Taiwan Needs To Be Ahead of the Curve on Loosening Dollar Dominance

As we enter 2023, the world’s financial and monetary economies are accelerating their de-dollarization campaigns and the dumping of American debt.

In late January, the world’s major central banks rushed to buy gold and adjust the composition of their official reserves, increasing the proportion of gold and reducing dollar-denominated assets – almost as if getting their ducks in a row and actively preparing for the arrival of a quasi-gold standard. The mighty dollar weakened, and within a week, the international gold price jumped by 13%.

Since acquiring its status as the world’s reserve currency in 1947, the dollar’s supremacy has expanded and strengthened without end. The U.S. has gratuitously manipulated interest rates and exchange rates to fleece the world, using military might to invade and destroy anything that cannot be taken by force.

In 2018, Donald Trump’s wars on trade and technology and his economic decoupling met with Joe Biden’s continued currency war and the unchecked printing and spending of money on financial bailouts to save markets. For the U.S., this resulted in high debt, high inflation, high interest rates and low growth. When American debt sells poorly, the desire to maintain the strength of the dollar inevitably trumps corporate profit-making, exposing the national debt and financial markets to the risk of national bankruptcy. All that is needed is for the Federal Reserve to raise the interest rate to 6%, and the federal debt will soar to $35 trillion by June of this year, with annual interest payments amounting to $1.8 trillion. The Treasury’s remaining $400 billion, used to defer default payments, could be exhausted by May of this year, making for a worrying credit picture.

The Treasury’s International Capital report for January showed that institutions such as central banks and sovereign wealth funds sold U.S. debt for the tenth consecutive month. Since the Fed’s interest rate hike last year, countries have reduced their holdings in U.S. debt, with central bank sales globally accounting for $73.7 billion. The top two, Japan and China, respectively sold $246.4 billion and $210.8 billion, and even Japan, a staunch supporter of U.S. debt, followed China’s lead in reducing its holdings to their lowest level in more than a decade.

Now that the large-scale buying of dollars in the second half of last year has come to an end, shorting the dollar has become a hot deal in the Wall Street currency markets.

Dollar dominance began in 1947 with the Bretton Woods Agreement, which gave the dollar reserve currency status; this was followed by the Nixon shock of 1974,* which decoupled the dollar from gold. The gold dollar was then replaced by the petrodollar, which continues to be the official reserve currency of the world, and SWIFT became the exclusive transaction settlement platform for global trade and investing, with full control over the flow of funds for commodity trading and investment.

In order to break through the comprehensive hegemony of this mechanism, China established its Cross-Border Interbank Payment System in October 2015; Russia established its System for Transfer of Financial Messages in late 2017 to carry out cross-border payments; and the British-French-German INSTEX system in Europe was officially launched in February 2019. Since the outbreak of the Russia-Ukraine conflict, China and Russia have been pushing for de-dollarization through Xi Jinping’s Belt and Road Initiative, which has thus far been promoted by 54 countries and is a de facto weakening of the sanctioning power of dollar supremacy.

In a report on the worldwide surge in gold purchases by central banks on Feb. 4, the Financial Times noted that the last time we saw gold purchases at these levels was at a turning point in the history of the world’s monetary system. In 1967, for example, the demise of the Bretton Woods system was brought about as a result of European central banks buying large quantities of gold from the U.S., leading to an accelerated decoupling of the dollar from gold.

If central banks around the world start issuing digital currencies, they will need to buy more gold to serve as digital currency reserves. This will create a new world order in the global markets, parallel to that of dollar supremacy. Under this new system, gold will become indispensable — a system in which only gold is money, and everything else is merely credit.

The New Taiwan dollar, which has been pegged to the U.S. dollar for the past 75 years, is about to be challenged in unprecedented ways. Taiwan’s central bank and the entire ruling Pan-Green Coalition need to face that challenge as early on as possible and meet it in full battle array.

*Editor’s Note: The Nixon shock actually occurred in 1971.