Broker Check

Financial System Reset

January 30, 2023

Last week we talked about the Debt Ceiling and alluded to what an amazing mass of debt has been piled up by specifically the U.S. government– but also the world’s governments, businesses and individuals in general. Some of world’s debt numbers start to look ridiculous when you really start analyzing them and there is no shortage of financial commentators that, recognizing the unsustainability of the system, predict some sort of a reset.

In criticizing these reset claims, let’s take a look at some of the fundamentals of our monetary system that may not be all that obvious. First and foremost, we need to realize that the entire world’s monetary system is based on the U.S. dollar. Every other currency is a derivative of the U.S. dollar. There will be no “reset” that takes the form of the world’s economy dropping the dollar and using just Euros or the Chinese Yuan or Japanese Yen. That will not happen.

The foreign currency trading exchanges have a market cap of nearly $2 quadrillion. That’s nearly 2 thousand trillion dollars. The forex market trades some $7 trillion in valuation daily and is 30 times the combined value of the U.S. publicly traded stocks and bonds COMBINED.  In this marketplace, 88 percent of all trades are denominated in U.S. dollars.

International trades are using the U.S. dollar more than 60% of the time. Leveraged trades requiring collateral are using the U.S. dollar again in the form of U.S. Treasuries. The more treasuries that are poured onto the world economy, the more leverage there is because counterparty risk is reduced. Most people aren’t even familiar with the Eurodollar system, but it is essentially U.S. dollars deposited in overseas banks. The Eurodollar system began after World War II when the Marshall Plan distributed dollars all around Europe to aid in the reconstruction after the devastation of the war.  Now the Eurodollar market is a key ingredient in world finance. We don’t need to worry about competition from an AmericanEuro marketplace springing up and taking Eurodollar business. That won’t happen. The Euro is a drastically flawed currency…

Another point about the monetary system that we think is important to understand is that everything is based on debt – everything. Even those paper dollars in your wallet are on the debit side of the Federal Reserve’s balance sheet.  The only financial asset on the planet right now that isn’t someone else’s liability is gold. U.S. dollars are borrowed into existence. If everyone paid off all their debt, there would be no dollars – only gold would be left… Sit with that for a while…

Back to the idea that a reset is coming… We don’t see a viable alternative to the current system. Argentina and Brazil cannot manage a legitimate currency for South America. As we frequently mention, Argentina has restructured or defaulted on their debt NINE TIMES since their emancipation from Spain. They don’t know what they are doing and just because the current system that we have is drastically flawed that doesn’t mean they can fix anything. The Chinese Yuan is NOT a viable alternative to a world reserve currency status. China does not even have GAAP (generally accepted accounting principles.) The Chinese have capital controls and don’t let their own citizens wire money overseas. China has a debt bubble that DWARFS ours in America. Europe and Japan are in a much worse monetary situation than the U.S. We recently heard that the Saudis are backing off demanding U.S. dollars for oil, therefore the petrodollar system is at risk. This is NOT good news; however this is not the death knell of the U.S. dollar. Foreigners are buying energy from the Russians right now in rubles where they used to buy in dollars. But they aren’t storing their wealth in rubles before or after the trade. Buyers won’t be holding their wealth in Saudi bonds in front of buying oil from them either. 

Cryptocurrencies aren’t the new reset coming at you either. Cryptos have simply become new tables at the Wall Street casino. If you want to speculate on Cryptos – go ahead – you may very well make a lot of money. But cryptocurrencies are NOT a monetary system. NO ONE is borrowing Bitcoin to buy a house, or to build a new factory, or to open a pizzeria. Monetary systems need consistent pricing to allow participants to plan for the long term. That is not how the Bitcoin world is built – and of course the U.S. government would never sanction a monetary system that it has no control over…

At the end of the day, we can come up with many different analogies – the U.S. dollar is the least dirty shirt in the pile or the U.S. dollar is the prettiest girl in the leper colony… Whatever you want to say, we have a flawed system – but there is no obvious alternative right now so let’s not get bamboozled by doomsayers that want us to join their tribe. We are certainly not telling you to sell your gold – in fact we are always fans of investors buying gold – but until this chart looks different, we will tell you that the U.S. dollar will continue world reserve currency status.

 

This is a chart of the amount of U.S. treasuries that are owned by foreign governments and investors. Question for the “reset” people… So, you say the U.S. dollar is about to give up its world reserve currency status – is that why everyone internationally keeps buying U.S. treasuries?  Big international players are preparing to jump off the U.S. dollar train and yet they keep buying these U.S. Treasuries? Nope – don’t think so. The treasuries are simply long-dated dollars that pay interest, and the foreigners are buying in droves. If you take a look at the results of recent treasury auctions from the last few weeks, there are plenty of buyers and we don’t expect that to change. By the way, the aggregate of foreign ownership of U.S. Treasuries is somewhere in the neighborhood of $8 trillion. According to the St Louis Federal Reserve website, total ownership by the Fed of foreign assets is about $20 billion.

We are not fans of the way our government spends money and we don’t think that the current system can survive indefinitely without serious restructuring. Any monetary system where the premier debt issuer – in our case the U.S. government – is borrowing money that it has NO INTENTION of ever repaying – is dishonest.  But the concept that the world is prepared to jump to a whole new monetary system is absurd and we need to reel in the panic.  Many years will transpire before the dollar dominance over the world’s economy is even at risk. As time goes on, however we do feel the ice thinning below our feet. Make sure to keep your financial house in order – and that includes owning some “alternative” assets including gold. We see volatility continuing in financial markets throughout 2023 – so stay tuned…

Regards and good investing!

Greyson Geiler