Peter Schiff believes safeguarding the exorbitant privilege, emanating from USD reserve currency status will need more of a carrot than a stick.
The status quo, where 58.2% of global foreign exchange reserves are held in USD, and 90% per cent of global foreign exchange transactions are made in USD, defines US reserve currency status.
The exorbitant privilege that comes with a currency widely held, accepted as a safe store of value and used for international trade benefits all in that currency zone, from the billionaire filling his private jet with fuel to a single parent on food stamps.
Sitting on the USD reserve currency throne means demand for the treasuries is buoyant, enabling the government to spend and invest in an array of public expenditures from public infrastructure and social programs to defence. The world beavers away providing goods, services and commodities, then stores surplus wealth in USD by buying treasury bonds, which enables the federal government to run large deficits for whatever it pleases.
“USD reserve currency status will need more of a carrot than a stick”
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In other words, US reserve currency status is the Federal Government’s golden credit card with no credit limits, provided the world saves and transacts in USD and demand for treasuries exceeds its supply.
But if there is an imbalance in the market for treasury bonds where supply exceeds demand and the Federal Reserve steps in to buy the surplus, creating currency unmatched with more goods and services, that leads to currency debasement, a diluted dollar and cost-push inflation.
We are in this scenario.
The rise of BRICS, an alternative economic, political and military hemisphere outside the US-centric sphere of influence, is a rival and potential threat to US hegemony, USD reserve currency status and US exorbitant privilege.
What happens when the world’s largest factory, China, becomes weary of exporting tangible goods to the US in exchange for US paper, backed by the government’s promise to pay in debased dollars?
The 2023, the worst treasury bond crash in history, claimed five known banks and was a wake-up call.
If the perception of USD goes from a safe store of value to being toxic, that would be the beginning of the end of the US reserve currency status and a collapse in the US standard of living.
“What happens when the world’s largest factory, China, becomes weary of exporting tangible goods to the US in exchange for US paper”
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Are we staring down the barrel of what could potentially be the worst man-made famine in history?
Forty-two million Americans per month rely on government aid to feed themselves.
A loss of US reserve currency status would have implications on asset prices, particularly leveraged assets such as real estate.
Non-debt assets would shelter investors from this potential storm.
Bonds and bank stocks would be the worst to own.
“The US government’s conservative estimate is that it will take on another $22 trillion in debt over the coming decade” – Peter Schiff
Peter Schiff believes safeguarding exorbitant privilege from reserve currency status should be paramount
He notes the dollar is still dominant. But it is not a good trajectory.
“With $35.5 trillion of debt, equal to about 123% of GDP, the US desperately needs big buyers of its bonds,” he wrote.
“If foreigners decide to stop using the dollar, it ultimately means they will not buy as much US government debt… And the only real option at that point would be for the Federal Reserve to ‘print’ the money.
We all saw what happened when the Fed printed about $5 trillion during the pandemic— we got 9% inflation,” added Peter Schiff.
Taking on more debt is not how Peter Schiff believes safeguarding exorbitant privilege will help save the reserve currency
“The US government’s conservative estimate is that it will take on another $22 trillion in debt over the coming decade. If the Federal Reserve had to print most of that, who knows how high inflation would go,” he said.
Peter Schiff thinks Trump is the only remaining Presidential candidate who acknowledges this massive risk for the US.
But Trump is also into low interest rates, low taxes and spending.
So, Peter Schiff thinks that Trump’s solution will not cut it.
Trump will threaten and bully countries into continuing to use the dollar. For example, if other countries say they want to “stop using the dollar,” they could impose higher tariffs or even outright bans on imports of that country’s goods and services.
“you could put your house on the market today and demand to be paid in Bitcoin” – Peter Schiff
Peter Schiff believes safeguarding exorbitant privilege reserve currency status comes from being the preferred currency and not being coerced into using it
“But that will not work. The decision to use (or not use) the US dollar for trade is not decided by Trump. Or Xi Jinping. Or most other world leaders and central bankers. It ultimately comes down to businesses and individuals to decide what currency to use,” he wrote.
If Apple decides they want to pay TSMC (Taiwan Semiconductor Manufacturing Co) in New Taiwan Dollars, that’s a decision that those two companies will make between themselves,” he wrote.
Peter Schiff believes financial and business decisions should determine whether a business is done in dollars, not arm-twisting bullying politics.
“Similarly, you could put your house on the market today and demand to be paid in Bitcoin. Or gold. Or perhaps a potential buyer is from Germany and wants to pay you in euros. It’s entirely up to the buyer and seller to decide on the settlement currency,” he wrote.
Peter Schiff believes safeguarding exorbitant privilege is not with threats but through incentives
“Much more carrot, much less stick,” wrote Peter Schiff.
A less dysfunctional government that implements fiscal and monetary sound policies is also how Peter Schiff believes safeguarding exorbitant privilege could be achieved.
