How central banks, gold, and cryptos will shape the New World Order

“Money makes the world go around”, literally. This is because an interconnected world is a machine which functions only with the lubricant of money. “He” who controls the availability and pricing of that lubricant controls the world. Since the Bretton Woods Agreement in 1944, that “he” has been the United States because global trade and capital flow are predominantly done with US dollars (Nixon replaced the Bretton woods agreement with the Petrodollar system which further strengthened U.S. dollar dominance in global money-flow). For much (especially after the collapse of the Soviet Union) of this entire period — known to some as Pax Americana — the U.S. has policed a Unipolar world with its unmatched navy, ensuring safe passage of such trade and capital flow; and the US dollar accounted for 87% of global trade, even though U.S. trade only accounted for 35% of global GDP.

This exorbitant privilege of the U.S. Dollar “hegemony” has long been a complaint of other nations. But it wasn’t until the Ukraine war of 2022 in which the United States weaponized the US dollar that some nations’ effort to de-dollarize accelerated. By seizing US assets owned by Russian oligarchs without due legal process, the U.S. sent a chilling message to the world that any individual or country not in U.S.’s good grace can suffer the same fate. Foreign investors — particularly in countries with current account surpluses who need to park their money somewhere — are responding by divesting of their investment in US dollar assets such as Treasury bonds (which contributed in part to the collapse of the Treasury market in 2022). Today, about 59% of global central bank currency reserves are held in dollars. But in 2000, that number was 70%. The steady decline meaningfully started after all the reckless money printing since the 2008 Global Financial Crisis, but accelerated since Biden’s “free money to all” in post-Covid 2021:

The “peace dividend” of Pax Americana is visibly ending, transitioning to a new multipolar order as the world fractures into two distinct trading blocks: The West and the Global South. Never heard of the Global South? It is the area in red (with green and yellow soon to turn red):

The Saudis’ joining the de-dollarization movement drove the final nail in the coffin of the Petrodollar System. As de-dollarization gains momentum, both trade and capital flows are now diverted to the Global South in non-US dollar currencies. Less dollars will be used in commodity trade. Therefore less dollars need to be held by other Central Banks (in Treasuries, since that is still the deepest and most liquid bond market in the world). Less buying of Treasuries means less foreign subsidy of U.S. deficit spending (read: standard of living). The Federal Reserve winds up being the sole buyer of ever larger Treasury issuance. More supply and less demand means higher interest rates. The Fed will go to Japanese style Yield Curve Control to artificially keep long dated Treasury yields low. This is Financial Repression (robbing savers to fund the government). This further erodes purchasing power of the dollar. Sadly, YCC will get us to a worse place than Japan because Japan has been running net massive trade surplus all along and as a result, owns a ton of foreign assets (i.e. it has a huge piggy bank). If Japan one day raises rates, investments abroad will simply repatriate. The U.S. has no such piggy bank. YCC will get the U.S. to a place like Argentina.

For now, the footprint and legacy of US dollar around the world is too big for it to be supplanted quickly. But its footprint and value will diminish over time with an earnest and persistent effort is afoot to change the US dollar hegemony in place since WW-2. Given that ALL currencies are fiat and severely debased from unbridled “printing”, global reserve currency reset seems inevitable and imminent as hyperinflation looms. The only way to wipe out existing debt without outright sovereign default is via some kind of currency reset.

Agents of the reset will be central banks, and the most anticipated tool is Central Bank Digital Currency — CBDC. Sold to the populace as a tool of convenience, CBDC’s real purpose is to facilitate a government’s direct tracking and subsequent control of every penny earned, saved, and spent by every individual, thereby totally obviating the commercial banking system. Paired with a social scoring system, programmable CBDCs can punish (even just for thought crime on social media) and reward people — thus confiscate and redistribute wealth and engineer societies — as governments see fit. Such a system is already in practice in China today. It controls, down to the individual level, the right to purchase a train/plane ticket to travel beyond a certain radius, buy certain assets (like a home), or transact with certain institutions. Instead of letting cryptocurrencies disintermediate banks (i.e. facilitate transactions between individual entities without going through banks), banks will coopt cryptocurrencies to further enhance its absolute control over all financial transactions between any two entities.

Biden’s Executive Order 14067 was meant to fast-track the U.S.’s Central Bank Digital Currency. When fully implemented, it can be just as controlling as China’s. So how does a democratic government convince its populace with power of choice to adopt a new system of absolute centralized control? By fomenting fear in their current system. The (“manufactured”?) bank failures of March 2023 (not quite a “crisis”) sowed the seeds of that fear AND laid the foundation for CBDC. The first three banks that failed back-to-back — SVB, Silvergate & Signature all had one thing in common: They were the major funding sources for crypto startups. The mission of the crypto movement is to create a permission-less ecosystem for people to transact among themselves, free of bondage to the financial system with the central bank as its nucleus. The destruction of these banks conveniently disrupted the infrastructure needed by the crypto movement to exist. In other words, access to funding is now weaponized against the crypto movement.

The shocking speed and well-considered method of bailout executed in unison by the authorities — The Fed/Treasury/FDIC — is also telling. The centerpiece of bailout is the injection of more liquidity into the system while keeping interest rates elevated (i.e. no pivot to rate cuts). The intent of this well-considered liquidity injection, however, does not seem to be one of restoring old status quo (i.e. QE Infinity at zero-bound interest rate). Instead, it seems to be a controlled (i.e. orderly) demolition. Availing more quantity of money (the Fed has already pivoted from QT to stealth QE) assures the “orderly” aspect. And elevated cost of money (pausing hikes but not pivoting to cuts) assures the ultimate “demolition”. In other words, instead of allowing the crypto movement to proceed and create a permission-less parallel universe to the current banking system, the banking crisis may instead be used to kill off the crypto movement, further consolidate the current banking system and make the handful of “too big to fail” banks even more powerful.

Then came FedNow, — another foundational step toward the final act of installing CBDC, most probably triggered by a crisis. Crises always appear happenstance but are often planned (ever heard of “never let a crisis go to waste”?) to create the conditions toward an intended end. CBDC will not be named as such, of course. It will be given some non-threatening name to mask its effect (just like the “Inflation Reduction Act” masks the fact it actually causes more inflation).

Autocracies big and small (in the Global South) readily recognize CBDC as an ideal instrument of enslavement and can’t wait to adopt it. But thus far, forced CBDC adoption has backfied.

If indeed 2023 is the preparatory year before “reset”, what will the reset look like? Well, it won't be the US dollar being supplanted by another currency (read: Chinese Yuan) as the world’s major reserve currency. China is far from prime time in that regard because it neither has a convertible currency (because in order to maintain trade advantage, the Chinese authorities need to control the price of its currency and not allow it to be freely traded and set by the market), nor open capital account (whereby capital can flow in and out of the country without government control), nor mature/deep/bond market (making it attractive for foreign capital to park CNY — aka RMB — in Chinese bonds), nor rule of law. This is why there is net international investment outflow from Chinese sovereign bonds and net reduction of CNY holdings in global banking reserves:

Even Chinese citizens don’t want the CNY, and are desperately trying (unsuccessfully because of capital control imposed by the government) to get money out of China into other currencies. Yes, China is a trading giant with its GDP soon to surpass the U.S.’s by sheer size of its population. And it can trade with Russia, Iran and Saudi in non U.S. currencies all it wants. But at the end of the day, trade surpluses still have to be converted to U.S. dollar for trading with and investing in the rest of the world.

Further, to have the Yuan as the world's reserve currency, China has to run perpetual trade deficit which is contrary to its economic model. But all this doesn’t stop the Global South countries from bypassing trading with U.S. dollars. The IMF is likely to play a pivotal role toward this goal via (a CBDC version of) the SDR (Special Drawing Right) — a mechanism by which to change the relative weighting — thus “worth” — of a member fiat currency in a basket of fiat currencies.

In the process, we may see gradual phase-out of payment processors like Visa and MasterCard, merchant acquirers, and credit card issuing financial institutions. Then, we may see elimination of the use of cash, which will open the door for negative interest rates (erosion of savings will encourage deposit flight from existing banks) before the final CBDC rollout.

There’s a lot of talk about the Global South’s CBDC being backed by gold (evidenced by their central banks’ accumulation of gold over the past decade). This makes sense because unlike cryptos which are truth based, a CBDC is still trust based. Without the US dollar’s existing footprint from legacy, a new challenging currency must first establish trust with tangible collateral. Those who come to the table of negotiation with most gold will wind up with the most weighting in the new global reserve currency system. “In gold we trust” is an idea not lost at the state level here in the U.S. either.

Meanwhile, WW3 (kinetic in the Ukraine but with ancillary trade, currency, cyber wars happening concurrently) rages on. It can be viewed as a struggle between dollar-based US hegemony and a challenging commodity-based currency system to be launched by the Global South (with China and Russia leading the band). EU will fragment as its members are forced to choose sides. The end of this war — as the end all previous world wars — is when the different parties come to the negotiating table. Gold will play a part in the negotiation. (Until Nixon decoupled the dollar from gold reserve in 1971, the dollar was backed by gold. Prior to that, major reserve currencies had always been backed by commodities. With the benefit of hindsight, it is obvious to all that NOT having that backing, or reserve requirement, led to undisciplined “money printing”, wealth disparity, high inflation, and lower standard of living for the mass. So it’s only sensible to return to gold backing. That said, no government is honest and truly working for the people. Governments are inherently against being disciplined — i.e. being handcuffed — from printing money at will and inflating debt away. It is entirely possible that the Global South builds confidence in their new currencies with gold backing, only to “pull a Nixon” later, once their currencies have taken hold.)

In any case, a new multipolar world order is in the making and the global banking system will undergo substantial transformation. This is only one of several visions of the future. The biggest question of all is, of course, is how malevolent the U.S. CBDC will wind up being. The great state of Texas is taking no chance and introducing a bill to preemptively launch its own gold-backed digital currency. As Jim Grant once said, “Buying gold is the ultimate ‘vote of no confidence’ in your central bank”. That statement has now been made, loud and clear, by the 2nd largest state (by GDP) of the United States. Unsurprisingly, internal conflicts like this — most often accompanied by external conflicts — mark 4th Turnings and presage tear-down and rebuild of institutions that people can trust again in the next 1st Turning.

Power, politics, and populism completes the cycle of a regime (or empire). Power corrupts. Corrupt politicians syphon from society while offering “bread and circuses” to the dumb masses. Populism (in the eventual form of violent revolutions) rises when society is finally bankrupt (always in the form of a severely debased currency). The world is clearly in the Populism phase of this cycle, expressed by various countries — big and small — leading towards the far right right now.