Trust, confidence, and dollar debt
OK. There has been much news about the Non-Aligned Movement in recent years. These are countries considered neutral- not linked at the hip with the USA or the West. BRICS- Brazil, Russia, India, China, and South Africa and nations in the Middle East, plus a number of others in Asia.
The belief is that these states want to get from under the absolute hegemony of the Dollar and form a parallel currency universe to compete with the Dollar. The preceding is speculation, clearly. However, BRICS meetings held in Russia on and after October 22, 2024, may offer insight into whether this attempt at an alternative currency BLOC will actually take place. It seems unlikely.
Now, this writer believes any present attempt to adopt a parallel global reserve currency will fail. Why? Simply because the societies, cultures, and institutions controlled by Dollar denominated constituencies, markets, and regions, possess greater resiliency and sustainability than what BRICS nations can offer at this time. Yes, it is a harsh reality.
Investors, who rule in capitalist society, prefer to place their cash in places with democratic traditions of freedom, Rule of Law, and sustainable economic institutions, and not in countries that could nationalize their assets and investments at the stroke of a pen. Investors will choose self-interest over emotion when the tire hits the road.
Russia and China are authoritarian states. South Africa is in social and economic turmoil post-apartheid. China’s global intentions remain a mystery, and the superpower may attack Taiwan plunging the Pacific into crisis. Russia is embroiled in conflict in Europe. The Mideast is teetering on the edge of a precipice. Brazil and India appear to be the two truly sustainable democratic countries in BRICS that possess social and economic stability and long-term sustainability.
BRICS simply does not have the confidence, sustainability, and resilience of western institutions that investors look for. The Non Aligned Group certainly does not possess the solid platform such as represented by the Federal Reserve and western central banks, the G7, and NATO that drives global social and economic power. The trust and confidence of investors does not hold with BRICS, as it does with the Federal Reserve and the G7.
Currency, weak or strong, is the principal means of exchange and store of value. Currency decides the value of debt, our assets, and the goods and services we all consume.
USA national debt is $34 Trillion and rising. That debt is valued in Dollars for a good reason. National and international investors, foreign countries like China, and US agencies, own that debt and trust the Dollar to maintain its value, and hence the value of their investment in debt. The Dollar possesses credibility, otherwise these bodies and countries would not touch that debt. US political, social, and economic might underpins the value of the Dollar and global debt: The Trust and Confidence Standard.
Without Federal Reserve control of the printing presses that print Dollars there is no way this debt would be sustainable. Printing Dollars to service that $ 34 Trillion Dollar debt and US annual deficits approaching $2 Trillion is the only way US debt and government spending is sustainable. The Dollar is Fiat Currency. It thrives on love from investors and consumers. Trust and confidence in the Dollar are its platform: its oxygen.
US annual tax revenues are $5.5 Trillion on a GDP of about $28 Trillion. Debt to GDP is 121%. The USA will not be paying off that $ 34 Trillion national debt in any of our lifetimes, if ever. There is not enough government generated revenue, tax and otherwise, to take care of ever-increasing national obligations of annual deficits of $2 Trillion, when added to servicing increasing national debt. Therefore, that debt will go on rising.
Then, the Federal Reserve can only print Dollars based on investor and consumer confidence in the ability of the central banking system to sustain the present order of debt to asset value. The FED cannot print Dollars to pay off the whole $ 34 Trillion national debt without unsustainable inflation and even economic collapse. Investors will not tolerate that level of profligacy. Trust in the Dollar will end if that happens, to awful effect. Think of Weimar Germany in the 1920s and stagflation.
Therefore, the FED will continue to create debt at what it considers a sustainable level to maintain the current annual deficit and national debt levels. It will fine-tune the Dollar to maintain its present value with allowances for sustainable inflation. The world runs on debt. Investors are happy to provide that debt as long as the returns are acceptable.
The day the Dollar collapses the global economy collapses. The world will wake up one day to shut banks and shut government offices, add severe economic depression, maybe trade by barter once again. Wars and instability thrive in economic depression. China may invade nearby territories to recover loaned assets, while Europe returns to a dark economic age as the Ukraine war expands. The USA will shut its borders indefinitely, and aggressively patrol nearby seas. Millions of migrants will be on the move desperately needing to escape the gathering inferno in Africa and Latin America. Global warming will add to woes. Thankfully, apocalyptical type narratives about a coming social collapse are not going to happen any time soon. It is in no one’s interest.
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5 Responses to “Trust, confidence, and dollar debt”
Moreover, several attempts have been made to trade oil in other than US dollars. For example, Saddam Hussein in Euros; Muammar Khadaffi in a new currency called the Dinar. A recent event may be posing a threat to the trading of oil in US dollars. Saudi Arabia declined to sign/renew the Petrodollar agreement. Further, though countries may push back on the hegemony of the US, their investment of choice is in US Securities. However, the Feds can only create dollars, for these dollars are backed the US taxpayers. No tax system, the Fed would not have the backing and could not create dollars(Tom Wheelwright). The US dollar is a fiat currency but US will fight to maintain its dominance as the world reserve currency.
[Let’s lead as eagles lead, not careen off the cliff as buffaloes do].