America’s influence is waning in the world, militarily, economically, and culturally.The global financial structure which has been in place for decades is unraveling and it will not end well for the United States’ currency and economy.This change is being driven by a desire of many nations with totalitarian capitalism to rid themselves of a reliance on the US Dollar which gives the U.S. power over them through threats to remove a country or institution from the dollarized financial system.
We’ve discussed the consequences to the dollar and America in previous posts as 0 far as reserve currency status and interest rates are concerned and the severe problems they could bring. What I’d like to get across right now is the level of uncertainty which is building up across the global financial architecture.
Let me start with a few examples.First, recently The Moscow Exchange announced it had set up ruble/renminbi futures contracts to facilitate burgeoning trade between the two nations. This is significant because it further removes the need and demand for the USD in international trade. The dollar and America’s associated rule-of-law has provided an overlay of stability since the end of World War II. The steady removal of American involvement in financing trade and other types of financial transactions will make it all the more easier for “bad actors” to move dirty money around the world. It will make it easier for criminal and terrorist elements to achieve their financial goals. This could include financing terrorist plots, funding drug and other illegal trades, or simply increasing the economic power of an American adversary.
In another stunning development, America’s European and Asian allies one-by-one have been signing on to the Chinese-led Asian Infrastructure Investment Bank which was started by Chinese President Xi Jinping last year. This institution is meant to give China more control over global financial machinations and wrest control away from the Washington-based World Bank. The fact that America could not convince its own long-standing allies to follow its position and not join the bank is another example of failed American leadership.This trend has been happening for a decade.
So what will happen as the old world order is destroyed and a new, more anti-American order rises to take its place? Will there be more financial warfare? Will countries now attempt to use access to the capital markets as a weapon? Will there be cyber warfare against another nation’s financial systems? The answer to these questions is yes. We are entering a very dangerous period of uncertainty and change for the worse. The Chinese, Russians, Iranians, etc. will not think twice about using finance as a weapon of war. Without a dollar based system, katy-bar-the-door. This will not end well.
The question is, can the Yuan take the dollar’s place? Or will it be a myriad of different currencies that each take a bite out of the greenback’s place in the global financial system? The answer to that question is not clear as there are many bubbles and structural problems with the Chinese economy and financial system. The lack of the rule of law, corruption, large amounts of inefficiency caused by misplaced capital, all are a negative for the Chinese currency to achieve the level of trust the dollar had in the past.
Investors need to keep up with global events and make smart decisions on where to place their assets. Most likely we are entering a period of elevated volatility and investors will need to be more nimble,possibly shifting back and forth between currencies as opportunities arise. Many nations and associated currencies have structural economic problems that cannot be overcome. However, there will be trading opportunities in these assets.
The bottom line is investors need to be knowledgeable and nimble in the coming years to protect and grow their wealth.
L.Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to Fox Business, Newsmax TV, and others. LToddWood.com