place, there would have to be a suitable, alternative currency in free circulation to switch to after US citizens have lost all trust and faith in their government and banking system.

Other frequently read “experts” predict that a “Hyperinflation” event will soon occur in the United States, often using the Hyperinflation event in the Weimar Republic of Germany in 1923 as an example. They ignore the fact that for such super high inflation to occur — a Hyperinflation event — there must be a collapse in confidence and use by American citizens of the local currency in their trade and capital settlements. And that can’t happen if there is no readily available alternative currency. So the stories preaching that Hyperinflation will occur inside the US appear to be a gross exaggeration.

In regard to external trade settlements, America will not accept any currency other than US Dollars in return for its exported goods and services. And it is equally reluctant to pay for any imports using any other currency. The same can be said regarding any capital settlements.

If US real estate, stocks or bonds are purchased by foreign investors, then they must pay for them with US Dollars. That is as plain as day to understand. And if foreign investors sell those US assets, then they will be equally forced to accept US currency for settlement.

US DOLLAR COLLAPSE OUTSIDE THE US:  Outside the US, when dealing with nations other than the US, external nations cannot easily switch to using currencies other than the US Dollar in their trade and capital settlements. To do so, they would have to find sufficient volumes of non-US currency. Total Global trade is estimated to be around US Dollar value of $32 Trillion per year. That does not include global capital movements for the purchase (and sale) of assets.

$ 32 Trillion is a big number – the Volume problem arises again.

The Russian Ruble currency and the Chinese Yuan currently make up less than 2% of global foreign currency holdings in central banks. That is a tiny number; not much more than the Australian Dollar representation.

The fact is that the US Dollar is dominant in volume in central bank currency holdings (60%) and therefore, it is the currency of convenience used to settle most international transactions — even with Russia and China. The Euro currency holdings amount to another 20%.  However, the Euro is often seen as a US Dollar Proxy so, together, they amount to 80% of foreign currency holdings. That is currency dominance right there, in plain sight.

People who say “the US Dollar will soon collapse” simply don’t understand that currency volume, availability and convenience are critical features of the so-called “reserve currency” status. It is impossible for the Chinese Yuan to replace it quickly or even match it. Boom estimates that it will be a 50 – 100 year project, if not longer.

China’s central bank currently holds about US$2.3 Trillion in foreign currency reserves. Russia holds almost US$600 Billion. These are huge amounts but they are held principally in US Dollars. China has the largest holdings of all nations and Russia is number 6 on the list. These high ratings reflect their exports and thus their reliance on the US Dollar.

So the narrative that states “the US Dollar will soon collapse” simply cannot happen inside the US and will not happen quickly outside the US.

EURODOLLAR VOLUMES:  There is another matter to consider in regard to US Dollar dominance in global trade and capital settlements. And that concerns Eurodollar volumes. Eurodollars are US Dollars outside the United States which reside on the balance sheets of the commercial banking systems of many nations. In other words, they are outside of the control of the US regulatory bodies.

And, by the way, most of those dollars have not been “exported” from the US. They have been created in offshore tax haven banks when US Dollar denominated loans are made to willing corporate borrowers. There is no strong demand for such loans to be denominated in other alternative currencies. Thus, this Eurodollar volume acts as a buffer to all other currencies globally. The dominance of the US Dollar is therefore very difficult to replace with other alternatives.

The next time you see an article stating that the “US Dollar is about to collapse” or “Hyperinflation is about to happen in the US”, please take time to consider these US Dollar dynamics — inside the USA, outside the USA and in Eurodollar volumes.

JUNK BONDS AND INSIDER BUYING:  In the US last week, despite considerable Doom and Gloom, there was notable strength in the prices of Junk Bonds and in regard to insider buying of stocks. When these two combine, it usually indicates that asset prices will gather in strength. BOOM has been forecasting this renewed strength in financial asset prices since October last year.  So far, that prediction has proved very accurate. BOOM is now expecting a recovery in US real estate prices as the year progresses. Watch for the turn-around in home prices in particular.

QB Explained: https://boomfinanceandeconomics.wordpress.com/2019/12/15/boom-as-at-15th-december-2019/  and

BOOM’s Perfect Economy: https://boomfinanceandeconomics.wordpress.com/2020/01/18/boom-as-at-19th-january-2020/

In economics, things work until they don’t.  Until next week.  Make your own conclusions, do your own research.  BOOM does not offer investment advice.

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BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY: LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans). https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy Watch this short 15 minutes video and learn as Professor Richard Werner brilliantly explains how global banking systems really work.

AND Watch for 4 minutes, this Bank of England explanation: Money is essential to the workings of a modern economy, but its nature has varied substantially over time. This video describes what money is today.

Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.  EMAIL: gerry{at}boomfinanceandeconomics.com

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