Topic
The global move toward de-dollarization – countries moving away from the previous standard of using the US dollar as the world’s premier reserve currency – is often cited as one of the main factors driving the price of gold higher. Let’s take a look at the continuing fall of the US dollar and how the United States, through a series of policy errors, has shot itself in the financial foot.
Among the three biggest missteps of the US government and its financial authorities are the following:
Going Off the Gold Standard
I suppose you could say that the major problems for the US dollar started back in 1971 when infamous US President Richard Nixon abandoned the gold standard. Other nations foolishly followed suit, giving us the worldwide fiat currency system that exists today.
A fiat currency is one that is allegedly backed solely by the faith that people and countries have in the economic and financial stability of the nation issuing the currency. In practical reality, fiat currencies aren’t backed by anything. The whole fiat currency system is little more than one big financial illusion. Countries print money at will and hope that people will continue to believe that the currency notes they issue are somehow worth more than just the paper they’re printed on. That usually works for a while, but never in the financial history of the world has it worked indefinitely. Every country that’s ever tried it has eventually faced a day of financial reckoning when it had to pay the piper. The result has typically been a period of economy-wrecking hyperinflation, followed by the need to completely revamp the country’s currency.
The folly of abandoning the gold standard was quickly made apparent, as inflation and loss of purchasing power ravaged the US economy over the next decade. But, of course, there was no putting the genie back in the bottle, as the Federal Reserve had already printed billions of dollars that could no longer be backed by gold – at least not at the previous pegged gold price of $35 an ounce. Gold and silver prices, right along with inflation, soared in the 1970s, with gold topping out near $1,000 an ounce and silver hitting $50 an ounce. (Does that sound somewhat similar to the current US financial situation? – It should.)
Freed from the confines of the gold standard, the Federal Reserve was free to print money at will, and it has taken more than full advantage of that freedom ever since. As of 2024, the Fed has cranked out more currency notes than one could have ever imagined back in 1971, slamming the purchasing power of the US dollar over and over again.
The US Bureau of Labor Statistics estimates (and it’s a conservative estimate) that the Consumer Price Index (CPI) has gone up by approximately 500% since 1971. Here’s a chart that just shows the freefall in purchasing power of the dollar over just the past couple of decades:
Not very pretty, is it?
For a much nicer looking picture, let’s take a look at a gold price chart that covers roughly the same period. While the dollar has been sinking lower, gold has been rising substantially higher and higher, from less than $1,000 an ounce to nearly $2,500 an ounce.
The Rise of the Petro-dollar
The “brilliant” move that the US made after dumping the gold standard was to, in effect, tie the US dollar to oil from the Middle East – principally Saudi Arabia, and also to its oil-rich OPEC neighbors. The Petro-dollar system arose out of a two-fold agreement between the United States and Saudi Arabia:
Part Two there ensured that there would be strong, constant demand for US dollars around the world and served to establish the dollar as the world’s reserve currency. Now, at first glance, the agreement might look like a pretty good deal for the US…except for one little thing. What morons in the US government actually believed that Saudi Arabia (you may recall the Saudis from the 9/11 terrorist attack on the US) and its Arab neighbors were ever really going to be best buddies with the US, the forever-ally of Israel?
If one had any doubts about how the Saudis really felt, things should have become clear pretty quickly when Saudi Arabia and its OPEC partners almost immediately put the squeeze on the US with the mid-1970s oil embargo.
So, how’s that Petro-dollar deal looking these days? – Well, Saudi Arabia has recently announced that it’s perfectly willing to accept payment for oil in plenty of other currencies besides the US dollar. The Saudis have become especially friendly with China, joining the growing economic cartel known as the BRICS nations (BRICS stands for the original members of the group – Brazil, Russia, India, China, and South Africa – but the group has expanded by adding Saudi Arabia and several other Middle Eastern nations). Altogether, the BRICS group now accounts for nearly half of the world’s total oil supply, which gives the group increasing global economic power.
The Saudis dumping the Petro-dollar and, by connection, the US dollar, is a significant part of the overall, worldwide push toward de-dollarization – dethroning the US buck as the world’s premier reserve currency. It hasn’t totally lost that position yet, thanks to the World Bank and the International Monetary Fund (IMF), but its currency supremacy is now seriously threatened.
(In all fairness, I guess I should mention that the US hasn’t kept its end of the original Petro-dollar either, as it has since bought oil from several other countries besides Saudi Arabia.)
“Let’s do everything we can to piss off pretty much every other country in the world”
What’s another driving force behind de-dollarization and the sinking purchasing power of the US dollar? – Well, it’s due in no small part to the US taking actions that are virtually guaranteed to alienate other countries and to make them reluctant to rely on the US dollar.
Imagine this: You’re the United Kingdom – not so terribly long ago, the world’s greatest empire, and a longtime financial center of the world. Now one day the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC) of the United States rings you up on the phone and informs you that they want you to regulate all of your financial trading markets and financial institutions with the same regulations that they apply to trading and banking in the US. They also want you to report to them any and all financial transactions that US citizens or residents do in your country.
Well, the sad, stupid fact is that the US financial authorities have, essentially, done pretty much that very thing with virtually every country in the world. Apparently, they have the idea that they are, or should be, the emperor of the entire financial world, able to dictate to every other country how to run their financial business. This has led to, among other things, all the financial institutions in many countries refusing to serve any clients from the US. They simply – and I’d say, rightly so – have no desire to be under Uncle Sam’s regulatory thumb.
And now add to that overreach of hubris, high-handed moves such as confiscating hundreds of millions of dollars in assets of countries that do something the US government doesn’t like. Case in point: Russia attacking Ukraine. What is the obvious logical response to that going to be, by Russia or any other country subjected to such treatment? – Doing everything it can to avoid financial exposure to the US. And that includes moving away from doing business in US dollars or holding any kind of US financial assets, such as US Treasury securities. Vladimir Putin has already publicly stated that Russia’s preferred currency for international trade is the Chinese yuan/renminbi. OPEC and the BRICS countries are also moving toward favoring the yuan. Gosh, what a surprise (not!).
It also appears that the US government lacks any foresight that extends beyond a week or two. Pretty much anyone who’s savvy in world economics sees the handwriting on the wall – that China is the world’s next great economic empire. There’s a very simple, very basic reason for this: it has, by far, the most consumers – and more and more of those consumers are becoming “middle class” citizens who buy all the stuff like cell phones and cars. But rather than pursue trading partnerships with the ever-growing economic giant of the East, the US has chosen to pursue a trade war with China. The yuan is rising as a reserve currency while the US dollar is declining as such. You don’t need to be a fortuneteller to see the future on this one.
I don’t claim to have covered in this article every financial policy mistake made by the United States over the past 50 years. That would likely entail having to write a multi-volume set of books. But this article does highlight three of its biggest errors, those with enduring and far-reaching impact on both the value of the US dollar and the price of gold.
The push toward de-dollarization has been combined with a push toward gold. China and Russia, along with most of their BRICS partners, have their central banks buying gold hand over fist. Russia alone, despite all the US propaganda garbage about it being hopelessly broke, has bought more than a million ounces of gold since the start of the war with Ukraine. The same OPEC and BRICS nations that are moving steadily away from the US dollar are also among the major gold buyers worldwide over the past several years. Yes, fortunately, all the things that the US has done that are bad for the dollar are continuing to prove to be good for gold.
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Sources:
https://www.investopedia.com/terms/b/brettonwoodsagreement.asp
https://www.visualcapitalist.com/purchasing-power-of-the-u-s-dollar-over-time/
https://www.bcg.com/publications/2024/brics-enlargement-and-shifting-world-order
https://www.linkedin.com/pulse/how-why-petrodollar-could-end-soon-harshad-shah-ltqaf
https://bmg-group.com/china-moves-world-gold-standard/
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