April 4, 2022

Vladimir Putin And The Fiat Dollar.

It's been 51 years since we've seen anything that approached what happened this week in the world's currency markets.

Without a doubt, there has been a historic shift in worldwide currencies. And it's most profound impact has been between the Russian Ruble and the US Dollar.

A little background. In 1971 then-president Richard Nixon took the US Dollar off of the “gold standard.” Up until that point, anyone could exchange $35 US dollars for a troy ounce of gold.

This fixed the price of the dollar to that of gold. Making the dollar “gold-backed” established the “price,” if you will of the dollar.

Historically gold-backed currencies have been a citizen's best protection against runaway inflation.

By floating the dollar, its worth became essentially whatever the US Government claimed it was. The dollar after 1971 has been simply a “fiat” currency. A currency based on the full faith and credit of the US Government, but little else.

Now, as we all know, the dollar is also the world's reserve currency. Meaning that most international transactions are done in dollars. Overall, this has worked out well, as long as the dollar has also remained a stable currency.

One that both sides of a transaction can rely on to have essentially the same “price” when the transaction is completed as when it was initiated. You don't want wild fluctuations in the reserve currency. The kind you get, say, when there is high inflation.

This became was has been a two-front attack on the dollar's reserve status. The dollar is no longer behaving as a stable currency. Wild inflation, caused by off-the-wall monetary policy is inflating the dollar beyond all comprehension.

And this alone would be enough to challenge the dollar's reserve status.

But heaping coals on this burning fire, have been the moves by this President to “sanction” Russian oil.

Immediately this took about a third of the worldwide petroleum transactions away from the dollar. The world's  third-largest oil exporter was told to “take a hike.”

So they did, taking their trade with China, much of Europe, and likely India with them! The dollar immediately lost all those transactions.

And that might be the end of the story.

But the reaction by President Putin was so much more than just a tit for tat. He went well beyond just a sanction for sanction moment. In fact, he has challenged not only the dollar but all of the central banks that run western economies. All of whom rely on their own form of fiat currency.

Now the American Press has all reported that Putin is requiring that anyone who buys Russian oil and gas must pay in Rubles.

This strictly speaking is not the case. What Putin said was that to purchase Russian oil you must pay in hard currency. A currency linked to gold.

And because all of the Euro-based countries, and certainly the US are all fiat-based, none of their currencies qualify.

An interesting, and potentially devastating blow to our fiat-based financial systems. You see earlier this year, as no one was watching the Bank of Russia linked the Ruble to gold. Fixing one gram of gold to 5,000 Rubles.

Thus Russia becomes the only major currency in the world, which is a hard currency. It's because the Ruble is not fiat, that Putin will accept it in trade.

Thus he has laid down the gauntlet to all the western nations, but especially the US. Go back to a gold-backed dollar, and Russia will do business with you too.

What an incredible turning of the tables.

In one deft move, Putin initially took one-third of the international trade in oil. And then moved to challenge the dollar as fiat currency.

And for those who think this is nothing but theater, at the beginning of March, a dollar bought nearly 140K Rubles. Today a dollar buys about 85K Rubles. That's a 40% move in less than a month. In favor of the Ruble.

I'd say the Forex markets are definitely paying attention. The question: is this Administration?