This may make US borrowing much, much more expensive

 

Until very recently, the US dollar has been the only reserve currency trusted by most of the rest of the world.  That's helped us sell US treasury bonds to other nations, and to investors, because the dollar's status has been a guarantee of its ongoing security and trustworthiness.

However, the Federal Reserve's incontinent printing of more and more and more dollars has greatly weakened our currency, just as large parts of the world are rejecting any US economic (or other) hegemony.  It now appears that Russia and China, along with other BRICS nations, are working towards an alternative reserve currency to challenge the US dollar's dominance.

It shouldn’t be any surprise to those paying attention that Russia and China are strengthening their economic ties amidst continued Western sanctions on Russia as a result of the country’s war in Ukraine.

What may surprise some people, however, is that Russia and the BRICS countries, including Brazil, Russia, India, China, and South Africa, are officially working on their own “new global reserve currency,” RT reported in late June. Nobody even seemed to notice.

. . .

And of course, as Russia has been cut off from the SWIFT system, it is also pairing with China and the BRIC nations to develop “reliable alternative mechanisms for international payments” in order to “cut reliance on the Western financial system.”

In the meantime, Russia is also taking other steps to strengthen the alliance between BRIC nations, including re-routing trade to China and India ... In fact, “trade between Russia and the BRICS countries increased by 38% and reached $45 billion in the first three months of the year” this year, the report says. Meanwhile, Russian crude sales to China have hit record numbers during Spring of this year, edging out Saudi Arabia as China’s primary oil supplier.

"Together with BRICS partners, we are developing reliable alternative mechanisms for international settlements," Putin said.

. . .

I’m ... stunned that nobody seems to care that arguably the largest shift on the global macroeconomic playing field over the last half century may be taking place.

Sure, under the context of the conflict in Ukraine, the news may seem “par for the course” of sorts, which may result in the media and the financial world downplaying it. But put this piece of information out there on its own, without context - that there is a coordinated global challenge taking place to the U.S. dollar - and it would be the biggest news story in decades. Imagine if China and Russia just dropped this out of nowhere? Now, remember that both countries have been working on, and preparing for, this situation for years.

. . .

Ergo, it seems to me that the BRIC nations understand exactly how precarious of a financial situation the U.S. - and our dollar - is in. Despite the dollar’s recent strengthening, these nations have been in the midst of a multi-decade-long plan to de-dollarize. Even before the Ukraine conflict started, both China and Russia were stockpiling gold and working on denominating transactions outside of the U.S. dollar. It was another “secret” that was out there in the open.

There's more at the link.

If the US dollar is no longer the primary reserve currency of the world, and other countries have greater choice in what currencies to hold, then the sale of US treasury bonds (which funds US deficit spending) is about to become much more difficult.  That's because the USA will have to offer higher interest rates on those bonds to attract investors;  and as the dollar weakens, those investors are going to become more and more skeptical about its value, so they'll want even more interest.  That, in turn, will absorb more of the US annual budget, soaking up money that might otherwise be used for defense, public services, and entitlement programs.

It's a vicious circle, and one we aren't well equipped to break in the foreseeable future.  What's more, Russia and China will doubtless do everything in their power to make it more vicious.  Russia wants to punish us for our interference with its war in Ukraine, and China wants to keep us so preoccupied with domestic and economic matters that it has a free hand in south-east Asia - particularly in Taiwan.  If currency manipulation and economic measures can accomplish both those objectives, why shouldn't they pursue them?  They know the Biden administration is effectively hamstrung, unable to respond effectively.

If I were living in Taiwan, I'd get the hell out of there as fast as I could.  I reckon China is very likely to move against it within a matter of a few months at most, while the USA is distracted and ineffective.  It may not even take that long.

Peter