Dedollarization is Not a Thing

Brent Donnelly is president of Spectra Markets and is a veteran FX trader and market maker. His latest book, Alpha Trader, was published last summer to great acclaim (by me, among others!) and can be found at your favorite bookseller. I think it’s an outstanding read, and not just for professional traders. He publishes an excellent daily (!) note on FX, which you can subscribe to here.

You can contact Brent at [email protected] and on Twitter at @donnelly_brent. As with all of our guest contributors, Brent’s post may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.

Every now and then there is a story like this Reuters clip that came out this week.

These stories inevitably kick off a brief hysteria about the USD and its inevitable collapse under the weight of the twin deficits, reckless spending, crazy policies, and/or…-insert whatever you dislike about USA here-. It’s worth remembering that there are stories like this every single year.

Here’s a nice once from 2012:

And one of my personal favorites from the dollar doom hysteria genre:

I could easily find one of these stories for every year from 2001 to now but I won’t because that would be boring.

It is intuitive to think that growing debt levels are unsustainable and hegemony is always temporary. History shows that eventually a new country takes over as the global hegemon and Ray Dalio’s books cover this in excellent detail. The long-term story is of course that nothing lasts forever. The reality is that this process of change takes hundreds of years and the situation in the last 35 years looks like this:

USD, EUR, CNY, GBP and JPY: Share of international transactions (1989 to now)

Every currency transaction has two sides so grand total of all numbers each year is 200%.
Chart by me, with BIS data.

If anything, the dollar is more stable while the EUR and JPY are slowly losing popularity around the world.

It is true that central banks reduced their USD reserves from 2000 to 2010. The chart looks like this:

There was a meaningful reduction in USD reserves as a percentage of the overall stack in the 2000s. This was mostly centered on the 2003-2007 period as the external value of the dollar was falling and there was an off-and-on panic about the USD as a store of value in those days. Here is the external value of the USD since 1972.

Dollar Index, 1972 to now

Source: Bloomberg

The dollar’s demise has been imminent in many minds since the beginning of that time series.

You can believe that the USD is not doomed and also be bullish bitcoin and gold. They are not the same thing! Overall increases in the global supply of fiat currency are good for gold and bitcoin vs. every currency. They are not particularly bad for the USD specifically, and they do not signal imminent doom of any sort. They just signal that global central banks tend to lean loose, almost all the time.

While bitcoin and gold are often marketed as hedges for societal collapse, there is a middle ground where you can believe all these things at once:

  • The world is not going to end just because sovereign debts are high. They have been hitting new all-time highs most years throughout my entire life. Somehow, we always figure out a combination of growth and inflation to burn the debt off in a controlled manner. Sure, there could be some nonlinear tipping point, but it’s impossible to predict and you’ll probably know it when you see it anyway.
  • Monetary policy will need to be loose, generally, to allow the controlled burn of the debt.
  • Bitcoin is an excellent hedge for loose monetary policy. I wrote an article about this topic and I believe that hedging overly loose monetary policy is the main useful function of BTC.
  • Monetary policy is not always loose! When it gets tight, BTC is one of the worst high-beta things to own.
  • No matter how scary the headlines or how visceral the FinTwit rage, rational optimism is the best human metagame.

If you are an investor or a trader, do not worry about the death of the dollar. It’s always imminent. It’s totally irrelevant to any investment process. The external value of the dollar and its usage in global transactions is incredibly stable. You can take a cyclical view on the USD (bullish or bearish) but taking a structurally bearish view has not been and will not be the way to optimize your portfolio or your framework for decision making.

Make a distinction between A) the gradual erosion of fiat in favor of harder assets like BTC, gold, and real estate, and B) the hysteria around the end of the dollar or dedollarization. The first one is happening, the second one probably will not happen in my lifetime or my kids’ lifetimes. The gradual erosion of fiat due to loose policy required to fund large deficits is a thing. Dedollarization is not.

People like to throw around the phrase “gradually, then suddenly” as a witty rejoinder to suggest this is a nonlinear process that will unfold any day now. That only sounds smart when Hemingway says it.

To be clear: There is no structural dollar depreciation or dedollarization story. Global usage of the USD is stable and changes in the value of the USD are cyclical.

CNY is gaining moderate importance in the global financial system, at the expense of other fiat currencies like EUR and JPY.

Meanwhile, the value of all fiat currencies relative to hard assets is in decline because the global supply of fiat currencies is increasing. Changes in the external value of the dollar relative to other fiat currencies are cyclical. Don’t worry about the end of the dollar. It’s always coming in 20 years but that has been true for more than 50 years.

50 years? Yep, here’s one last clip, from 1975.

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  1. image

    These points are well taken , however , I would argue that some facts supporting the things have changed narrative.

    Debt: Prior to 3Q 2008 our debt to GDP ratio was 63% today it’s over 120%. I know it was that high at the end of WW2 , but WW2 was the driver of the debt and it ended. The drivers of the debt today are just getting started.

    The FED’s balance sheet was about 500 billion prior to 2008 , today it’s about 18x that amount.

    Want to talk about loose money?

    There is loose money supply ,and then there is this…this is not your father’s loose money supply.

    I would contend that the dollars demise will not be linear , because the massive explosion of dollars into the system has not been linear.

    This has been the cost of financing The Long Now—the house of cards is in the late innings.

  2. Avatar for bhunt bhunt says:

    I hear you, Lawrence, but even on this metric the USD is still the best house in an increasingly bad neighborhood. Japan’s debt-to-GDP ratio is 221%. China’s debt-to-GDP ratio is 270%.

    To what is the USD going to lose its reserve status to?

  3. I could be wrong but I think that number for China includes all debt (public and private).

    If we look at total debt in the USA divided by GDP the number is somewhere around 750%.


    China Government Debt to GDP - 2022 Data - 2023 Forecast - 1995-2021 Historical.

    Of course , the numbers coming out of China could be suspect.

    I wish I could predict exactly how this party comes to an end. What I do know is that I would rather own gold, land , apartments, anything real over dollars at this point.

  4. My only criticisms of the arguments in this post, which I am nowhere qualified enough to do justice to, is that yes, the dollar looks as strong as ever, and the people claiming dedollarization is imminent look foolish - if you do pay attention only to financial factors and ignore some of the geopolitical developments that have been happening in the intervening time. People have been predicting the dollar’s downfall for a long time, but only in recent years has the following interrelated combination of factors obtained:

    1. MMT and/or financial repression as the de facto default monetary policy
    2. Deglobalization
    3. Increasingly bold and direct geopolitical confrontation - trade wars with China who has an explicit goal of trying to effect dedollarization of commodities (and are capable of actually doing it?), proxy war with Russia, possible non-proxy war with China over Taiwan? (Even if you win the war it has the possibility of obliterating the value of your currency, see e.g., GBP after WWII)
    4. increasingly expensive energy and other commodity shocks
    5. Significant and persistent inflation with anemic real growth

    It reminds of the scene in S4 of Breaking Bad where Mike is telling Gus: “Look, I know you’ve got your reasons for keeping him [Walter] alive, but I’m telling you, it’s a mistake. If it’s just him or the cartel, fine. But them both? That’s a whole different animal.”

    If it’s just inflation, or it’s just deglobalization, or it’s just too much money printing, or its just conflict with China, okay that’s not too much to worry about. All of them happening together could be a whole different animal. I think that’s what I would mean if I were making the “slowly, then all at once” type of argument.

  5. This.

    The US dollar is not the reserve currency because it is intellectually the right choice or what not. It is simply the currency that everyone falls back to as the most stable in the world (rightly or wrongly).

    I have a negative view of the US dollar that is an extension of a negative view of fiat currencies. So if I am abandoning the best of the worst (the US dollar) I am not scaling down the currency shit pile. I am going to find something that is a productive asset (ie not bitcoin) to put my money into. Probably in a remote region of the US with a good stock of ammunition.

  6. Every currency transaction has two sides so grand total of all numbers each year is 200%.
    Chart by me, with BIS data.

    This is the caption to the international currency transactions bar graph. Is there an ‘Other’ not shown which fills in each year to arrive at 200% ? (If so, it might have been nice to use the same color code as in the ‘foreign exchange reserves’ graph.). If not, can you explain the bar graph a little more?
    (Sorry if I’m missing something obvious.). Thanks!

  7. Avatar for bhunt bhunt says:

    Yes, although the vast majority of the China number is what we would consider to be public debt in the US and the rate of increase is faster than in the US. Point being that every country in the world has taken on enormous public (and private) debts alongside a global ZIRP regime.

  8. Avatar for bhunt bhunt says:

    Yes, the Other would be every other currency in the world not named USD, EUR, JPY, GBP and CNY.

  9. Avatar for Laura Laura says:

    Curious what you and/or @bhunt think would happen to the USD if the US were to go into a civil war? There certainly was a push towards that in mid-2020 as the election rhetoric was ramping up during the heat of the BLM covid summer. I think there was a good amount of astroturfing behind but there is quite the widening gyre here, so who knows…

  10. Where would you buy them/hold them? Real estate in US is valued in dollars, as are companies and many commodities. To realize the. value, they are sold for dollars. Or are you making a different point that I am missing?

  11. Having no background in finance or economics I found this article informative and but also a bit interesting.

    I assume that for most in the finance world this type of information is pretty common knowledge (making an assumption here). At least those who deal with currencies directly or indirectly anyways.

    However, while reading the article I got the feeling that it was trying to convince me that USD isn’t losing reserve status more than inform me (which it did btw). This was interesting to me because it left me wondering:

    Who this article is written for?

    Certianly not people like myself who, other than my exposure to ET, wake up thinking about everything under the sun…except the status of USD reserve status. I’m here at ET to learn about these things because it’s import to understand what drives the world and why it works the way it does: Money!

    Yet, I’m still left with the feeling the note was trying to convince the reader not to panic that everything is ok. If this is true, and not just my interpretation, I’m left wondering who the notes intended audience is?

    So how big of an assumption am I making thinking most in finance already know this or are capable of doing the research to find out themselves?

    And how much can narratives be used to create a tipping point? We are seeing it happen with the division in US politics and voters. Is the data proving otherwise strong enough to fight against a coordinated narrative attack? Are there reasons for competing currency nation states to join forces or due to the nature of the game is everyone with their own (major) currency best situated to fight for their own to replace USD?

    Thanks for the article. I almost feel guilty for all the questions it brought up but that’s the sign of an interesting article!

  12. I know you did not ask for my opinion , but a true Civil War in the US is highly unlikely. The biggest factor being there is no way to know who is on what side. If there was some line like the Mason/Dixon line I would think the probability would be very high indeed.

  13. Avatar for Laura Laura says:

    That’s what I (want to?) think too Lawrence.

    But given the attempt at Common Knowledge creation, makes for an interesting thought exercise vis-a-vis the dollar supremacy question I think. I suppose it all comes down to whether people believe in our military coming to the rescue of it or not (“full faith and credit”).

  14. Yes different point. I would go into goods and assets that have a real world tangible value to me (and hopefully others) with an ability to defend them. That way, I will still be able to get what I need and don’t have.

    Inefficient, yes? But better than owning gold in a vault in a place I can’t reach. :slight_smile:

  15. I suggest that BRICS+ are on the process of creating an alternative to SWIFT. This will likely evolve into a new transactional currency.

    What is missing from tge discussion is a lack of trust in the U. S. government.

    Just thoughts from a simple minded farmer.

  16. May I recommend - First The People.

    Lack of faith in the US Govt and many of its institutions is accelerating faster than an Indy Car exiting pit road.

  17. I won’t speak for Brent, but I am one of the “finance guys”. It would surprise those outside the system how many finance voices shout in opposition to the premise he outlined. Maybe not directly in the world of currency trading, but as thematic trades in markets interconnected to them. I took the article as a primer/reminder that the dollar (and its Eurodollar money twin) are the water that global financial markets swim in. However many Black Swan events lurk around the corners ahead, this system exists and trading/investing has to keep that front of mind. But, just because nothing is on the horizon to replace this system, he is not dismissing the probability of lost purchasing power in the currency units investors keep score in.

  18. @bhunt @BrentDonnelly1
    @bhunt Thank you for this clarification! I modified Brent Donnelly’s graph to include OTHER:

    " Every currency transaction has two sides so grand total of all numbers each year is 200% " (Apologies: I couldn’t figure out how to match the bar colors so please disregard my suggestion regarding bar colors above.)

    To me this graph is like excess mortality data. The numbers don’t lie. From the modified graph it is clear that the only big change is the introduction of the EUR, and dedollarization has not been a thing. I hope that @BrentDonnelly1 and ET will update the International Transactions and Foreign Exchange Reserves data every 2-3 years so we can follow the trend going forward. Thank you!

    (I accidentally hit ‘reply’ to Ben’s reply to Lawrence, sorry.)

  19. I keep thinking about all the contracts in the world that are denominated in $. I keep thinking of all the systems that are built on $<>[insert a currency relationship]. I keep thinking about the way most non US businesses that need access to capital ultimately deal with the Devil that is the Dollar.

    Will one day the dollar fall/evolve/whatever? Certainly. Is that day now? Not even close both based on data and based on the way the real world operates.

  20. Grim chuckling ensues… you sound like some of my neighbors, who believe TEOTWAWKI transactions will be denominated in mm (as in 9mm, 7.62, 5.56, etc.) in much the same way that prison transactions are denominated in cigarettes.

    Ignoring the sentence ending preposition ( :rofl:), I’d have to say we don’t know yet, but the short answer is “whatever the elites at the highest levels agree denominates the commodities and behaviors they value”.

    There’s a whole lot to unpack in that answer, and I don’t have it by a long shot.

  21. Avatar for aw21m aw21m says:

    Totally agree here. You aren’t going to ditch the US dollar and then use some other (even shittier) currency.

    All fiat is the same. This is my thesis for Bitcoin though I agree it’s not for everyone, especially the older audience on here. I think the younger generation will innately understand crypto currencies like they do the internet.

    Adoption of Bitcoin will be another “gradually, then suddenly” sort of deal.

  22. Any currency needs to be backed by a source of trust that the currency won’t be debased, manipulated or otherwise altered. The current Fiat currencies are clearly failing.

    Bitcoin and crypto and decentralized finance are in the midst of a trust crisis and the [insert your prefix]-coins are also failing in trust as well.

    Not because of the basic properties of crypto and blockchain, which are built around trust and verification. Rather because of the basic properties of people, who will find a way to exploit any system to their benefit (aka racoons).

    Until the dust settles somewhat on Binance, FTX, etc, etc. and this cycle of regulatory attack is over (at least a 2-3 year process which just started, imo) there will not even be a “gradually” part to that equation.

    Said differently, the herd will be wary of the bitcoin raccoons for a while. Until they forget. Then gradually will start again - maybe towards the coins, maybe somewhere else.

    I guess what I am saying is that the failure of fiat will eventually be a “gradually, then suddenly” thing, however the idea that it is the adoption of bitcoin that will follow is not certain nor easily forecastable at this point.

  23. Avatar for Laura Laura says:

    Curious what you are referencing with that phrasing? I don’t follow closely so would appreciate a link or two.

  24. Another informed opinion:

    Not really mine , but thats ok.

    How to Lose Reserve Currency Status

    To view this article, Click Here.

    Brian S. Wesbury, Chief Economist
    Robert Stein, Deputy Chief Economist

    Date: 4/10/2023

    History is full of economic and societal collapses. The Incan and Roman societies disappeared, the Ottoman Empire fell apart, the United Kingdom saw the pound lose its reserve currency status. So, anyone who says the US, and the dollar, couldn’t face the same fate doesn’t pay attention to history.

    The question is: will it? Russia, China, Brazil, and others, including Saudi Arabia, all seem to think they can find a way to replace the dollar and undermine US dominance on the world economic stage.

    They may try. And they may cause many to fret, but we highly doubt these countries will succeed. In order to understand why we think this, it is important to understand the ascendance of America. In the late 1700s, the US was a patchwork of colonies barely clinging to the Atlantic Seaboard.

    But it wasn’t victory in the revolutionary war that made America strong, it was the writing of the Constitution and the culture that created that Constitution. The rule of law, private property rights (especially to inventors through patents), democracy (and free elections) made America different and ushered in two centuries of supercharged human progress.

    While the US ran up large debts to fight wars, it managed to grow its way out. At the same time, our monetary system kept the value of the dollar fairly strong and stable relative to other currencies. The combination of all of this led to deep and robust capital markets, and a dominant 60% representation by the dollar in foreign currency reserves and nearly 90% of global financial transactions.

    If the US reverses course, printing too many dollars, undermining entrepreneurship with high taxes and regulations and growing government too much, then the dollar’s standing will diminish. Clearly, we are on that path today. Federal government spending has reached an all-time high of 25% of GDP in the past three years, state and local spending is near 20%…so, combined, government controls 45% of US output.

    As Milton Friedman said, the more the government is involved, the higher the price of things and the lower the quality. More importantly, for the dollar, the Federal Reserve has embarked on an experimental “abundant reserve” monetary policy that has flooded the financial system with more liquidity relative to GDP than at any time in US history. In 2007, the Fed’s balance sheet was 5% of GDP, today it is more than 30%.

    Massive government involvement in the economy, combined with excessive money creation is a perfect recipe for the decline of a currency. But, before you become convinced that this will happen to the US anytime soon, think about what might replace the dollar. It would have to be a currency managed by a country that had better policies.

    What made America strong is not its natural resources (which it definitely has), but its human resources and freedom. China, Saudi Arabia, and Russia may have resources, but they are not free. It will not be any these countries that replaces the dollar and it is highly unlikely to happen in our lifetimes. However, that’s not to say it won’t happen in our children’s lifetimes. Bad policies beget bad outcomes. King Dollar will only stay that way if the US keeps its fiscal and monetary house in order. Limiting government spending, keeping tax rates low, and returning to a “scarce reserve” monetary policy are our suggestions.

    The problem we see is that politicians have used the last two “crisis” periods to expand the size and scope of government, not shrink it. With government so big, we are likely to face another crisis. It’s past due time to head that off.

  25. Avatar for Laura Laura says:

    I was with him until this part. I think he’s conflating incumbents and startups. It’s never been easier or cheaper to start your own business. Yet there is less and less entrepreneurship when you look at the stats in contrast to how it may seem in a (ZIRP) culture of Startups!™ And I wholeheartedly agree with him, despite disliking his taste in economists, that a very low bar to starting a business, i.e. entrepreneurship, is key to America’s special sauce.

    I think that is very much a distinguishing factor beyond patents per capita or any other research & innovation criteria when you compare to other liberal/open societies. Also the mindset to give it a go is crucial, which speaks to the important cultural element the author describes. They go hand in hand in my book.


    To me, tt is pretty clear that the regulators are starting a cycle of regulations on crypto that will take at least 2-3 years to play out before the more institutionalized side of the house will step back in. Until the pension funds and large institutions step back into the water - liquidity will be thin and it won’t be a thing.

  27. Avatar for Laura Laura says:

    Thanks for sharing the linkS, will have a read.

  28. Disclaimer I really, really appreciate a clear-eyed contrarian viewpoint on this issue. One of the flaws in Brent’s argument as I see it, the article boils down to 1) a heuristic: “this argument has been wrong for 50 years and will be wrong for 50 more”; and 2) it does not address the new variables of weaponized dollars, or also CBD Dollars. 1) is valid, but overplayed that hand in the article imo. 2) these are huge and seriously need addressing if you’re planting your flag on this hill.

    Very much appreciate the contrarian viewpoint though.

  29. I give more weight to the weaponization of the dollar and was hoping for some sort of addressing of this new variable as well.

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