In February this year, US President Joe Biden said: “the message I want the world to hear today: America is back. America is back”. Maybe he should have said ‘American troops are back’. This week’s ghastly pictures from Kabul, showing hapless Afghanis clinging to (and falling from) the side of monster US jets taxiing down the runway of Hamid Karzai International Airport as they try to flee the Taliban, are reminders of the ignominious US retreat from Saigon in April 1975. US military power and the vigour of its foreign policy have progressively diminished since its failure to defeat the Vietcong almost 50 years ago. The deposing of the Shah of Iran, Iraq, Libya, and now Afghanistan… all expensive foreign ventures that America has started and walked away from.
The prime beneficiary of this latest humiliation of the US — apart from the Taliban — is China. Those Afghans opposed to the Taliban feel they have been ‘betrayed’ by the US and, by extension, the West. China says it will respect the ‘choices’ of the Afghan people. China’s state-backed tabloid newspaper mouthpiece the Global Times quickly commented that: “The US’ desperate withdrawal plan shows the unreliability of US commitments to its allies: when its interests require it to abandon allies, Washington will not hesitate to find every excuse to do so”. Commentators closer to home have already started to write about the “post-American world”. The cost to the US is not merely in prestige; wrapped up in all this is the fate of the US Dollar.
Control of money is power
For some, the US has been on a steady decline since President Nixon ended the gold standard and ushered in the era of fiat money. What started 50 years ago was a new monetary order which ultimately will spell the end of the Dollar’s international dominance. The 18th century French philosopher Voltaire said “paper money eventually returns to its intrinsic value — zero.” Perhaps we are closer to that zero than we imagine. The Dollar has already lost around 90% of its purchasing power since 1933 and even at a fairly low rate of around 3% inflation it will have lost another half of its purchasing power by 2022.
At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power. While we strongly believe that gold is the fairest and most reliable currency on the planet, it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
The Dollar effectively replaced gold as the international currency standard in 1973. The US quadrupled its grain export prices shortly after the Nixon finally killed the gold standard in 1971. In response oil-exporting countries quadrupled their oil prices. Then US diplomats led by Henry Kissinger, Secretary of State did a deal with Saudi Arabia under which the US agreed to supply military hardware to and defend Saudi Arabia in return for all oil trade being denominated in US Dollars. The ‘petrodollar’ was born.
By 1975, all members of OPEC (the Organization of Petroleum Exporting Countries) were trading their oil in US Dollars, creating a voluminous demand for the US Dollar and US government bonds. On the back of that the US fuelled its decades-long instant gratification splurge, able to finance a vast array of government-funded schemes and an explosion in consumer demand through this petrodollar ‘recycling’. The US could literally print money to buy oil, and then have the oil producers hold the debt that was created by the printing presses in the first place. Neat.
What is coming?
Upheaval.
That’s according to Stephen Leeb, a US economist and author.
Last December, he published China’s Rise and the New Age of Gold which is avowedly bullish on the future gold price because he sees the direct link between money and power: “China’s rise is spearheading a historic shift in economic power from West to East that is leading to a foundational change in global relationships. It’s a change that points inexorably to higher gold prices. And the United States will be powerless to hold back the tide”, he writes.
Key to his message is what he sees as China’s long view, which he contrasts with America’s short-termism: “China — in contrast to the United States — does know where it’s going…understanding that China plays the long game is one of the most important insights you can have about what lies ahead”.
In this respect, Leeb highlights China’s ‘Belt and Road Initiative’ (BRI) as providing major long-term support for a wide range of basic commodities such as concrete and steel. This requires him to digress into important side-bars, such as China’s Ultra-High-Voltage Grid, its rail network expansion and its ‘ghost cities’, megalopolises which were built before anyone moved in. Western commentators initially mocked empty cities, but they have now started to fill and thrive. The US has built no new rail track since 1950, claims Leeb, and less than 1% of its total rail network is electrified; China meanwhile has leapt forward in providing its citizens with high-speed electric rail connections. Leeb dismisses America’s fracking ‘revolution’, once touted as freeing the US from its dependency on oil imports, as “mostly a chimera”.
A new international currency
If control over money is power, then the reverse is also true — power is control over money. This power is mutating at a rapid rate. It’s not just that the US has lost an immense amount of prestige over its hasty but well-flagged retreat from Afghanistan. Part of the enormous power of the US has been, still is, the possession of the global international currency, the Dollar.
But America’s power — that control over money — is being undermined from many directions: the blockchain and the thousands of cryptocurrencies it has given rise to; the challenges to the SWIFT international payments’ system by fintechs such as Glint; the relentless drive by China to roll out and compel the use of its own digital money, the e-Yuan; all of these (plus the multitude of internal divisions within the US itself) signal a profound fragmentation in what has been the steady-state system we have lived under since Nixon ended the gold standard.
China, Russia, and other states are bridling against the Dollar’s hegemony. They see the Dollar’s primacy as granting the US privileges it no longer merits. They are bristling against what they regard as the US being able to browbeat other nations, by imposing sanctions on them it when wants and using the Dollar as a big stick. It irritates China by forcing other developing nations — a growing number of which are part of the BRI — to trade with China using Dollars, rather than their own currencies. From China’s perspective, the Dollar stands in the way of the trade it wants. And, remote though it seems, the ignominious failure of the American mission in Afghanistan is yet another indication of waning US power, and the dying of the Dollar.
So presumably China’s ambition is to see its currency, the Yuan, replace the Dollar as the international currency? Not according to Leeb: “While internationalising the yuan is an important initial step, China isn’t looking to simply replace the dollar with the yuan. Rather, its ultimate vision is a basket of currencies that includes the yuan in a prominent role alongside the dollar and selected other currencies and, crucially, that is linked with gold… Because in the eyes of China’s leaders, a monetary reserve system based on any single sovereign currency is inherently flawed. A basket of currencies, backed by gold, would address those flaws, in China’s eyes better serving not just China’s interests but the world’s”. Leeb quotes part of a 2014 speech by Song Xin, then president of the China Gold Association:
“For China, gold’s strategic mission is to support the internationalisation of the renminbi [yuan] and be a strong support for China’s goals of becoming an economic power and realising the ‘Chinese Dream’.
Gold is the only product that holds properties of a commodity and currency; it’s the most trusty asset on which modern fiat currency can be based… [gold has] a glorious and holy role to play during the revitalisation of the greatness of the Chinese people…”
In such a tightly controlled, top-down state as China, it may safely be assumed that Song’s words had Beijing’s endorsement.
How much gold China has in its reserves is a tightly-controlled secret. Currently, it officially has almost 2,000 tonnes, sixth in the world’s rankings. But many believe it has much more. In Leeb’s view, “gold will back a new reserve currency, pushing gold prices far higher. Of that much I’m certain”. But “the new gold standard will be a whole new animal: a gold-backed currency that lets gold rise to accommodate expanding economic activity, especially growing international trade”.
Thus does China’s willingness to deal with the Taliban make sense, even though it is obviously worried about a fundamentalist Islamic state so close to its own large minority Muslim population, the Uighurs. It’s not simply that Afghanistan is, according to the US Department of Defense, “the Saudi Arabia of lithium”, a critical component for electric vehicles and renewable energy batteries. It’s that China’s ultimate mission is to topple the Dollar — and in this it’s making progress. How fast, how benign this transition will be, is a matter of speculation. But that it’s happening is not.
