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Remember fidget spinners? Holy shit. Those things were everywhere…for like, 10 minutes. Then, nobody wanted them anymore. And now they’re worthless.

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Who cares, right?

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Well, somewhere out there is a guy sitting in front of a dream factory filled with unsold crates of fidget spinners, and a loading dock out back that is lousy with rats and returned merchandise. That dude is in trouble. 

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Now watch as I blow your mind hole. 

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That dude is us. The factory is America. Fidget spinners are U.S. dollars. 

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I know, right?

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Ok. Clumsy metaphor, I admit. That’s why we invited market analyst and author Peruvian Bull to join us for this week’s episode of Let’s Talk Markets.

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He explains the whole thing so much better, particularly in his widely read and discussed Dollar Endgame blog series and book. He offers a forecast for the not-too-distant future of the U.S. dollar. It’s…not great. 

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And as Dave Lauer points out during their discussion, Peruvian Bull’s theories are not too far outside of mainstream thinking. 

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So how does the U.S. dollar go from being the backbone of the global economy to the fidget spinner of the foreign exchange trade? 

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According to Peruvian Bull, it all starts with exorbitant privilege. 

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Exorbitant Privilege

If you get triggered when French people are right, you’re gonna hate this. In the 1960s, French Minister of Finance Valéry Giscard d'Estaing explained that the United States has enjoyed “exorbitant privilege” as sole producer of the global reserve currency.

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What did he mean? Something snotty, no doubt…but also something entirely accurate. 

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The United States is in an utterly singular position in the world. In short, the entire global economy is pegged to the U.S. dollar. 

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And while we can print a dollar for the cost of a few cents, the rest of the world has to pay a dollar for that dollar. You can see why that would piss off the French. 

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Indeed, we do enjoy a tremendous privilege. But Peruvian Bull says that we’re living well beyond our means, and we are mired in a kind of risk that is simply too great and inexorable to be avoided. 

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Translation?

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Out of the Woods

But to understand why we’re fucked, we need to understand what it means to be a global reserve currency.

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Ultra quick history lesson. For roughly 200 years, the world was pegged to the British pound, which itself was pegged to gold. Then World War II happened. The U.K. blew up, along with the rest of Europe. Fearing German occupation, France, England and a whole bunch of other places sent their gold reserves over to the U.S. for safekeeping. 

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When the war ended, the U.S. sat atop the world’s largest gold reserves (roughly 50% of all that existed in the world economy at the time). It was also the only major world power that was not blown up during the war.  

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It was thus that the global community entered into something called the Bretton Woods agreement. This first international monetary agreement set forth the conditions for currency trade between independent nations.

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The U.S. dollar holds a singular role in this agreement. Beginning in 1944, every nation aligned with Bretton Woods was required to guarantee that their currency could be converted into the U.S. dollar within 1% of fixed parity. The U.S. dollar itself was pegged to the gold bullion. 

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In the simplest terms, this arrangement would peg the global economic trade system to the U.S. dollar. All nations must keep a reserve of U.S. dollars as a way of backing their economies against inflation, economic shock, and other currency related catastrophes.

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Then, in 1971, when Richard Nixon eliminated the gold standard, it left the U.S. dollar all alone at the center of the global economy. This would bring sundown to the Bretton Woods agreement, giving nations the freedom to peg their currencies as they wished. Still, the dollar remained the most stable safe harbor for most of the world’s nations.

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It was thus that the U.S. stepped into its current role, the economic advantages of which are hard to overstate. 

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So back to the exorbitant privilege. 

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What if the U.S. dollar ceases to be that stable safe harbor? What if it already has?

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The French Minister of Finance had a point. We get to print our money for pennies on the dollar while other countries have to buy it at face value. 

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As Peruvian Bull explains in our podcast, this means we have had the ability to borrow and spend, run fiscal deficits, and even endure inflationary cycles without an off-the-rails financial crisis.

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But this is the thing about exorbitance. It can’t last forever.

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“There will be an unwind,” argues Peruvian Bull…

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“And the unwind will be bad.”

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I don’t know about you, but that line right there—that one sticks with me. 

The unwind will be bad. 

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It just kind of hangs there, echoing in the air with damning understatement. 

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This cocoon that we’ve woven around ourselves is unraveling, and when we are exposed to the elements, our lives of comfort may soon be illustrated as historical examples of why we are indeed so utterly fucked. 

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The Downward Spiral

What does Peruvian Bull mean by unwind? Peruvian Bull argues that the U.S. Dollar won’t be the global reserve currency forever, or perhaps not even for that much longer. This special privilege is expiring. Indeed, the Dollar Endgame suggests it already has, that we’ve passed the event horizon, and that the almighty dollar is living on borrowed time. 

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The U.S. is in a debt spiral—more than $33 trillion in national debt here in late 2023. Our foreign trade deficit stands above $64 billion at the time of writing. According to the Australian Financial Review, we are running a 7% budget deficit relative to GDP. The number is projected to reach 10% by 2030.

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The reality is that even the U.S. can only go on living in debt for so long before certain financial responsibilities come home to roost. Peruvian Bull points to what are called Unfunded Liabilities. These are non-optional financial obligations for which money has not been set aside, including Social Security, Medicaid, Medicare, Veteran’s benefits, and an array of other non-discretionary expenses.

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Estimates on the size of these obligations vary from $87 trillion to $222 trillion. We’ll have to come up with that money somehow.

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Fan…meet shit.

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All Apologies

We are approaching the monetary debt horizon.

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And the events of the pandemic and the money printing bonanza that followed have seen the U.S. dollar verge on double-digit inflation.

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In Part 7 of his Dollar Endgame series, Peruvian Bull argues that these are the kinds of signs that have historically pointed to currency death. 

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If it sounds far-fetched from our comfortable perch atop the global economy, Peruvian Bull knocks us down a few pegs with a cold hard history lesson. Currency death is the norm. 

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He explains that “In a study of 775 fiat currencies created over the last 500 years, researchers found that approximately 599 have failed, leaving only 176 remaining in circulation. Approximately 20% of the 775 fiat currencies examined failed due to hyperinflation, 21% were destroyed in war, and 24% percent were reformed through centralized monetary policy. The remainder were either phased out, converted into another currency, or are still around today.”

The average lifespan of a fiat currency is exactly equivalent to that of a legendary rock star—27 years. That’s a unit of one Kurt Cobain. 

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So yeah, it’s not unreasonable to think that we’ve already far exceeded expectations. 

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Bull describes the global monetary system as resting witlessly beneath the dangling sword of Damocles, unaware of how close we are to the tip of the blade.

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Making It Rain

How close are we? Bull explains that foreigners own $49 trillion of our assets. They have to. After all, every nation is required to back its own currency with a reserve of U.S. dollars.

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But what happens if they don’t have to do this? What happens if the U.S. loses reserve status? When our currency is no longer the centerpiece of the global monetary system, what happens to all those foreign owned dollars?

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If other nations don’t need to hold these assets, they can sell. Suddenly, the global market is flooded with dollars—fidget spinners clogging up the pathways to trade like so many once-cherished novelties. 

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Our massive responsibility and our central risk will collapse on each other. 

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How often do you think about the Roman Empire?

If the answer is, not much, Peruvian Bull might suggest that you give it some contemplation. After all, it is merely logical for us to consider what a toppled empire might look like. Chances are, we’re gonna get to see it first hand.

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But won’t the world rally round the U.S. dollar, simply to avoid what Dave Lauer refers to in our podcast as “mutually assured destruction”?

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Not if crypto has anything to say about it. Peruvian Bull explains that, in many ways, the emergence of Bitcoin threatens to bring us to the brink. Contrary to the flagging U.S. dollar, says Bull, Bitcoin exhibits all the characteristics of a good, or even perfect reserve asset— no central control; no custodian; no need for blind trust in a flawed or unequal system.

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If the governments of the world get together and recognize, on a global level, that Bitcoin is an ideal currency reserve, the unwind will surely be upon us. 

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And it will be bad.