Daniel Lacalle discusses the current perception of "dedollarization," emphasizing that what is actually occurring is a decline in confidence toward fiat currencies and sovereign debt in developed economies. He argues this trend is leading to an increased demand for gold as a stable asset, rather than a significant shift away from the US dollar.
1. Misunderstanding Dedollarization: The idea of widespread dedollarization is misleading. Despite a growing interest in gold, the US dollar maintains its role as a central reserve currency.
2. Loss of Confidence in Governments: There is a diminishing trust in developed economies' ability to manage their debts. This is illustrated by three limits that constrain government debt issuance:
• Economic Limit: Excessive debt can lead to stagnation and reduced productivity.
• Fiscal Limit: Increasing interest expenses can reduce the effectiveness of central banks' monetary policy.
• Inflationary Limit: Erosion of currency purchasing power can negatively impact citizens' living standards.
3. Shift to Gold over Bonds: Central banks are increasingly moving away from government bonds and towards gold, which is seen as a safer asset amid rising debt burdens and economic uncertainties. This buying trend has intensified since 2021.
4. The Role of Central Banks: Major central banks have increased gold purchases to about 80 metric tons each month. This shift indicates that central banks are losing faith in the long-term viability of developed nations' debts.
5. The Dollar's Continued Dominance: While governments are under fiscal strain, the dollar remains the currency of choice for global transactions and reserves. It still accounts for approximately 59.6% of allocated foreign reserves.
6. Comparative Weakness of Other Currencies: The euro and other currencies have not shown significant strength or capability to replace the dollar's position in global finance.
7. Financial Repression and Geopolitical Risks: Ongoing financial policies and geopolitical risks, including the weaponization of financial systems, have heightened the appeal of gold as a reliable asset.
8. Stealth Shift Toward Real Assets: Analysts note a notable shift towards investments in gold and other real assets, denoting a lack of trust in fiat currencies, driven by fiscal irresponsibility in major economies.
9. Illusion of Fiat Currency: The expectation that governments will manage debt sustainably is challenged. High debt levels, along with political resistance to fiscal consolidation, create uncertainty in currency value.
10. Conclusion on Currency Futures: There is no emerging fiat currency that can challenge the dollar's current status. The article concludes that the global financial environment is moving away from trust in fiat currencies towards a reliance on gold as a secure asset, while the US dollar remains the least imperfect choice for reserve managers.
The ongoing trend shows a pivot from confidence in fiat currencies to a preference for gold, reflecting concerns about the fiscal health of developed nations. Despite this shift, the US dollar retains its dominance in global finance, underscoring the complexities in transitioning to alternative currency systems.
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