It’s Over: China Just Broke The US Dollar

What's up guys, it's Graham here. So it's official: China and Brazil have just struck a deal to ditch the US dollar. Whoops! Okay, before everyone freaks out, don't worry, it's a fake build for dramatic effect, but the point still remains. The world's second largest economy is slowly cutting off ties with the United States, and this, not surprisingly, is the first to go. So today, let's discuss exactly what's happening, why this is happening, what this realistically means for all of you watching, and whether or not this is a topic to be concerned about.

Because I have to say, this is something to be taken extremely seriously. After all, billionaire Ray Dalio has previously described the impending downfall of every major economy as we know it, how these cycles typically happen on a regular basis, and how we could best prepare for what's to come based on predictable events that happen about once every 100 years.

Although, before we start, I have to warn you that the like button is also in danger of not being smashed for the YouTube algorithm. So if you wouldn't mind hitting the like button or subscribing, it does help out tremendously. So thank you guys so much, and now, with that said, let's begin.

Alright, so as a quick 60-second recap to bring you up to speed about what's going on: as of now, and for the last 80 years, the US dollar has been the most powerful currency in the world because it's known as what's called a reserve currency. This refers to a currency that's accepted throughout the entire world, and since 1945, the US dollar has taken that place because of its safety, resiliency, and stability.

Like when the system was first adopted, it was used as a way to keep the price of investments, exchange rates, and commodities like gold and oil stable, knowing that no matter which currency you held, its value was pegged to that of the US dollar. See, when you have dozens of countries all trading goods and services with each other, it helps to have one universal currency accepted around the world with a predictable value to conduct those transactions in. Otherwise, you run the risk of getting paid in a currency that might be difficult to exchange, or maybe its value has fallen by the time you're able to convert it back to your native currency.

So think of this kind of like a global transfer of value through the US dollar that everyone has agreed to be safe. Of course, the United States benefits from this as well because more countries use the US dollar, and more countries hold on to those dollars, and as a result, we have greater buying power.

But the US dollar is apparently at risk of losing that reserve currency status, and to understand why, look no further than Ray Dalio's changing World Order. See, as he explains, throughout history, there's a constantly changing World Order between the leading economy and the rising economy, and over time, one will fail to make way for something new.

For example, prior to 1945, the reserve currency was held by the British pound, which lasted for 105 years, followed by the French Revolution, followed by the Netherlands, followed by Spain and Portugal, Venetian gold, and so on, with the understanding that reserve currencies have never lasted forever and about every hundred years they change in a transition that lasts between 10 and 20 years.

So what causes this, you might ask? Well, Ray Dalio points out that this could be summarized into three categories: the rise, the top, and the decline. During the rise, after every new reserve currency, there's a period of peace, certain prosperity as people bet and borrow on that system. Continuing this is typically marked with strong education, critical thinking, character building, and work ethic that allows for innovation, new technologies, and other resources for a continual rise in productivity.

However, in order to finance that continual rise in productivity, there has to be a system in place for borrowing and allowing people from around the world to convert their currency into investments that share in the success of making that happen. In fact, Ray Dalio points out that all the successful reserve currencies followed the exact same path leading to, of course, the top.

At the peak, the general consensus is that, well, people earn more; their time becomes more valuable relative to other countries who would be willing to do the same work for less. On top of that, other countries have the ability to take the blueprints of the latest innovation and then copy that for a fraction of the cost, reducing the leading power's competitiveness.

The tipping point, though, comes when people lose faith in the reserve currency. They refuse to buy it and would rather sell than reinvest the profits, leading to, of course, the decline. Ray Dalio explains that during an economic downturn, if the country cannot sustain its own debts, it has to choose between defaulting and printing more money, and they're always going to choose printing more money.

That devalues the currency, raises inflation, and since the 1990s, the central bank has already stepped in three times to finance an industry collapse—once in the dot-com bubble, once during the mortgage crisis, and again during the COVID shutdown. Historically, it's said that when a government is troubled funding itself during bad economic conditions or rising inflation, the rich move their assets to places, investments, and currencies that they feel safest in, giving way for other nations to eventually take the spot as the reserve currency.

Surprisingly, he explains that these events have repeated themselves consistently since the Roman Empire, and even though no two changes have been the exact same, there is a similar blueprint that we could look at today to determine what might happen in the future.

Now, in this case, the value of our dollar is indeed weakening. See, the dollar isn't just valued at a dollar; even though technically, a dollar is always equal to a dollar, really though it's tracked against three different metrics: the first is the exchange rate to other currencies, the second is the demand for 10-year treasury notes, and the third is what's known as foreign currency reserves, which is a really fancy way of saying how many US dollars are held by other countries.

Now, when it comes to the exchange rate to other currencies, it is true that the value of the US dollar has been gradually weakening since 2020. However, the US dollar is more recently higher than it's been throughout the last 20 years, despite the recent drop. Second, as far as the demand for 10-year treasury notes goes, this is essentially just a 10-year loan to the government, and for people who want a safe place to store their money, they'll essentially buy these and then get a guaranteed return on their capital.

In terms of our own currency, though, the value of the US dollar has been actually going up alongside with interest rates, meaning the higher the rates go, the more demand there is to buy those higher yielding bonds, which is good for the US dollar. And third, in terms of foreign currency reserves, this is where things get slightly less optimistic because, as you can see, the US dollar has been steadily declining as other currencies are beginning to take its place, and as CNBC reports, we're now at the lowest level that we've seen in 25 years.

This, of course, brings us to what's happening right now. On March 29th, it was announced that China and Brazil struck a deal to trade in their own currencies, ditching the US dollar as an intermediary. This would essentially enable them to trade directly with each other without having to buy US dollars in the process, and they currently transact around 150 billion dollars every single year that's no longer going through the U.S.

Now, keep in mind that this is not the first time that something like this has happened. China has been slowly shifting away from the US dollar since 2010. Russia and India both ditched the US dollar a year ago, and Saudi Arabia recently said that it was open to the idea of trading the Chinese Yuan. Not to mention, China, Russia, Brazil, India, and South Africa have already joined forces to transact in their own reserve currency that's separate from our dollars, referred to as BRICS.

So this isn't exactly something that came out of nowhere, but it could have a significant effect. In fact, as Great Capital points out on Twitter, China's trading volume skyrocketed upon the Russia-Ukraine war with sanctions, allowing them to gain an even stronger foothold on international trade. But is this actually something to worry about? And could the U.S. be heading towards a time where it's no longer the reserve currency?

Well, as of now, even though the future of the US dollar looks uncertain, there's currently nothing close to being able to take its place. Now, of course, it's certainly not the most confidence-inspiring to hear that China's economy is supposed to outpace the U.S. by 2030, or that BRICS economies are some of the fastest growing nations in the world, but the US dollar still makes up the vast majority of global transactions, and its dominance is not going anywhere anytime soon.

Frankly, a lot would need to happen first if there were to be a new reserve currency, and notwithstanding a massive Black Swan event that undermines the United States' role in worldwide trade, it might not happen or it might not be able to take place in a way that we could reasonably predict. Of course, this doesn't mean that there's not any concern at all, with even Elon Musk tweeting that this is a serious issue.

U.S. policy has been too heavy-handed, making countries want to ditch the dollar, combined with excess government spending, which forces other countries to absorb a significant part of our inflation. With that, it's no wonder why Barron's recently reported that the U.S. stimulus following the financial crisis started a currency war, cheapening the Greenback to boost America's economy.

Because there is the very real danger that other countries will want to compete. Even Saudi Arabia entered a new trade agreement, and ultimately, that's going to put a lot more pressure on the United States. But at the end of the day, the reality is the US dollar is being traded less, there is more competition between countries, and that's not going away anytime soon.

However, I personally believe that the US dollar as a reserve currency is not going anywhere. It's still in the number one spot by far, and most of the headlines that you see simply want clicks. I think to spend your time worrying about this is going to be incredibly unproductive, especially when there are way more imminent topics that should be discussed, a lot more like in regards to raising the debt ceiling, which is likely going to take a significant toll on the markets if both sides can't come to an agreement.

That's why I tend to believe that it's always a good idea to understand what's going on and why this is happening, but instead, focus your time on what you can control, like whether or not you're diversified, whether or not you save enough money, whether or not you have a consistent income, and whether or not you invest on a regular basis.

That's why I think focusing on those will make you so much more money than thinking about the possibility that maybe one day the US is not going to be the world's reserve currency at some point possibly in our lifetime. Plus, by focusing on what you can control, you're going to be in a much better position to subscribe if you haven't done that already, because why not?

I hope you enjoyed the video, and if you subscribe, that does help out tremendously. So with that said, you guys, thank you so much for watching. As always, feel free to add me on Instagram, and don't forget you can get that free stock with your sponsor, public.com, down below in the description when the code "Graham" when you make a deposit. Enjoy! Thank you so much, and until next time.