Crossing the U.S. Dollar Rubicon

Over the past two years, whenever it has come up, I've sought to remind interviewers of the most significant financial action of 2022. After the political events of this past weekend, it's time to discuss this again.

Of course you'll recall the Russian invasion of Ukraine in late February of 2022. This was the most important geopolitical event of that year, and the ramifications continue to metastasize in 2024.

However, the most important financial event of 2022 occurred in early March of that year when the United States and the European Union combined forces to:

1. Freeze Russia's non-domestic foreign currency reserves.
2. Expel Russia from the SWIFT international payment system.

The ramifications of these moves continue to metastasize today too. Why?

By taking those financial acts in March of 2022, the U.S. established a very important precedent. To wit, if your country dares to pursue an economic or military policy with which the U.S. disagrees, you will soon find yourself economically isolated and/or removed from the U.S. dollar-based monetary system. As such, "offending" countries are left with no alternative but to seek other currencies and systems for conducting business. 

As a result, the past two years have seen increased shedding of U.S. treasuries by "BRICS" nations, an acceleration in the planning of a new BRICS-based trade system, and a steep rise in the price of gold as measured by every major fiat currency. Expect these trends to continue.

But now the U.S. has taken things one step further.

Beginning a few months ago, think tanks floated trial balloons regarding the idea of seizing (stealing) those frozen Russian assets and giving them to Ukraine as funding for their war effort. This idea was next picked up by SecTreas Yellen and then by President Biden himself.

"Progress" on this issue was made over the weekend as the U.S. House of Representatives passed the REPO Act, which paves the way for the U.S. to confiscate (steal) Russia's frozen assets.

Now this might feel good to non-thinking politicians and their ideologically-blinded supporters...

...but it is terrible news for the long-term viability of the U.S. dollar-based financial system.

Why are these developments such terrible news for the long-term viability of the U.S. dollar-based monetary system? Don't think of it from the U.S. or E.U. perspective. Instead consider how this looks to the potentially adversarial BRICS nations, where the message is clear: Play ball and toe the line regarding U.S. demands or face the consequences.

Put yourself into the shoes of Putin, Xi, Modi, or any of the other BRICS leaders. In advancing your country's interests, it’s almost inevitable that you will one day run afoul of the United States. What happens then? Do the U.S and E.U. steal your foreign currency reserves too?

As such, this precedent will undoubtedly speed the development of a U.S. dollar alternative. Besides the inherent geopolitical and military dangers that will result from any threat to U.S. financial hegemony, the simple lessening of demand for the U.S. dollar—at a time when the supply of U.S. dollars is exponentially increasing—will make dollars less valuable. This is simple Econ 101. Shift the supply and demand curves accordingly and you get a drop in price.

In the end, all of this is just another prompt for you to acquire the ultimate form of money—physical gold. If you don't own any, you should get some. If you already own some, you should buy more. As the world increasingly spins out of control, only physical gold can provide safe harbor through the financial storms ahead.