Global Currency Reset: What Would This Mean for Your Portfolio?
Global currency reset is a topic that doesn’t come up in the mainstream media. It’s mostly discussed on private blogs, and when someone of stature does publicly discuss it, they’re usually dismissed as gloom-and-doomers. But the world financial situation is now so tightly stretched, and under so much stress, that a global currency reset can no longer be easily dismissed.
What is a Global Currency Reset?
A global currency reset is an event involving a simultaneous revaluation of the currencies of most of the world’s nations, certainly those with the most important currencies. It is an event that actually has never taken place before, however unbacked paper currencies issued by multiple nations didn’t exist prior to World War I. At that point, major currencies were typically backed by – and convertible into – gold and silver.
Currency resets by individual nations however are not at all unusual, and they’re almost always brought on by cataclysmic events.
For example, since 1900, Germany saw at least two currency resets, the first being the collapse of the Weimar Republic in the early 1920s, and the second at the conclusion of World War II. The UK had such an event between the two world wars, when they were forced to withdraw the pound as the world’s de facto reserve currency. And Russia experienced a currency reset following the fall of the Soviet Union.
Here in the United States, it has occurred at least three times. The first was in 1933, when the Roosevelt administration declared that US citizens could no longer exchange dollars for gold (the currency then fell 40% against gold). The second time was at the end of World War II, when the world’s major trading partners decided that the US dollar would become the world’s reserve currency, fully backed by gold on the international market. The last time it happened was 1971, when US unilaterally decoupled the dollar from gold on international markets, and declared floating exchange rates between global currencies.
To get an idea as to what a global currency reset might look like, imagine all of the above events taking place at once.
It would be an event of truly historic proportions.
The Current Environment of Global Currency Wars
One of the reasons why a global currency reset is more likely now than ever is because of the current environment of global currency wars. As the global economy continues to weaken, and international imbalances grow, individual nations are devaluing their own currencies in response. It is believed that by devaluing their currencies, they will increase their exports to other countries, and decrease imports, stimulating the domestic economy.
That strategy isn’t exactly working. While it may be effective to some degree if only one country does it, it can never work in environments where multiple countries are devaluing at the same time.
This conundrum is sometimes referred to as a race to the bottom. It involves numerous countries, all of whom are looking to alleviate economic stagnation and excessive debt levels through near zero interest rates and expansion of the domestic money supply.
So far global currency wars have avoided complete disaster. That’s mainly because the net effect has been a coordinated move to weaken by multiple countries. For this reason, currency values have appeared to be relatively constant, despite the multiple devaluations.
In the past couple of years, the US dollar has strengthened against most major currencies, primarily because of the end of quantitative easing, and the fact that the US is now devaluing its currency at a slower rate than other countries are.
But how long can that last, given that the US has its own pressing domestic economic needs?
Will the Nations of the World Halt Currency Wars and Force a GCR?
There’s another possibility, but one that will not end well for the US dollar. As the currencies of other countries weaken faster than the dollar, and since all countries pay their foreign obligations in US dollars, it is possible that the nations of the world will put an end to the currency wars, and force a global currency reset.
This will almost certainly be initiated by major countries, and in fact it has already started. The BRIC countries (Brazil, Russia, India and China) are already working to move away from the dollar for international trade. China has already established bilateral trade agreements with Russia, Japan, Australia, and other countries, in which trade takes place without US dollars.
If numerous other countries determine that the process of converting their own currencies into US dollars is creating too great of an economic burden, they can join the party, and those bilateral trade agreements could morph into a full-blown global currency reset, abandoning the dollar for good.
How Likely is a Global Currency Reset?
It’s virtually impossible to know when such a massive event could take place. But suffice it to say that all the dominoes are already aligned in that direction. A global recession, or a global depression, could fast-forward the process. Decoupling from the dollar could become the ultimate route to resuscitating a depressed domestic economy.
The pressure to do this is building, as many nations are experiencing permanent trade deficits. In addition, as populations age and public benefits increase, so do deficits. Nations, including the US, have been using debt for decades to cover expenses that their economies can’t pay for.
When those debts become unsustainable, there will be enormous pressure for currency change.
But there’s yet another “X factor” that could force a global reset, and that’s oil. Since 1971, the greatest strength of the US dollar is the fact that it became the prime currency to purchase oil on the international markets. Should that arrangement ever breakdown, a global currency reset will happen virtually by default.
Russia and China are already exchanging oil in their own currencies, and similar agreements are likely to grow around the world, particularly if the dollar continues to strengthen against other currencies.
What Would Happen if a Global Currency Reset Occurs?
Whether we like it or not, a global currency reset with fall most heavily on the US. This is because the US dollar is the world’s reserve currency, and that status will almost certainly disappear with the reset.
Few Americans understand how important America’s global currency reserve status is and how it impacts the economy in this country. It’s so important that it’s sometimes referred to as America’s exorbitant privilege. That’s because it means that the US is the only country in the world that can pay its foreign obligations in its own currency. That means oil imports, interest on the national debt, and trade deficits.
Should a global currency reset put an end to that reserve status, the US would be instantly poorer. The cost of anything imported – especially oil – will skyrocket, as the US will be forced to acquire the currencies of other nations or gold in order to pay international settlements.
The end result is very likely to be inflation, and even hyperinflation, as well as currency controls in an attempt to limit the fallout damage from the reset. Still another consideration would be a sovereign debt default by the US. Since the US pays interest on its foreign held debt obligations in its own currency, the sudden lack of that ability could cause a debt collapse.
In truth, the potential fallout from a global currency reset could go in any direction we can imagine.
How to Protect Your Money from a Global Currency Reset
Given the sweeping possibilities, it probably won’t be possible to 100% insure your investments against the event, particularly here in the US. But it is reasonable to project that certain asset classes will do better than others.
Consider moving money into the following:
- Productive land, preferably farmland (food will be at a premium)
- Energy, food and other natural resources stocks
- Foreign sovereign debt securities, though identifying countries likely to remain stable will be problematic
- Gold and silver – they’re the only assets that are not simultaneously someone else’s liability, and can’t be defaulted on; in addition, they functioned as money for thousands of years (and as recently as 1971)
- Barter-able goods, since barter will likely replace cash early in the transition
It would be best to spread your money around into different assets, as there can be no guarantee that any single asset class will survive intact.