The Great Monetary Reset

The Monetary Reset

A lot of people have talked about a reset coming in the global monetary order. Rather in our book the “The New Global Order” (2016) we had predicted about the coming of the next monetary reset as the current system of fiat currency and debt becomes unsustainable globally. In “The New Global Order” while explaining the global banking system and the coming of global corporate state we had talked about the the role of US Dollar as a reserve currency and its debasement process as follows:

“The Federal Reserve being privately owned is a for-profit corporation. It is in its interests to have individuals and nations constantly borrow money, for it to constantly earn interest, and interest on the interest. This not only results in an endless vicious cycle of debt that is beyond repatriation but also inflation. Over the last several decades, though the US dollar remains the global reserve currency, it has lost much of its purchasing power due to inflation. In a testimony before the House Committee on Banking and Currency, regarding the role of the Federal Reserve in creating conditions that led to the depression of the 1930’s, Marriner Eccles, the Governor of the Federal Reserve on being asked how the Fed was able to get the money to purchase $2 billion of US Treasury Bonds in 1933 said, “We created it, out of the right to issue credit money. If there were no debts in our money system, there wouldn’t be any money”. In the 2008 Crisis, the banks were bailed out by the US government while it was the common man who lost his savings. This is another indication of the power of the corporate elite over the US government”

Rise Of the Bretton Woods

The Bretton Woods system as devised in 1944 in response to the chaotic monetary relations that reigned in the inter-war years. Many countries, notably Britain, had gone off the gold standard at the start of World War I in order to gain leeway for the monetary financing of war expenditures. High inflation in the post-World War I period, more prominently in Germany, led countries to countries switching back to the gold standard in the mid-1920s. The gold standard was once again abandoned in the early 1930s to deal with its deflationary impact. This was the period of severe financial and momentary instability compared to the pre world war 1 era where Pax Britannica with British Pound as global reserve currency dominated the global financial markets. However with world war II, as the British Empire crumbled so did the financial order with Pax Britannica giving way to Pax Americana.

The transatlantic shift of global reserve currency from British Pound to American Dollar has been documented in the “The Great Reset” (2022) authored by Navroop Singh. It had extensively explained the how this ‘Pax Americana’ world order was formed. The section of the book on Pax Americana and Bretton Woods goes as follows:

“The Pax Americana world order as enunciated in the War and Peace studies was implemented through financial institutions like the World Bank and bilateral agreements for aids & grants. The World Bank and the IMF arose from the War & Peace study recommendation P-B23 of July 1941. tis memorandum called for stabilising currencies and promoting capital investments in the under developed countries of Asia, Africa and the Middle East. On basis of these recommendations, President Roosevelt of America in 1944 organised an international conference in Bretton Woods, New Hampshire USA which led to the birth IMF & World Bank. tis led to the establishment of the Bretton Woods monetary order with US Dollar as global reserve currency backed by Gold. These two institutions have steadfastly over the years only advocated and furthered American interests be it economic, financial or political. USA still remains one of the dominant partners of these institutions having a quarter of voting rights and the approval of the state department is necessary for its orders.”

Removal of the Gold Peg from Dollar

The second stage in the global monetary reset was the de-linking of the US dollar and its convertibility with gold. President Nixon in 1971 relinquished the US responsibility for global monetary affairs giving seamless power to US Federal Reserve to focus on domestic economy and print money at will. The Nixon decision to de-peg Dollar from Gold came in the backdrop of expansionary US fiscal policy under President Kennedy and Johnson financing the Vietnam war and Johnson’s war on poverty in USA. The Federal Reserve kept the interest rates on what was needed from overheating the American economy and rising inflation. This period of instability post removing the US Dollar from Gold peg gave rise to the Euro-Dollar system where much of the dollar transactions and reserves were kept in European central banks in a jurisdiction over which US Federal Reserve did not have any control making the system of Eurodollar free of sanctions or freezing threats by America or the Federal Reserve.

What followed post Nixon’s de-pegging of Dollar from gold would be even more consequential and would give rise to system over which America would gain immense power and dollar would then become de-facto currency for trade in commodities specially crude oil. The birth of the Petro-Dollar took place after the oil embargo placed by the Arab countries on America and the West’s for its backing of Israel. Later Nixon Kissinger deal with Saudi Arabia birthed ‘Petro-Dollar’ where that crude oil produced by Saudi Arabia and Gulf Arab countries would be sold globally in US Dollar cutting OPEC’s power down firming the American alliance with GCC countries countering the OPEC cartel. The Oil embargo and birth of the Petro-Dollar meant that GCC countries became captive buyers for US treasuries. The runaway inflation in the US in the 70s weakened the US dollar further. This made the Federal Reserve to switch to a monetary growth target, raising its lending rate sharply with the Fed funds rate reaching an unprecedented 20% in 1980. The actions of US Federal Reserve worked with inflation peaking in the early 1980s and the dollar rallied.

The tight fed policy rates with Regan’s tax cuts kept the interest rate high into the mid 1980s. The problem now wasn’t a weak US Dollar but a stronger US dollar hurting the global economy. This caused chaos in many countries and ultimately lead to the Plaza Accord of September 1985 where the United States, France, West Germany, the United Kingdom and Japan agreed to jointly weaken and devalue the US dollar to respective currencies. The declaration achieved its goals and the US dollar began to retrench. A stronger US Dollar in 1980s however had other effects in emerging market economies like Mexico, Brazil, Chile. The Latin American countries borrowed heavily in US dollars in 1970s leading to LatAm crisis when interest rates began to go up in United States.

The Volcker Fed as it is known in later 1980s and early 1990s purged the inflation with interest rates declining along with combination of strong US growth in the 90s. This lead to heavy borrowing by countries such as South Korea and Thailand. Under Allen Greenspan, as Fed Chairman, the interest rates again began to rise in 1994 with US Dollar once again appreciating leading to the Asian Tiger crisis in the mid 1990s when South East Asian economies crashed as their forex reserves dwindled and these countries came close to defaulting. A similar patten was once again seen in the mid 2004 where the US Fed started to raise interest rates in order to slow the housing boom after a prolong period of artificially suppressing the interest rate leading to systematic buildup of risks in American banking system which lead to full blown Global Financial Crisis in 2007-08.

But an even more important legacy of the global financial crisis was the birth of quantitative easing (QE) as a policy tool. It was applied because the Fed, in contrast to the European Central Bank and other central banks in Europe, was not prepared to move interest rates into negative territory. It meant that the Fed’s balance sheet expanded massively in trillion of dollar, with the central bank advancing to be a major holder of US Treasuries. For more than a decade, the main policy concern was deflation, which central banks in the West fought with low policy rates and QE. Financial market volatility was repressed during this period and asset prices experienced a spectacular rise.

To quote from my first article during the US Regional Banks crisis on 31st March 2023:

“The low inflation world stood on three pillars: first, cheap immigrant labor keeping service sector wages stagnant in the U.S second, cheap goods from China raising living standards amid stagnant wages third, cheap Russian gas powering German industry and the EU more broadly. U.S. consumers were soaking up all the cheap stuff the world had to offer: the asset rich, benefiting from decades of QE, bought high-end stuff from Europe produced using cheap Russian gas, and lower-income households bought all the cheap stuff coming from China.

The 2008 Sub Prime crisis & GFC lead to rate cuts to near zero till 2017 when Fed decided to initiate QT & balance sheet tightening. All this has worked for decades, until nativism, protectionism, and geopolitics destabilized the low inflation world. Then President Trump initiates Trade War against China adding inflationary impact to American consumers and disrupting the supply chains. While Fed was slowly drawing down the balance sheet and excessive liquidity amid inflationary impact of Trade War, Covid-19 strikes and the Spigots were turned back on once again. Wherein after Fed injects 3 trillion $ in Global Economy setting the stage for what is to come.

The impact of massive QE by Fed & European Counterparts during COVID-19 set the stage for massive inflationary conditions setting in. The Fed wakes up late to it in mid 2022 and starts raising rates fast & quick in few months at the fastest pace ever leading to liquidity being sucked of the economy. Russian meanwhile invades Ukraine in February 2022, sanctions are imposed on Russian Oil & Minerals disrupting the commodities supplies across the world. The Commodity bull run peaks out with Crude touching 130 $ per barrel. Gasoline & Oil price shoot up across US, Europe & Asia. America records 9% inflation way above 2% target.

Instead of being transitionary inflation this has become structural due to supply side shocks from Trade Wars, Commodities War, Zero Covid lockdowns in China and America’s weaponisation of Dollar in a currency war with Russia. This is further mired by excessive liquidity swindling in global economy post Covid-19. Fed decides to hike rates in fastest & steepest manner in recent history. As interest rates rise the bond prices fall and the yields go up. The yield curve gets inverted as 2 Year Bond gives better return than 10 year bond. This begins to impact Hedge Funds & Banks who hedge securities. As pressure increases it becomes difficult to service interests & many are on cusp of margin calls.”

Geopolitics has played a pivotal role for monetary systems in the past. The World War II led to the emergence of the USD-based reserve currency system. The creation of the Euro, the most recent monetary experiment of scale, was also strongly influenced by geopolitical change, with the fall of the Soviet Union and the reunification of Germany playing a major role in it. The era of cooperative multilateralism and globalization that was initiated by the fall of the Berlin Wall and intensified significantly with China’s reforms under Deng Xiaoping and China’s ascent as the factory of the world to culminate when China joined the World Trade Organization (WTO) in 2001 has given way to intense and sometimes aggressive rivalry between the two major powers. The geopolitical rivalry between USA & China will end up resulting in Bi-polarity and Cold War 2.0 however the subtle difference this time would be ‘multi-polarity within bi-polarity’ where countries which proximately aligned with respect poles yet trading and interacting with each other much like India & Russia.

Trump’s Trade War: The Pivot Point

Trump administration introduced tariffs on a broad range of Chinese products in 2017 unleashing a trade war from where there would be no going back and souring US-China relations. The US relationship with China soured over issues such as the protection of intellectual property and to limit Chinese access to advanced technological capabilities. This was the reason why Trump Administration launched the Trade War against China and rest of the world in 2017 on the basis of America first, in a bid to reduce trade deficit with China, Mexico, Canada, South Korea and even Europe. However we must not forget that it is the trade deficit that underwrite the American dollar hegemony where China as the factory of the world continues to provide cheap products to American consumers. This shift from the mid 90s after China’s admission to WTO had other consequences too as American manufacturing shifted base to China and America slowly over the decade of 90s and first decade of 21st century de-industrialized.

The Trumpian revolt in 2016 was in a sense manifestation of the disenchantment of American middle class against the globalist elite which had de-industrialized America’s rust belt to Asian countries specifically China. The issue of illegal immigration, outsourcing of technology jobs specially to India and the H1B Visa outrage by Steve Bannon & Co against Elon Musk, Vivek Ramaswamy are symptomatic of the popular revolt against status quoist policies of the Washington elite who is in bed with the Wall Street and silicon valley technocratic czars. It is another thing that President Trump’s Trade war was carried forward by Biden Administration who unleashed tech war on China by aiming to curb its access to high value semiconductor chip making technology by NVIDIA, ASML & TSMC.

The Chips Act and the Inflation Reduction Act passed by US Congress in the backdrop of Russia’s war in Ukraine and the impending energy sanctions had the intended consequences of de-industrialization of Europe specifically Germany and its Auto sector. The coming of Trump 2.0 administration with a stronger than expected US economy further mires the job of the US Federal Reserve to stop its pivot to cut interest rates. As a result due to stronger US economy the dollar is rallying and the currencies across the world are facing heat with equity markets taking a beating specifically in emerging markets. The Fed Futures now prices hardly any cuts in the second half of the year 2025 with Trump tax cuts set to rile up inflation once again. This is how patterns keep on repeating with a stronger US Dollar impacting the emerging markets seeding economic chaos globally. To mire it further are the geopolitical risks from Ukraine to Syria to Iran and Taiwan and freezing of Russian assets in Eurodollar by European Central Banks eroding the trust in Dollar as reserve currency further with Russia experiencing it the hard way.

That said, the decline in the US dollar’s share has proceeded in a rather steady manner throughout the past two decades. In other words, the world has gradually been moving toward a more multipolar currency system. The question is whether this process will continue in a fairly smooth manner, or whether we might see abrupt moves in one or the other direction, indicating that a structural break or pivot is underway. Other major emerging markets changed their reserve management practices as well, each for a variety of reasons. Russia shifted from treasury securities into gold and divested due to the threat of sanctions, and it moved its reserves to the Eurodollar market through foreign exchange swaps. The latest G-7 sanctions have, however, led to a blockage of these funds as well.

Saudi Arabia, the largest member of OPEC and the largest holder of petrodollar reserves, has also diversified into other currencies for trade apart from accumulating US treasuries. It has increasingly focused on real assets instead, as did Brazil and India. Conversely, the Swiss National Bank (SNB) partly diversified its portfolio into US dollars and away from euros. Recognizing the growing risk of sanctions since it annexed Crimea in 2014, Russia sold all its US Treasury securities and moved its reserves from US dollars into the Eurodollar market where it deployed them via foreign exchange swaps. In 2022, the G-7 central banks in coordination with the US Treasury froze the deposits of the Central Bank of Russia at other central banks as well, expanding the asset freeze and further reducing Russia’s access to its funds. The safety and accessibility of reserves has thus become a significant topic that may have ramifications for reserve policy in the future.

De-Dollarisation: The Gold Play !

The follow-up question is then whether there might be a currency other than the US dollar to take on a similarly dominant role in the global monetary system. Here the answer is also a clear no, at least for the foreseeable future. There are two competing regions that are similar in economic size to the United States, and which by their scale might compete with US Dollar as a reserve currency i.e. the Eurozone and China. Eurozone is still quite far from being a fully fledged fiscal union and therefore lacks a region-wide safe asset like US Treasuries. This implies that there is no highly liquid and uniform asset that the rest of the world could hold as reserves.

China with its few large banks can be regraded as competitor in foisting its Beijing Consensus with instrumentalities like AIIB, Yuan in SDR and its own payment messaging system in CIPS. However, the Chinese currency renminbi lacks international capital mobility to rival US Dollar globally. For the foreseeable future, it seems most unlikely that China will fully liberalize and open its financial markets for cross-border transactions as such a step would likely be too destabilizing. This is the key reason why the share of renminbi in global Forex reserves is still so small. Other features, such as an internationally recognized legal system, also argue against the renminbi as a serious contender as a lead currency. Because of limited capital mobility, the renminbi is also not suitable as a currency to which other countries might peg their own currencies.

China has also been at the heart of efforts to develop an alternative international payments system. In the current hierarchical system Fedwire (for net settlement at the Fed), CHIPS (for netting between its current commercial bank members) and SWIFT (for messaging) are the key institutions for international payments. This system has enormous scale, of course, and thereby contributes to lowering international transaction costs. At the same time, it reinforces the US dollar as the dominant currency as every bank that has a reserve account effectively banks with the Fed and, if one makes a payment to another, money never leaves the Fed’s balance sheet.

America has the all the essential requirement for a global reserve currency, backed by a trans Atlantic alliance in NATO and financial messaging system like SWIFT. While China has CIPS yet it does have a reserve currency which is having international mobility like US Dollar or a military alliance like NATO to enforce its Beijing Consensus. Many people have speculated that a BRICS currency would be the alternative to US Dollar. However in linear terms using respective currency in bi-lateral trade cannot dislodge the US Dollar unless the world’s big economic and oil producers collectively decide to dethrone it. That can happen only when trust in fiat currency like US Dollar erodes upending the global financial system.

With piling of US debt, sanctioning of Euro Dollar reserves of Russia after Ukraine war has meant that countries across the world are slowly moving away US securities and repatriating their gold. India’s Reserve Bank of India announced recently that it has imported 102 tonnes of its gold reserves from Bank of England, Germany already has repatriated whole of its gold with Federal Reserve in New York some time back. Emerging market economies like Indian & Chinese central banks are massively buying gold. China’s PBOC started buying gold in large quantity from May 2024 more than disclosed amount of about 5,000 tonnes. India followed suit in July 2024 by relaxing import duties on Gold. India record import of gold reached 14.8 billion $ in November 2024.

Rather Nassim Taleb a statistician said in a tweet on X that “People are not seeing the real ‘De-Dollarization’ in progress. He wrote it is not about trade settlements. Transactions are labeled in USD, as am anchor currency but central banks (particularly BRICS) have been storing, that is putting their reserves in Gold”. Further Richard Turin replied to Taleb tweet that dollar’s high percentage in trade settlements is increasingly meaningless as a) gold holdings show reserve storage & b) Migration of trade settlement currencies isn’t captured on SWIFT statistics. The US will tout USD high percentage use in trade all the way to bottom. With federal reserve expected to cut rates and ever rising geo political tensions across multiple theatres in the world, the binge on gold by institutions in emerging markets is likely to continue. Rather emerging markets central banks despite heavy buying in recent times are heavily underweight on gold. Lets not forget that gold has been a safe haven asset in times of financial and geo political crisis, history has been testament to it.

What lies ahead

Three trends emerging as of now first, the trend increase in bilateral trade among many countries in the use of their respective currencies rather than the US dollar; second, the deepening of local capital markets in emerging markets; and, third, efforts to develop mutual insurance schemes against shocks resulting from shifts in US monetary policy.

Thus the dominance of US Dollar $ is not going away anytime soon even though non dollar trade of commodities is going up significantly like those bi-lateral contracts between Saudis & China, Iran & China & Russia & China, trading petroleum & gas in Yuan apart from coal. This is the difference between Payment Currency & Reserve Currency. Even the much touted Chinese Yuan is not free float internationally & does not a have a reliable asset class like US treasuries. Moreso countries like India would not want to trade in Chinese Yuan/Renminbi as reserve currency.

However the slide has begun. The Global Fracture between West & Russia and US & China will increasingly lead to countries adopting measures to insulate themselves from fluctuations in US $ and events like Federal Reserve Rates/Interests impacting Emerging Market economies. Thus what began with Trade War, accentuated by QE in Covid and added on steroids by Currency War will only lead to further decline of dollar and increase in non dollar trade across the world as the world heads towards a Global Disorder that will ultimately culminate into a Global Conflict.

In his speech of 2009, Governor Zhou Xiaochuan the Director of PBOB, as part of the board member of BIS (Bank of International Settlement), Basel, Switzerland also discussed the potential role of SDRs (Special Drawing Rights) in a redesigned monetary system as International Reserve Currency. Indeed, sometimes SDRs are thought of as the base of a new global money. However, the volume of SDRs is determined by the amount of capital paid in by individual countries to the IMF. The IMF does not have the power to create additional SDRs “out of thin air” as would need to be the case for an effective global central bank.

However the magic wand in the whole thing is CBDC’s i.e. Central Bank Digital Currencies. The IMF in its recent paper on CBDC talked about two tier architecture. Where the Central Banks would issue Digital Currency to Commercial Banks which would in turn distribute them to consumers. The wallets of consumers would be directly linked over block chain network with Central Banks where commercial banks would act as intermediaries. The model of CBDC will be sold as solution to modern the banking & financial crisis with special impetus on financial inclusion in the developing world. China already has eCNY & India’s RBI has rolled out its own Digital Rupee. UK’s BOE is also come out with idea & paper of Digital Pound.

With the CBDCs come the risk that every transaction & consumer behavior can be now monitored centrally by banks. Think of it this way that this time it is Global Population who would be demonetized with their cash & deposits making the lure of CBDCs more attractive. The Control & Surveillance on Citizens when linked along with a credit score & a unique Health ID will be truly Orwellian in nature. With one click you can be barred from accessing your money for dis-obedient behavior or it could be programmed that certain purchases are not allowed given your social & health profile. Thus the future post the next monetary reset is likely to be a mixture of digital global reserve currency with an Orwellian control over the global populace.

Welcome to Hell ladies & gentlemen where you would own nothing and everything would belong to the state for the Communist principle of Greater Good. Your mere human existence would relegated to barcode & chips in a consumeristic society that is totally cut off from its value system and heritage. This is the Great Monetary Reset that awaits humanity after next financial crisis, the piling US debt, disruptions and bifurcation of global supply chains with economic center of growth moving back to Asia. We are in choppy waters now with Trade War, Tech War and Currency wars that have been unleashed in last few year and there is no way to turn back except of riding it through ! Bon Voyage