Three ways to protect yourself from a dying dollar

US dollar bill © Getty Images
Domination of the dollar is coming to an end

Tick tock, tick tock… the countdown to the dollar losing its reserve status is really moving forward with pace now.

I recently wrote to you about the Shanghai Co-operation Organisation – the eastern bloc I think will come to dominate the faltering eurozone. It includes Russia, China, Iran and plenty of smaller nations that are bullied by US-led sanctions and dollar asset confiscation. They’re saying to the USA: “We don’t need your currency system!”

And now the counter-attack gets fiercer still.

That’s because there’s a group of nations that overtakes even the SCO’s power. Brazil, Russia, India, China and South Africa (the ‘BRICS’) just announced the first stage of their own new currency system.

These guys are fed up with the US and Western-centric banking and foreign policy, and now they’re doing something about it. They’re setting up the institutions you need if you’re going to run the world’s reserve currency yourself, like a mini-IMF and development bank.

Not that you’d hear much about it in the Western media. This is a story that many in the West would rather gloss over. It’s a story that says we’re in terminal decline, that it’s only a matter of time before the new powers flick the switch on us.

Today let’s look at how we got to this point, and more importantly, what you and I can do to protect our investments when the domination of the dollar does finally come to an end.

The emerging markets want their dues

After the Second World War, the US was the only major superpower, and certainly the only country with any money.

A new financial world order was created, and alongside it came institutions like the World Bank, the International Monetary Fund (IMF) and the Bretton Woods agreement. This confirmed the US dollar as the preeminent currency for cross-border transaction.

But since then, the US has lost a lot of its clout – and emerging markets have become more and more powerful.

Today around 20% of global trade comes from the emerging markets, a percentage that could be much higher if they were allowed more control over the global monetary system.

And yet they hold only 11% of the votes at the IMF’s table…

For years the IMF has promised change. In 2010 they promised a series of reforms that would give the southern and eastern nations a greater share of the pie. Alas, nothing has happened, and given Russia’s recent branding as pariah, there’s little chance of meaningful change happening.

So how have the emerging nations responded?

They’re cutting out the middleman

Well, they’ve given a great big two-finger salute to the IMF.

Last week the BRICs signed an agreement to set up both a new development bank – capitalised at $50bn – as well as a ‘contingent reserve agreement’ (CRA) to bail out members in trouble, potentially stocked with $100bn.

The development bank will make loans to enable the emerging markets to establish key infrastructure projects – things that will bring electricity, transport, telecoms and water projects on line.

The contingency fund will help ward off speculators from trashing local currencies and help them help themselves during times of financial stress.

And to top it off, they’re setting up a system that will allow them to hold their massive reserve savings out of reach of the powerful Western nations and their hugely conflicted interests.

These commitments are formed on bilateral currency swaps that specifically avoid the US dollar. And that’s the point – while they all use the dollar as a mechanism for valuing their own currency, they no longer need the dollar to effect transactions.

And while this might sound like an insignificant circumvention, believe me, this new development has serious global significance. This is no idle threat.

You and I need to realign our interests, but how?

Three ways to protect yourself

Make sure you’ve got exposure to emerging markets

It’s true that in the past, these markets have been highly volatile. But, of course, that’s because the West has made them that way. During times of stress, the Western banking system has hung them out to dry. Right now, these guys are saying “No more!” and I suspect that the emerging markets will prove even more defiant going forwards.

Make sure you’re well stocked up on resources

Oil, gas and key minerals will be in increasing demand. The southern and eastern nations are pushing ahead with infrastructure projects, and a plan to take a seat at the high table. All of this requires resources. To my mind, we’re still in the middle of a global commodities bull market, it’s just that there’s been bit of a slowdown. Take a 20-year view on commodity stocks, and I don’t think you’ll go far wrong.

Keep an eye on precious metals

The Bretton Woods system was established on a dollar/gold relationship. Basically, a nation’s trade would be transacted in dollars and settled in gold. As we all know, that relationship was dropped in 1971. However, the emerging world is starting to impose its own rules now. And that looks increasingly like a new Bretton Woods – call it a Shanghai Woods.

The new world bank is to be established in Shanghai, Russia will hold the first chairmanship, India will be the first president, and Brazil will chair the board of directors. A regional office will be established in South Africa – yes, Africa is very much involved in the new regime.

I think that this emerging world bank will dwarf that of the current system in due course. These are the guys that are building a savings resource, these are the guys that are feeding the world economy’s consumer appetite. While Western nations bloat on the welfare/warfare state, the south and east make hay.

This is a game-changer. Hold your hands over your ears if you want, but I, for one, am taking this very seriously.

More to come.

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  • Glenn

    This is so so true. The dollar’s days are severely numbered and yes it will happen very quickly, you have only to look at all the bilateral agreements. For goodness sake even countries that have territorial disputes like Japan and China have one. America will have to pay for all the manulation of the markets they have allowed, what I still find very difficult to understand is the manipulation of the precious metals market where some US banks have been allowed for naked sell the market with impunity. This has allowed the likes of China to stockpile gold at a ridiculously low price.

  • Sage of Aldershot

    Good to be kept informed, thanks Bengt. I noticed nothing about all this on Google News or elsewhere.

  • MikeOS

    Excellent article, do not forget the UNASUR countries are jumping on board with the BRICS. Of course the US won’t take this lying down, whenever middle eastern countries threatened to dump the dollar as the world reserve currency they’ve been bombed backed to the stone age.

  • mikeT

    But, on the other hand, the traditional SUPPLY of USD is reducing because a) the US is tending towards energy self-sufficiency and b) firms are repatriating the manufacture of goods as labour costs abroad, in China particularly, have risen. Whether one offsets the other, or to what degree, I do not know. Anyone?
    However, the impact (logically) should be felt in Treasuries. If BRIC countries gradually reduce their holdings of T bills/bonds (in favour of precious metals and bilateral holdings of BRIC assets) and QE does at some stage unwind…that represents a lot of supply.
    Your comments, Bengt, in “more to come” would be welcome.
    By the way, speculators usually win. A currency devalues because of fundamentals and speculators are simply agile enough to get in first. The most a BRIC “central bank” could do is manage a more orderly decline if one of its currencies is uncompetitive and what is wrong with that?

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