Previously I wrote about the potential coming wave of hyperinflation. And, as usual, it looks like the US has more than one or two canaries that have just shuffled off this mortal coil.
The US dollar has largely been propped up by some pretty strange methods. That’s Cliff’s Notes version of things from around 1971.
Of course, just like almost all of the plans that politicians generate out of politicians, this was short-sighted and assumed nothing would change. Sixty years later and SURPRISE(!) things did.
Here’s a synopsis since and from the Bretton Woods Agreement in 1971:
- Saudi Arabia would always accept dollars for oil (as long as we are one of the primary purchasers, that is).
- The US refuses any monetary competition from physical gold.
- Gold is still mostly priced in dollars, which is key to US reserve status.
- A byproduct of suppression of monetary competition from gold was a robust futures and derivatives gold market (a.k.a. “paper gold” or unallocated gold)
It’s no secret the US hates competition internationally or domestically, and the arrangement it made with Saudi Arabia to always and only accept US dollars for oil was a big part of this short-term cures-all-ails fix.
But as the US has since shifted toward greater energy independence it’s imports from Saudi Arabia have been falling off a bit. The US has even gone a few weeks without any oil imports from Saudi Arabia at all as ‘Darth Cheeto’ had the audacity to suggest that maybe it would be far smarter to actually NOT be dependent on foreign oil for a change.
Paper gold looks a lot like fractional reserve banking. (Anyone whos studies this will realize is the closest thing to a violation of the Law of Conservation of Energy that can exist). It relies on low levels of cashing out, and the ability to invest or lend out physical assets FAR in excess of the actual “collateral”, keeping only a small fraction in reserves:
The fractional reserve method trading of unallocated precious metals is the primary means by which the U.S. government, the primary trading partners of the Federal Reserve Bank of New York, allied central banks and the Bank for International Settlements suppress gold and silver prices.
By selling paper contracts, without having to deliver the physical metals, there is the appearance that there is a lot more gold and silver available on the market than there actually is. The result is that prices are lower than if buyers and sellers of precious metals traded on the basis of actual supply and demand information.
This has been happening for years-as stated before, when the music stops there will NOT be enough chairs.
But how many of us have been paying attention to the Basel 3 Accord?
As a refresh: The Basel 3 Accord is a set of financial reforms spearheaded by the Basel Committee on Banking Supervision under the domain of the Bank for International Settlements, based out of Basel, Switzerland (now there’s a shock)
This agreement finds its impetus in the 2008 Great Recession, designed to reduce risk by demanding banks maintain healthy leverage ratios and reserves on hand. (Out and out mortgage fraud doesn’t seem to be addressed, for some reason)
It’s been getting pounded out since 2013, with its full implementation expected to be finalized by January 2023.
And in related news, let’s get back to Basel 3 in a moment… and explore what’s called the Triffin Dilemma or Triffin Paradox. I’m pulling this straight from Wikipedia:
The Triffin dilemma or Triffin paradox is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. This dilemma was identified in the 1960s by Belgian-American economist Robert Triffin, who pointed out that the country whose currency, being the global reserve currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfill world demand for these foreign exchange reserves, thus leading to a trade deficit.
It certainly looks like the US dollar fits into this, but here it is more clearly explained:
“[T]he dollar’s Triffin dilemma has meant that inflationary US policies have supplied the world’s demand for dollars, to the extent that foreign governments and private sector entities now possess dollar-denominated financial assets and bank deposits totaling some $30 trillion — 150% of US GDP.”
We have three predators circling the prey here:
- Basel 3 Accord Regulations
- Triffin Dilemma
How do these three things come together and become Voltron?
The Basel 3 regulations upon implementation will require banks to hold reserves against their assets; this will cause a major disruption in the unallocated metals market:
Under the coming regulations, banks would count unallocated precious metals at 85 percent of their value on the bank’s books in making the determination of how much it needs to hold in reserves against these assets.
However, banks would no longer be able to consider any of the liability for unallocated precious metals as part of their required reserves.
Therefore, to comply with Basel 3 regulations, banks would have to either create a huge increase in their shareholders’ equity to provide the required reserves or they will be forced to sharply reduce or completely eliminate their trading in unallocated precious metals.
Since we currently use “Paper Metals” to offset or defuse the demand for physical metals, this is especially troubling since the physical metals to “cash out” on the paper metals doesn’t actually exist (I am using “physical metals” as singular lot type adjective).
If the banks opt to eliminate trading in unallocated metals, they can’t just assume the physical equivalent of their unallocated holdings any more than they can create a balance sheet based on Tarot readings. (Actually, this would explain quite a lot…)
People holding a worthless paper metal, will likely or at least in part, want to switch to the physical asset instead. That will trigger a surge in the value and price of precious metals.
Enter the Triffin Dilemma: Gold has always been a hedge against the dollar. So a rise in gold prices means a drop in the purchasing power of the USD.
Now enter depolarization: What does this mean for foreigners, both private and government sectors, who hold any part of that $30 trillion of dollar-denominated financial assets and deposits?
Russia is desperately trying to cut its reliance on the USD.
Russia has what’s called the National Wealth Fund (NWF)-initially formed to support the country’s pension system, as of the end of May, it held $600.9 billion in assets.
Russia’s finance minister, Anton Siluanov, announced at the St. Petersburg International Economic Forum on Thursday that dollar assets will be removed from the National Wealth Fund (NWF) altogether as Washington continues to impose sanctions on Moscow.
They will be replacing those U.S. dollar-based assets with Euros, Yuan, Gold, Yen, and Pounds. This is part of Putin’s larger initiative to become invulnerable to US sanction efforts and sanctions.
Likewise, Russia and China have been fortifying their alliance; with Russia being the number one exporter of energy resources, and China being the top consumer of those resources, it should have been expected that the two countries intend to double their bilateral trade to $200 billion by 2024.
Russia and China turning their backs on the US is somewhat predictable, but the question is who else might be getting ready to jump on this particular train? Hint: Anyone who is paying attention to what our politicians are doing to the US dollar.
Divestment out of the US dollar isn’t just a whimsical phase for online get-rich-quick folks and cutting-edge corporate tycoons.
The dollar and paper metals appear to be vulnerable and the global economic tides, well, they’re changing. And a closer reveals that they are shark-infested.
And our only defense appears to be to bury our heads and insist that it’s not happening.