Over the past twelve months, the decades-old economic infrastructure that supports global dollar dominance suffered irreparable damage to two of its load-bearing walls.
First, the petrodollar system quietly began to die late last year. As crude prices plunged, the deluge of oil proceeds which had for years been recycled into USD-denominated assets dried up. Indeed, OPEC nations drained liquidity from financial markets for the first time in nearly two decades last year:
As we noted last month, a new oil price "equilibrium" (i.e. a sustained downturn) could result in a net petrodollar drain of $24 billion per month on the way to nearly $900 billion in total by 2018, according to Goldman.The implications, BofAML observed in February, are far reaching: "...the end of the Petrodollar recycling chain is said to impact everything from Russian geopolitics, to global capital market liquidity, to safe-haven demand for Treasurys, to social tensions in developing nations, to the Fed's exit strategy.”
Second, the world’s most influential emerging economies have lost faith in the US-dominated multilateral institutions that have dominated the post-war world. This has manifested itself in the creation of two new supranational lenders (the AIIB and the BRICS bank) and one major new infrastructure development fund (China’s Silk Road fund). China plays an outsized role in the AIIB and the BRICS bank and both should serve to help Beijing embed the yuan further in global investment and trade.
Meanwhile, Russia and China have begun settling crude imports in yuan amid the extension of Western economic sanctions on Moscow and Russia recently overtook Saudi Arabia as China’s number one crude supplier.
All of this marks a departure from the economic and political norms that have served to underwrite decades of dollar dominance and it goes without saying that printing trillions of dollars over the course of multiple QE iterations doesn’t help king dollar's cause.
In addition to the above, there’s certainly an argument to be made that the US effectively surrendered its right to print the world’s reserve currency long ago.
That is, once the new economics succeeded in burying sound money once and for all, and when fine-tuning macroeconomic outcomes and "smoothing" out business cycles finally became so entrenched in modern economic thought that talk of balanced budgets and a gold standard was largely relegated to the annals of history, the dollar became nothing more than another example of fiat money, unworthy of the reserve currency title.
Nevertheless, the status quo must be perpetuated, which is why Washington launched a Quixote-esque campaign against the AIIB complete with President Obama tilting against environmental and governance windmills and it is also why the likes of Bank of America must issue "research" with titles like "Econ 101: The reserve status of the dollar."
Fortunately, that particular piece of crisply-worded dollar cheerleader propaganda has one footnote that makes the five minutes we spent reading it all worth while. We present it below and leave it to readers to respond.
Another mechanism could be a self-fulfilling feedback loop. If the general public watches the gloom and doom videos, loses faith in paper money and dumps it in favor of hard assets the dollar would collapse. On a similar note, if global investors believe QE is a signal of the central bank giving up on controlling inflation, they could dump the dollar, driving up the price of imported products. However, after seeing that QE has not caused inflation or triggered a dollar collapse in the last five years, it is not clear why people would wake up one morning and decide to panic.