Let me start off with a short fictional story that happens every day in individual life and is now happening in a global sort of way. This story is about a football player. Not just “any” football player, the star football player. The guy who played quarterback and was captain of the squad. He was talented, he had natural motion and was blessed with a body that had incredible endurance. Not only did he have physical abilities, he was a leader. When things got tough he could rally the team emotionally and spiritually to perform at their best. This was the guy that everyone wanted to hang around with, he was the class president and elected homecoming king. Naturally he dated the beautiful homecoming queen who was on the cheerleading squad. Then along came graduation, college and then real life. Let’s call this guy “Sam”. Sam had it all, he married his childhood sweetheart, he had a great job, bought a beautiful home and they had 2.3 kids.
The story however didn’t end “happily ever after”. In later years Sam got lazy and relied on his past talents to get him by. He started drinking at local bars, carousing women, getting into fights, he gambled heavily and became deeply into debt. This was bad enough on its own but it came out in later years that he was abusing his children. Once they moved out his wife of so many years stopped going out in public and when she did she normally had signs of old bruises. Yes, Sam was now beating his wife. Then the news broke, Sam and his wife were divorcing. No, Sam didn’t want the divorce to be with one of his many women on the side, his wife wanted the divorce. You see, she met someone that treated her nicely and with respect. Someone that didn’t play head games or beat her if supper wasn’t ready on time. Sam died an old and broken man, his wife however lived happily ever after.
I know that you are wondering what the heck I’m even talking about here. Sam of course is the United States, his wife could be any nation you’d like to choose but in this case it is France. The U.S. just sanctioned BNP Paribas nearly $9 billion for breaching sanctions on Iran, Cuba and Sudan. The fine was issued for “money laundering”. Apparently “dollars” were used so the U.S. somehow has the power to impose the fine. There has been speculation that this fine might have been far less or even nonexistent if France herself didn’t go ahead and do the recent naval deal with Russia. France and Russia signed a deal 3 years ago for France to supply Russia with “Mistral” class warships, the first one is now close to being delivered. The U.S. however has warned France that complying with their contract would break the recent sanctions imposed on Russia.
As with the above fictional story where Sam’s wife left him, France looks like it is filing for divorce… or at least threatening to. Christian Noyer, who is the head of the Banque du France (also a board member of the ECB) issued what I would call more than a warning shot. He said in an interview “the BNP case will encourage diversification from the dollar”. Do you understand how serious these words are? He is saying that the U.S. is and has shot itself in the foot. The polite words “encourage diversification” can be understood on the street as “won’t use”. What Mr. Noyer is now saying is that the BNP case will make it so that foreigners “won’t use” dollars in the future. If you were a bank president and saw this case unfold where a massive fine was lodged, not by your government but by another government, what would you think? You would probably think “who in the hell are they?”. You would also probably think of not ever using their currency ever again for any transaction of any sort …because that would leave you open to being fined.
Do you see what is happening here? The U.S. has gone to war, we have deposed and “disposed” leaders who even spoke about using something other than dollars for settlement of trade, particularly oil. In one giant faux pax we have now encouraged not only BNP but France herself to no longer use dollars. Is France obligated to use dollars when they trade with the Russians? Or how about the Chinese, Brits, other Europeans, African nations, Australia or even penguins at the South Pole? This is not rational on any level that you can conceive but it is unfortunately U.S. “policy”.
Let me put this in perspective. The U.S. has brow beaten the world for years and required that dollars be used for literally all trade. Initially the world accepted the rules because the dollar was a “hard currency” backed by gold. This changed in 1971 when Charles DeGaulle forced the U.S. to reneg by demanding delivery of gold for dollars. The U.S. has now given the world a “reason” NOT to use dollars! We have given the entire world a reason to slink out the side door of commerce and do business amongst themselves… with their own currencies.
We have seen the massive selling of Treasury bonds get absorbed by the Fed. We have also seen the mysterious “Belgium buyer” gobble up $400 billion or so of Treasury bonds over the last year. Treasuries can be “bought” with dollars, can dollars be bought with…dollars? If the world stops using dollars and decides to sell them collectively, who will buy them? The Fed? With what? Gold? No, even if we had the gold that we claim to, that’s not even close to enough. How about foreign reserves? Basically we don’t have much in the way of foreign reserves because we “don’t need them”. We don’t need them because we issue the reserve currency …and here’s the big $1.4 quadrillion question. Would the U.S. need foreign reserves if all of a sudden the dollar were to be defrocked as the reserve currency? The answer of course is yes and the next question of course would be “how” will we acquire foreign reserves if everyone is selling dollars? I will remind you that it cannot be done through “trade” because we are a trade deficit nation month after month after month. Our industry is gone so it won’t come from manufacturing. We can’t “borrow” it as foreigners won’t lend it anymore. Seriously, how do you “buy dollars” to support them and pay in dollars? The answer is, you cannot.
To finish the original story, Sam went to his 50th reunion. No one wanted to talk to him. None of his old friends wanted to be seen with him and no one trusted him. In fact, South Korea who was one of Sam’s classmates just decided to do business with China…without using any dollars. Didn’t Sam use to protect South Korea? Do you see a problem here?