Late last year, data released by the PBOC and the Russian Central Bank shone a light on a disturbing – at least, for the US – trend: As the Trump Administration ratcheted up sanctions pressure on Russia and China, both countries and their central banks have substantially “diversified” their foreign-currency reserves, dumping dollars and buying up gold and each other’s currencies.
Back in September, we wrote about the PBOC and RCB building their reserves of gold bullion to levels not seen in years. The Russian Central Bank became one of the world’s largest buyers of bullion last year (at least among the world’s central banks). At the time, we also introduced this chart.
We’ve been writing about the impending demise of the greenback for years now, and of course we’re not alone. Some well-regarded economists have theorized that the fall of the greenback could be a good thing for humanity – it could open the door to a multi-currency basket, or better yet, a global current (bitcoin perhaps?) – by allowing us to transition to a global monetary system with with less endemic instability.
Though, to be sure, the greenback is hardly the first “global currency”.
Falling confidence in the greenback has been masked by the Fed’s aggressive buying, as central bankers in the Eccles Building now fear that the asset bubbles they’ve blown are big enough to harm the real economy, so we must wait for exactly the right time to let the air out of these bubbles so they don’t ruin people’s lives and upset the global economic apple cart. As the coronavirus outbreak has taught us, that time may never come.
But all the while, Russia and China have been quietly weening off of the dollar, and instead using rubles and yuan to settle transnational trade.
Since we live in a world where commerce is directed by the whims of the free market (at least, in theory), the Kremlin can just make Russian and Chinese companies substitute yuan and rubles for dollars with the flip of a switch:as Russian President Vladimir Putin once exclaimed, the US’s aggressive sanctions policy risks destroying the dollar’s reserve status by forcing more companies from Russia and China to search for alternatives to transacting in dollars, if for no other reason than to keep costs down (international economic sanctions can make moving money abroad difficult).
In 2019, Putin gleefully revealed that Russia had reduced the dollar holdings of its central bank by $101 billion, cutting the total in half.