The Bursting Dollar Bubble vs. A New Monetary System

The drive towards a global monetary and financial system as an alternative to the dollar is in full swing. At this point, several countries have made arrangements to use either national currencies in bilateral exchanges, or the yuan (renmimbi) in trade with China or with third parties. One such agreement was just made by China and Brazil, while France’s Total was the first European company to conclude a yuan-settled liquefied natural gas deal with China National Offshore Oil Corportation (CNOOC) on March 28.

This is the first step towards a new monetary system, Deputy Chair of Russia’s State Duma Alexander Babakov said at a New Dehli Forum March 31. The next step will be a “new currency” to be presented at the BRICS Summit Aug. 22-24 in South Africa. He added that it would be pegged to gold and “other groups of products”.

At the same time, U.S. Treasury securities are being dumped like mad by central banks of the BRICS and other nations. During 2022, Brazil sold off $22 billion worth – or almost 10% — of its U.S. Treasury holdings, and then another $21 billion just in March 2023. China sold off $175 billion of the same in 2022, and has reduced its once-huge holdings by more than a quarter. U.S. dollar assets are still an 80% (but rapidly diminishing) share of the foreign exchange reserves of Brazil’s central bank, while Chinese yuan assets amount to only 5.4%, but are rising and becoming Brazil’s main trade currency. The yuan’s share in Russia’s central bank reserves is approaching 30%.

The fact that the Bank of Japan sold off $189 billion of its Treasury holdings in 2022 shows there is more to the dollar’s problem than the BRICS nations’ plans for new monetary arrangements, or the U.S. Treasury’s seizures of the dollar reserves of other nations in order to sanction them — although both factors are part of the dynamic attracting the “Global South” (Global Majority) to the BRICS.

This brings us to the third, underlying factor which is the self-inflicted destruction of the dollar, through mass money-printing for almost 15 years and through the credit crunch of the past months. This same policy has depleted productive investment and productivity growth, from the U.S. economy in particular, and driven the mass of unpayable speculative debt (the “everything bubble”) through every ceiling.

The Federal Reserve policy has de-ranked the world’s biggest market — the $25 trillion U.S. Treasury public market — from a means of savings and credit into a wildly volatile and speculative casino played by the biggest banks, hedge funds and other shadow banks, and used as the collateral basis for hundreds of trillions in derivatives bets. Those speculative financial shops themselves, and the Fed itself, are coming to hold all the Treasuries!

The Fed’s attempt since Spring 2022 to raise interest rates has led to a contracting economy, the start of a “credit crunch,” and a falling dollar. That fall has reached about 8% in the past five months against other major currencies, including 7% against the Chinese yuan. The banking giant HSBC warned March 29 that the drop will continue for at least six more months, but what the big banks don’t suspect, is the speed with which that could happen, given the destructiveness of the major central banks’ policies, which has now produced a trans-Atlantic credit crisis.