So What’s Replacing the Dollar?

Some Contrarian Thoughts [The Daily Reckoning] January 21, 2023 [WEBSITE]( | [UNSUBSCRIBE]( So What’s Replacing the Dollar? - “In all the excitement over de-dollarization, some basics tend to get overlooked”… - It’s not just a multipolar world, but a fragmented world… - What does “backed by gold” really mean?… [A $557 credit has been applied to your account]( — Customer Service, Paradigm Press [Click Here To Learn How To Claim It]( San Francisco, California January 21, 2023 Editor’s note: Many people believe the dollar will eventually lose its prime reserve currency status. But what exactly will replace it? Today, Charles Hugh Smith shows you why the answer may be more complicated than many realize. [Charles Hugh Smith] CHARLES HUGH SMITH Dear Reader, We’ve all heard about how the dollar’s days as the world’s leading reserve currency are numbered. Much of the world wants a new monetary system that isn’t based on the dollar. The U.S. weaponization of the dollar against nations it deems hostile, like Russia, has only intensified the calls for change. What exactly will replace the dollar standard is a matter of debate, but many agree that it’s just a matter of time. It may not happen overnight, but it will happen. That’s fine, but let’s think about the alternatives for a minute. Longtime readers of mine know not to expect me to rubber-stamp anything, be it the status quo or proposed alternatives. Our interests are best served by screening everything through the mesh of independent analysis, aka contrarianism. Which brings us to the two sources of alt-media excitement in the currency space, the petro-yuan and another wave of proposed gold-backed currencies. I'm all for competing currencies. The more transparent and open the market for currencies, the better. In my view, everyone should be able to buy and trade whatever currencies they feel best suits their goals and purposes. In all the excitement over de-dollarization, some basics tend to get overlooked. The Yuan Is Just a Dollar Proxy 1. The yuan remains pegged to the US dollar, so it remains a proxy for the USD. It will only become a true reserve currency when China lets the yuan float freely on the global FX market and yuan-denominated bonds also float freely on global bond markets. In other words, a currency can only be a reserve currency rather than a proxy if the price and risk of the currency is discovered by global markets, not centralized monetary/state authorities. 2. Most commentators stop on first base of the oil-currency cycle: China buys oil from exporting nations by exchanging yuan for oil. So far so good. But what can the oil exporters do with the yuan? That's the tricky part: the petro-yuan has to work not just for China but for the oil exporters who will be accumulating billions of yuan. [Attention! Before You Read Any Further…]( Before you read any further in today’s issue, an urgent situation needs your immediate attention. If you don’t plan on claiming this new upgrade to your Strategic Intelligence subscription, you’re missing out on a huge opportunity. Right now is your chance to grab one of the biggest (and most valuable) upgrades our company has ever made to a newsletter. I’m taking Strategic Intelligence to an entirely new level and I’d hate to see you left behind. [Click Here Now]( The oil exporters can hold some yuan as reserves, but the global market for yuan is not very large. What assets can they buy with yuan? Again, the global market of assets denominated in yuan is limited. The oil exporters can buy assets in China, of course, but with China's property bubble finally popping, deglobalization sapping its export sector and Xi's widespread disruption of private capital, the bloom is off the China Story in fundamental ways. Why would oil exporters invest billions of yuan while Chinese wealth is leaving China? A Fragmented World 3. The net result of these dynamics is that oil exporters' yuan will end up in China's central bank, exchanged for euros and US dollars which will then circulate in the global economy. The money velocity of the petro-yuan will be near-zero if there's limited markets for investing hundreds of billions of yuan in low-risk assets, with low-risk being defined as diversified. The world isn't just multipolar; it's fragmented, and there are lots of places to invest. Being limited to places where the yuan can be exchanged for low-risk assets isn't low-risk because it isn't diversified. 4. The problem is never the issuance of currency, it's what to do with that currency once you've traded oil for it. Scale, ubiquity and transparency are what owners of capital value. China's financial system has neither the scale, ubiquity or transparency necessary to circulate hundreds of billions of yuan globally without exchanging them for euros, dollars or yen. If that's the case, then what's actually changed, other than the introduction of an intermediary currency that's still pegged to the US dollar? As for gold-backed currencies, there are two fundamentals that are often overlooked. [[CHART] Could Inflation Hit 20%+ In 2023?]( [Click here for more...]( Take a close look at this scary chart pictured here… What you see is the money supply in America… And as you can see, the number of dollars in circulation has exploded in the last few years. In fact, more than 80% of all dollars to ever exist have been printed since just 2020 alone! Which is why some say inflation could soon explode even higher than it is now, to 20% or more. And if you’re at or near retirement age you must take action now to protect yourself… otherwise you risk losing everything. See how to survive America’s deadly inflation crisis… [Click Here To Learn More]( 1. "Backed by gold" means nothing. It's the exchange rate of the currency to gold that counts. The problem here is the issuing central bank / state can change the exchange rate at their whim, i.e. by fiat. Should the issuing entity decide it needs more currency, it devalues the currency by increasing the number of units exchanged for an ounce of gold. This is entirely arbitrary and not within the control of those holding the currency. So if the issuing entity starts out saying that 100 units of currency equal one ounce of gold, and then later changes that to 200 units of currency equal one ounce of gold, those who own the currency "backed by gold" have just lost half their purchasing power. Central banks and states always seem to need more currency, and the temptation is always to devalue the currency by issuing more units. "Backed by gold" doesn't change this. 2. "Backed by gold" means nothing unless the currency can be converted to gold. If there is no conversion mechanism, "backed by gold" has no actual financial value. It's just nice-sounding verbiage. It’s the Velocity, Stupid 3. "Backed by gold" means the currency isn't supported by bonds paying interest. Bonds paying interest provide income, which is attractive, and the interest paid acts as a governor on risk and other financial fundamentals of the economy that's ultimately supporting the currency. If the nation issuing the "gold-backed currency" won't allow conversion of the currency to gold, the currency is actually a proxy for that nation's economy and governance. If the government arbitrarily intervenes in the private-capital economy as a matter of policy, if governance is opaque and shadow-banking dominates, then the currency will be at risk regardless of claims to the contrary. Rather than cheer the concept of a new currency, we're better served to look at the velocity of that currency and the cycles of investing that currency in assets denominated in that currency for a low-risk return. The entire point of a currency is to circulate to the benefit of the owners of the currency. Currencies don't become useful simply by being issued. Creating an entire transparent ecosystem for the currency is trickier than introducing a currency with much fanfare. Just a few things to think about as we ponder de-dollarization… Regards, Charles Hugh Smith for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Editor’s note: While everyday investors are getting killed in today’s market… Jim Rickards’ readers have been seeing one winning trade after another: Major shock to the energy market? 128% gain in 28 days. Federal Reserve bombshell? 183% gain in 11 days. Inflation at 40-year highs? 203% gain in 26 days. How are gains like these remotely possible in today’s market? It’s all part of a [moneymaking secret]( Jim discovered when he worked with the CIA. It may sound crazy… But just to prove it to you, we just added a [$557 credit]( on your account to help you get started with this secret, immediately. We strongly encourage you to claim it before the opportunity expires. [Go here now to see how to apply your $557 credit…]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Charles Hugh Smith] [Charles Hugh Smith]( is an American writer and blogger, and serves as the chief writer for the blog "Of Two Minds". Started in 2005, this site has been listed No. 7 in CNBC's top alternative financial sites, and his commentary is featured on a number of sites including Zerohedge.com, The American Conservative, and Peak Prosperity. 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