Imagine if Elon Musk stood up one day and told the world, “My #1 goal is for Tesla stock to lose 2% of its value every year.”
First of all, people would probably rightfully conclude that Elon had finally lost his mind.
And second, everyone would dump the stock. Who would possibly want to own an asset where the management is TRYING to lose 2% every year?
Yet that’s precisely the stated goal of the people who manage our currencies. They tell us flat out that they WANT 2% inflation, i.e. they WANT the dollar, euro, etc. to lose 2% every year.
Obviously these ‘experts’ have completely failed to achieve their goal lately… but the larger point is that incentives are clearly not aligned.
In the case of businesses, managers generally have the same incentives as their shareholders. Elon’s wealth only increases if his stockholders’ wealth increases.
But the people who manage currencies (politicians and central bankers) do not share the same incentives as the people who own the currency (i.e. responsible individuals who save money).
Savers want the currency to be stable. Politicians want it to lose value. It’s a totally perverse incentive structure… but it may get a lot worse– at least for the United States.
And it has a lot to do with the war in Ukraine.
History is full of examples of former superpowers who lose their dominance. Egypt. Greece. Rome. France. The Ottoman Empire. Mongolia.
And quite often there’s a ‘changing of the guard’, a reshuffling of the world order, when a rising power and declining power are involved in a war.
Carthage was once the dominant power in the western Mediterranean. But after losing the Punic Wars, Rome asserted its dominance over the region.
Spain was once the dominant power in Europe. But after the Thirty Years War, it became clear that France was the new superpower on the continent.
The two powers don’t even need to be fighting each other; after World War II, for example, it was clear that the US had surpassed Britain as the dominant superpower, even though both nations were on the same side during the war.
Today we see the same ingredients that may result in another reshuffling of the world order: a declining power (US), rising power (China), and a war.
Today is the first and hopefully only anniversary of the war in Ukraine. And I spend some time in today’s podcast episode exploring the larger implications, specifically focusing on the US dollar.
I think it’s very probable that, whenever this war finally ends, China will emerge as a clear superpower.
That doesn’t mean America will vanish. But it would mark the start of a new era in which the US can no longer do whatever it wants… and quite possibly share the dollar’s ‘reserve status’ with China.
For decades now, the US has enjoyed the exorbitant privilege of being the primary issuer of the world’s reserve currency.
This gives the US the luxury of having endless demand from foreign investors who have to own US dollar assets, and specifically US government debt.
Because of this endless demand from foreigners, the US government has been able to get away with the fiscal equivalent of double-homicide: multi-trillion dollar deficits, a $31.5 trillion national debt, etc.
Yet despite such irresponsible spending, foreigners STILL buy US government bonds… simply because the US dollar is the world’s reserve currency.
Anyone who wants to participate in global trade, buy oil from Saudi Arabia, etc. HAS to own US dollars… and hence hold their noses every time Nancy Pelosi said “it costs nothing”.
But imagine a world where the US dollar is no longer king. Sure, the dollar would still be relevant. But not king. Maybe a duke or viscount.
Without its status as the undisputed king of currencies, suddenly the US government wouldn’t be able to get away with outrageous deficits anymore. The Federal Reserve wouldn’t be able to get away with printing trillions of dollars, or slashing interest rates to zero, while expecting absolutely no consequences.
Suddenly all the debt and all the money printing would trigger inflation… and even a loss of sovereignty.
We may be closer to this reality than anyone realizes.
Again, history is full of examples of global power reshuffling because of a war. History is also clear that reserve currencies tend to change when global power is reshuffled.
So we have all the key ingredients right now for some pretty big implications for the US dollar… and that ridiculous “2%” inflation goal.
I talk about all of this in today’s episode, starting with the story of one of the biggest parties in world history that took place in 864 BC. The dominant superpower at the time was celebrating itself. And they thought their supremacy would last forever.
It didn’t. It never does.
I also walk you through the rise and fall of empires and reserve currencies, and I explain how even a minor decline in reserve status will be really bad for US inflation and sovereignty.
But this is not a gloomy podcast. Remember the words of Marcus Aurelius: focus on the things that you can control. And we can control a LOT.
We talk about simple ways to think about the future, why diversification is so important, and why real assets make so much sense.
It’s not a question of “which is the best currency”. ALL currencies are bad. Remember the perverse incentive structure I talked about at the beginning of this letter?
It’s really a question of which are the right assets to hold that can stand the test of time… including a reshuffling of power.