Taps Coogan – April 14th, 2022

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Yours truly has long argued that neither the Chinese Yuan nor the Russian Ruble are viable alternatives to the US Dollar. The reasons for this are numerous but perhaps most concisely summarized by Mish Shedlock here.

Mish listed eight criteria for a reserve currency (in this case with respect to the Yuan):

What Would It Take for the Yuan to Dethrone the Dollar?

1.) China would have to float the yuan
2.) End capital controls
3.) Respect property rights
4.) Have a bond market big enough (China has virtually no gov’t bond market)
5.) Inspire global trust
6.) Be willing to have trade deficits
7.) Stop export mercantilism
8.) Have a currency market big enough

China only meets ‘8.’ Points ‘1,’ ‘2,’ and ‘6’ are immediate show stoppers. There is no point in talking about a gold-back Yuan when it is still dollar-pegged, capital controlled, and scarce.

Russia isn’t even part of the reserve currency conversation. Its economy was smaller than South Korea before the Ukraine invasion and is now likely smaller than Spain’s. It doesn’t have deep financial markets. In 2021, it ranked #21 for the gross value of its exports, below Spain, the UAE, Mexico, India, Canada, etc… It’s not the world’s largest producer of oil (that’s the US), or natural gas (again the US), or gold (China), or wheat (again China), or Uranium (Kazakhstan), or silver (Mexico), or arms (the US). Italy has larger gold reserves. Its legal system doesn’t have a good reputation.

Nonetheless, the sweeping sanctions applied to Russia and anyone trading with Russia, which follow sanctions on Iran, Venezuela, Syria, North Korea, etc… are a reminder to the world that holders of US Dollar assets (and Euros and Yen for that matter) are increasingly vulnerable to unpredictable sanctions by the West.

Then there is the loss of purchasing power. The 10-year TIPS inflation protected treasury security has had a negative yield since the start of Covid. In so many words, that means that the true risk free benchmark rate in the US, hedged for inflation, is negative. The US dollar reserve system benchmark is now a negative yielding asset on a real basis. A negative real carrying cost is a highly unappealing quality for a reserve asset.

The calls for ‘non-aligned’ financial system are growing louder.

If a non-aligned currency is what one is looking for, the Euro, Pound Sterling, Yen, Swiss Franc, Canadian Dollar, Chinese Yuan, etc… all fail the various tests.

None of the world’s major currencies are a viable replacement for the US Dollar. If you’re wondering, that’s why the US Dollar is still as dominant as it is.

For the foreseeable future, the only real alternative is Gold. That’s Gold, not the some financial writer’s murky promise of a gold-backed currency in this country or that.

Gold is not going to be officially declared to be the global reserve asset. However, gold reserves are likely to grow at the expense of US Treasuries at central banks and treasuries around the world. India, the largest non-aligned economy in the world and the fastest growing large economy, is certainly buying a lot of it.

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