Power Up Wealth podcast – Global Reserve Currency Part 3 – Episode 54 transcript:
James Derrick 0:00
Welcome back to the SFS Power Up Wealth podcast. I’m James Derrick, and today, we will dive back into our discussion about the role of the US dollar in the world. This will be part three and our final discussion. We’ve covered the past and the present, and today we dive into the future.
Sharla Jessop 0:31
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
James Derrick 0:54
I’m joined today by Jordan Hadfield, who is a wealth manager and has a Certified Financial Planning degree. Jordan, thank you for joining me.
Jordan Hadfield 1:02
Yes, I’m glad to be here. Thank you.
James Derrick 1:04
Jordan, you have covered this topic twice already. And I wonder if you want to start with a review. What is a reserve currency? What are the pluses and minuses? How dominant is the United States?
Jordan Hadfield 1:16
Yeah, this is a big topic. And so I did break it up into three parts. Part one and two can be found on our website, Smedleyfinancial.com. You can go there and read up on that. In part one we talk about what is a reserve currency. We talked about the strength of the dollar and the global stage, as well as the fact that it’s not the only currency on the global stage. There are other currencies out there that are trading. And that’s important to understand. And the strength of the dollar is volatile, to some degree, it moves up and down. Sometimes we’re you know, 70% of international trade, sometimes were 55%. Right. And that’s normal. So we cover that in part one. We also talk about the disadvantages of being the issuer of the reserve currency. And there are some disadvantages, but the advantages of having reserve currency status far outweigh those disadvantages. We talk about that in detail in part one. In part two, we talk about the fact that you that the United States is the sixth issuer of the reserve currency since the year 1450. So that’s important to understand is, is how these other currencies kind of have come and gone. We talk a lot about the pound, and how it was the reserve currency before the dollar. And what happened there. How did the pound lose its status as the reserve currency? And what happened to make the US dollar replace it? Another big thing to understand in part two that I want to highlight is the fact that we ditched the gold standard, and what that meant. Leaving the gold standard has a number of different consequences, largely positive, but there’s also something else that I want to hit on there. And that’s the fact that when we left the gold standard that had never been done before, and that sparked a tremendous amount of fear in the United States, as well as in the global economy. We were the issuer of the reserve currency, and we are ditching the gold standard. What does that mean? That scared a lot of people, both domestically and internationally. International governments started to sell the dollar. A lot of fear about de-dollarization at that point, but what happened? The dollar powered through stronger than anyone would have expected. The United States economy has taken off. And we’ve just further cemented ourself as the the economic leader and the powerhouse in the economic stage worldwide. So there’s been lots of times of fear of de-dollarization. There’s lots of things that we can focus on and worry about. This is not a new conversation, although it is one that is kind of starting to gain steam again. And for some good reasons. There’s some things to talk about. But we’ll dive into into what the future looks like, in part three, which is what I hope to do now.
James Derrick 3:54
Thank you, Jordan, one of the things I think I mentioned in the last podcast we did together was that there’s not enough gold in the world to support the economies and the economic trade that’s going on. And so moving away from the gold standard was something that needed to happen in order to allow the economies to grow. And of course, we dove into some other things as well. Let me mention again, what you said six world currencies since 1450. That’s more than I would have thought.
Jordan Hadfield 4:20
Yeah.
James Derrick 4:21
And that makes me ask the question. I mean, as time is almost up on the dollar?
Jordan Hadfield 4:25
You’re not the only one asking that question. James. A lot of people are asking that question and that’s what’s motivated this three-part series right as a lot of people are worried I’m starting to hear fears, both from clients and I’m seeing it online and so I want to kind of get out ahead of it.
James Derrick 4:38
So the fears the fears make it sound almost like it’s a mystical thing like but in reality there are some concrete things that make a currency the world currency. I mean, what is it Jordan would crown a our currency or or the next world currency?
Jordan Hadfield 4:53
Great question. The first thing I want to state is there is no international law that says that the dollar has to be the global reserve currency. We became the issuer of the reserve currency from for a number of different reasons. There are some unofficial qualifications that have to be met. It’s important to understand that to be crown the global currency, you have to have trust from other governments. That is a big one. Governments of the world have to trust the government of the reserve currency status. So that’s a huge qualification. The next thing is the issuer of the reserve currency has to have a strong military and advanced defense capabilities. They’ve got to be able to defend themselves from global threats. They are a huge part in the economic system worldwide. And they’ve got to be able to back that up if they need to, with military power. So that’s important. And I think that’s largely why we often spend so much as a government on military spending. It’s A to protect our citizens, but also, it’s to protect our ability to defend a world currency. It’s an avenue that a lot of people don’t walk down when we’re talking about government spending.
James Derrick 6:04
Okay, so we’ve only hit two so far.
Jordan Hadfield 6:05
Yeah.
James Derrick 6:06
Financially trusted and world power militarily.
Jordan Hadfield 6:09
Not just financially trusted. Trusted in many different ways. Yeah, trusted in every way. I mean, you’ve got to be able to trust that your government is going to act morally, we know that they’re going to lead from a position of of honesty and integrity. But yes, they need to be trusted financially as well.
James Derrick 6:26
Okay. I mean, that makes me think there are not a lot of countries that even check those two boxes.
Jordan Hadfield 6:30
You’re writing, there are not a lot of countries that check those two boxes.
James Derrick 6:33
What else does a country need?
Jordan Hadfield 6:35
Another thing that needs to be present, in order to issue the reserve currency is you have to have deep and liquid bond markets. This is a box that few countries can check. These are not easy qualifications to meet. There are very few countries that can meet these. The fourth, I would say is the country must have a long history of stable currency operations capable of handling trillions per day in trade. So they have to have a huge economic system that’s stable. That’s capable of handling world trade. We’re talking trillions of dollars per day. And then lastly, I would say the country has to be stable. It has to have a stable and trustworthy banking system. Capable of handling several 100,000s of transactions every single second. So a massive financial demand as far as structure to be able to handle the trades required that happen every single second on the global stage.
James Derrick 7:32
I mean, this makes total sense. So and you said there are pluses and minuses and the pluses by far outweigh the minuses. Now, when you’ve used the term weaponization.
Jordan Hadfield 7:44
Yes.
James Derrick 7:45
In in an article that you wrote. Define weaponization. Is that just kind of taking advantage of your position of strength and maybe going too far? What is weaponization?
Jordan Hadfield 7:57
Yeah, so to get into weaponization of the dollar, and in this case, what you’re referring to. You need to understand that many countries want to be the reserve currency issuer. Because of these advantages. There are hundreds of countries that would kill for the opportunity that America has. So it’s not new that other countries are talking about becoming, you know, the reserve currency. Are doing everything they can to strengthen their currencies, their economies, and eventually become the issuer of the reserve currency. This is not new, and it’s never going to end. Every country wants to be strong, wants to be on top. Right, if they can. America is considered the greatest country on Earth for a reason. And we use that power as the issuer of the reserve currency in a number of different ways. You know as I talk about, in part one, a lot of our economic policies have to take into account other countries, right? That’s important. That’s a responsibility as the issuer of the reserve currency leader. And part of that is enforcing international law. And one thing that our government has done increasingly is what has been considered as weaponization of the dollar. So most recently, we have issued sanctions against Russia. What does that mean? So a sanction is something that a government can issue towards a company or a country to block their ability to trade in that country’s currency. Okay. So for example, Russia invades Ukraine, the Western world does not approve of this, they do not like it, they want it to end. However, they don’t want to send troops over there. We don’t want to put boots on the ground and start World War Three. So what’s a way that the United States can fight against Russia without fighting against Russia without risking human lives? And that is using their position as the reserve currency leader. We’ve issued sanctions against Russia that has prevented them from trading in the US dollar.
James Derrick 9:54
So if Russia then wants to do trade with China, or Iran or Saudi Arabia or even Germany, they don’t have access to the dollars.
Jordan Hadfield 10:01
Not only do they not have access to the dollars, to their dollars, in other words, the bank accounts had been frozen assets has been frozen. Right. But they don’t have the ability to access dollars in their central bank and trade internationally. So there’s multiple different avenues of of these sanctions. And this is complex, right? We could do a three-part series just on that.
James Derrick 10:22
But this is making some sense. And so we’re hearing something about the BRICS currency between some of these emerging markets. And what you’re telling me is, that is not something they are proactively doing that is reactionary because we have kept them out of some of these countries out of the financial system, we block them?
Jordan Hadfield 10:42
Well, yes and no. I think they are proactively working together. The BRICS countries, by the way, BRICS stands for Brazil, Russia, India, China, and South Africa, ok, they’re known as the BRICS countries, and they are emerging markets. And they are growing very fast. Their economies are growing very fast. And they kind of come together to create an alliance and a trading alliance that allows them to work together, they’ve agreed to work together to try and stimulate each other’s economies and grow. And they have been doing that independent of anything that America is doing. They again, like I said, they want to grow their economies, every country does, they want to strengthen themselves and, you know, reap the benefits of a strong economy and build up their place in the global stage. However, with, you know, most recently with Russia invading Ukraine, and the fact that we have blocked Russia’s ability to trade internationally in the dollar, has fueled that desire, because Russia doesn’t have a choice, they can’t trade in US dollars. And despite what Russia is reporting, this has been devastating to their economy, it’s had a huge negative effect on their economy. They’re forced to deal with that. And so they are trying to figure out ways to trade with China and with some of these other countries outside of the US dollar. And this isn’t a surprise, when we issued the sanctions, we knew that what happened, we forced their hand, but that has stimulated a lot of their desire, Russia and China and some of these other countries, to work outside of the dollar. The truth is, not every country agrees ideologically with the West, and many of these countries would love to be able to act without economic consequence. They would love to be able to invade other countries and manipulate the dollar and, and steal intellectual property, you know, online and not have to worry about economic consequence. The West is going to enforce that, and they don’t like it. So they would love to figure out a way to trade outside of the US dollar, because hitting them in the pocketbook is where it hurts them the most. This isn’t new, and this isn’t a surprise, we have forced Russia to trade outside the dollar. China would love to to strengthen their position, and figure out a way to trade outside of the dollar. And that’s what the BRIC company is trying to do to some degree. However, they still rely on the dollar. Russia can’t trade on the dollar. But these other BRIC countries still rely on the dollar. Only about 16% of all global trade is tied to the BRICS countries, and over 50% of that trade is still reliant on the US dollar.
James Derrick 13:18
Let’s just hit one more question on this and then we’ll move on.
Jordan Hadfield 13:22
Yeah.
James Derrick 13:22
Is it a threat to the US dollar?
Jordan Hadfield 13:25
That’s a loaded question, right? Is it a threat to the US? Let’s talk about China a little bit. Because most people think China’s the biggest threat. They now have the largest economy and they’re growing quickly. They are not shy about their intentions to surpass the US in every way, shape and form, including their desire to become the global reserve currency. They would love that. But China A doesn’t check the boxes that we outlined earlier, as far as qualifications of being a reserve currency. But I want to highlight they are manipulating foreign exchange markets in many different ways and I kind of want to talk about that a little bit just because I get a lot of questions about it. China in the 90s, they were importing a lot of goods. And they realized that they could grow their economies more if they begin to export. If they begin to sell Chinese goods to other countries at a faster rate they could build their economy faster. So what they did is they intentionally devalued their money, the RMB they devalued it. And what that meant was for them to export Chinese goods, all of a sudden became a lot more affordable for other countries. But it also made importing goods a lot more expensive. The Chinese were no longer able to afford to import because their currency had been artificially devalued. And globally, it decreased the price of Chinese goods. So companies all over the world begin to import Chinese goods And then they were exporting their own currencies. The US buys a lot of Chinese goods. China is dependent on US imports. In other words, we send Chinese US dollars, and we import Chinese goods. And this has stimulated Chinese economy to a significant degree. Now, according to you know, foreign exchange policies, these exporting surpluses balance out. And the reason being is, if a country is exporting a lot of goods, the demand for their currency goes up. And as the demand for their currency goes up, the value of that currency goes up, and the value of exports go up, which means the citizens of that country, if they’re enjoying a stronger currency, they can afford to import and other countries, it’s more expensive to import.
James Derrick 15:48
I’m going to jump in right here just to recap what you said in a few words, yeah, basically, they devalued so that they could manufacture there in the country.
Jordan Hadfield 15:56
Yep
James Derrick 15:56
And export. But there should be a natural equalization.
Jordan Hadfield 16:01
Correct
James Derrick 16:01
That occurs over time bringing that currency back up.
Jordan Hadfield 16:05
Yep and that currency comes back up. Chinese civilians are able to import and exports become more expensive, right. And so other countries are not importing Chinese goods, because it’s more expensive. China has continued to keep their currency low, despite that, so they haven’t allowed that natural balance to take place. And in keeping their currency low, they have done a couple of things. Number one, they’ve grown their economy at a tremendous rate. But two, they’ve also imprisoned their own currency to some degree. If the value of their currency goes up, exporting Chinese goods from that country become very expensive. We know the quality of Chinese goods isn’t great. So the reason why we buy him is because they’re cheap. But if they were to double or triple in price, and not double and triple and in quality, no one’s going to import Chinese goods. And that is going to be disastrous for the Chinese government. So they have intentionally kept the value of their currency low. And this is a market manipulation. So that can be problematic, because they are reliant, so reliant on the US dollar, on on trade with US dollar, this has allowed China to bring in a massive amount of US currency of dollars. And they haven’t been honest about the US dollar they have in reserves. Nobody knows how much China has in reserves. And it’s estimated that they’re greatly under reporting. This is problematic for a couple of reasons. And I’ll get into that. The other thing they’re doing is they’re buying a lot of treasuries, US Treasuries, they’re buying a lot of US debt. And so a lot of people are concerned about China. What happens if A they dumped their US Treasuries, right? That would spike inflation rates here at home, and B what happens if they sell off all their dollars? They flood the global market with dollars that devalues the dollar, and the strength of the dollar could plunge. So these are some reasons that people really fear the manipulation that China’s is undertaking, and you know, what they can do in retaliation to the US government and how that would impact the dollar on the global stage.
James Derrick 18:08
So the idea that the Chinese yuan would become the new world currency sounds like it’s a no go right now. Because there’s just not enough trust because of the manipulation. And now you’re bringing up another point, which is the weaponization of the dollar, not by us, but by someone else.
Jordan Hadfield 18:25
Yeah.
James Derrick 18:26
Do you want to dive into that?
Jordan Hadfield 18:27
I get a lot of questions about it. A lot of people think that China’s, you know, moving to to overpower us. The truth of the matter is, if China were to dump treasuries or sell off the dollar, it would devastate their economy. In other words, what would hurt the United States would also hurt China, and it would hurt China in a bigger way. And China is not in the business of hurting China. Right? China wants to build China. So if they were to dump the US dollars, if they were to sell all their US dollars or call in, you know, dunk treasuries. If they were to sell the treasuries, you know, to steal a phrase from the Japanese, that would be a kamikaze move. I don’t think the Chinese would appreciate me using a Japanese phrase in this way. But, but it’s the truth, it would be it would be devastating to the Chinese economy. So I think it’s something that our government is worried about. The Obama administration was very worried about it. And they did some things to try and solve that problem. But it is still an issue and it’s still a concern. But the Chinese government overtaking the US dollar as the reserve currency is not the concern. The concern is chaos in the economic environment globally, not just the destruction of the United States economy, but a global chaos through China misreporting what the amount of dollars they have in reserve, and if they were to dump those dollars or dump treasury, there would be chaos everywhere.
James Derrick 19:50
But you’re saying they would hurt them.
Jordan Hadfield 19:52
It would hurt them.
James Derrick 19:53
Maybe maybe even more than it hurts us and so it’s unlikely.
Jordan Hadfield 19:56
Yes, yeah, I don’t see it. It’s a conversation, but it’s a different conversation.
James Derrick 20:01
Let’s, let’s switch gears, let’s go. Let’s go into digital currency, you know, and there are a couple of different ways to tackle this. But I know that the US Federal Reserve is talking about digitalizing the dollar and the British are talking about digitalizing the pound and Europeans the Euro. And I think we’re already on this path.
Jordan Hadfield 20:24
There is a tremendous amount of false information out there, relative to the government moving towards a digital currency as well as just cryptocurrencies. There’s a tremendous amount of misinformation. And this is leading to fear. And it’s also leading to very high risk investment. And so it’s important to recognize that cryptocurrencies digital currencies, there’s still a lot of speculation here. And the fear around the US moving to a digital currency, we need to just talk about it in a little, a little bit more detail, I guess. Number one, most of our is currency is digital. There is no vault out there that has physical dollars in there that’s titled Jordan’s 401k, right. I don’t have a vault at my bank that’s got physical dollars in it, it’s digital. When I go to the store, I don’t remember last time I used cash. When I go to the store, I use my debit card or my credit card, you know. I’m not paid in cash, I’m paid digitally. It goes to my bank account, it’s digital, I contribute to my investment accounts, it’s digital. So we’re largely already digital. I do not think that the government, I’m quite confident that the government will not be moving away from a physical currency. The demand for physical currency is still very, very high. And I hear a lot of people say, we’re gonna get rid of physical currency. I don’t believe it. Not anytime soon. Physical currency isn’t going anywhere. However, the government is exploring digital currency options to run alongside of physical currency. You need to understand that a lot of our financial system is pre- 1950. That’s old when we’re talking about, you know, technology that’s really really old.
James Derrick 22:01
You’re talking about like infrastructure, like the pipes?
Jordan Hadfield 22:04
For example, James
James Derrick 22:05
That run the system.
Jordan Hadfield 22:06
For example, if I want to send you money, it’s going to take three days. If I write a big check to somebody, it takes three days to clear, and it’s expensive. And we can use modern technology to A speed that up and B reduce costs. Whenever someone swipes a credit card. If I go to Target and I use my credit card, Target is paying a large fee, just me using my credit card. It’s expensive. And so there are ways that we can use modern technology to decrease expenses and increase efficiency. And that’s what the government’s trying to do. They’re not trying to replace physical currency. And they’re absolutely not trying to take control of physical assets. I hear people say, the government’s trying to take over my 401k. I don’t know why the government would want to take my 401k. If the government needs money, they raise taxes, and they print money. Stealing money out of my 401k. I don’t know why they would they would do that I would cause chaos in every street in America if they started confiscating money. And I see that a lot is there’s this this conspiracy that the government is trying to digitalize the dollar in order to confiscate it from people to have control. And I don’t think that’s what it’s about. Some people may call me naive. But as I’m looking at the data, and I’m and I’m talking to people, you know, who are who are experts on the subject. It’s not about replacing physical dollars, it’s about creating a digital currency that runs along with that, to decrease costs to increase efficiency, and to improve our economic system. To update it.
James Derrick 23:34
It sounds like just a logical step.
Jordan Hadfield 23:36
Yes.
James Derrick 23:37
In in this century, something that just needs to be done and will be done.
Jordan Hadfield 23:41
Yep
James Derrick 23:41
Just a matter of time. And it sounds like they’re moving slowly, as well.
Jordan Hadfield 23:45
And the United States isn’t the only government doing that every government is doing it, by the way companies are doing it. You know, there’s Starbucks has come up with a digital dollar, quote-unquote, right? You can you can purchase things at Starbucks using a Starbucks currency, because they’re trying to get rid of transaction costs. They’re trying to lower their costs and credit card fees. And so companies are doing it, Facebook’s doing it. Other governments are doing it. It’s not about replacing physical currency. It’s about updating our financial system.
James Derrick 24:16
Let’s bring this all the way back to the initial question.
Jordan Hadfield 24:20
Yeah.
James Derrick 24:20
How much time does the dollar have left? We’re gonna pin you down and just answer this final question. You know, what is the future of the US dollar?
Jordan Hadfield 24:28
This is the climax of this three-part series is de-dollarization and what’s going to happen. There is not currently another option, whether Russia likes it, whether China likes it, whether South Africa likes it, whether Brazil likes it, there is not another option. The US dollar is strong. All data says that it’s strong and that it will continue to be strong. There is not another option, so I do not see the US dollar going anywhere. Now eventually, it will be replaced eventually.
James Derrick 25:00
There’s got to be another option somewhere maybe some type of a financial earthquake that tips everything.
Jordan Hadfield 25:08
Yes. You know, we started out this conversation you asked about six world currency since 1450. There’s a reason why world currencies have been replaced. And eventually, the United States dollar will be replaced with something. I think we’re in a different place than we were, you know, in the 1920s, when we replace the pound, I think we’re a global economy now more than ever, I think with technology, I think we’re in a completely different place. So I don’t see the replacement of the dollar looking like the replacement of the pound, or the replacement of any other currency in the past. However, there will always be a need for a world currency, a reserve currency to some degree in some way, or fashion. And there is not another option right now. There is no one that is challenging the dollar. I personally think the biggest threat is the Euro. And the Euro isn’t a threat. There are problems in in Europe right now. The Euro is not a threat, but it’s not China. It’s not Russia. It’s not India. It’s not South America. It’s not Brazil. The dollar is strong, there is no option. And I think that will continue for some time.
James Derrick 26:14
Thank you, Jordan for coming in and discussing this with us. It’s been fascinating.
Jordan Hadfield 26:17
Yeah, thank you so much.
Shane Thomas 26:24
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
