Every great empire that has come before the United States has eventually fallen. Some have fallen at least somewhat gracefully, like Great Britain. Others, like ancient Rome, well, not so much.
As I write these words, more and more ink has been spilled regarding the looming threat to the American-led world order. Words such as “de-dollarization” and a “multipolar world” are thrown out often, perhaps simultaneously or even interchangeably.
And indeed, “de-dollarization” is happening, albeit at nowhere near the speed some doomsayers describe. And we are likely already in a “multipolar world” where the United States is no longer the sole superpower. Instead, a new cold war—this time between the United States and China—seems to have dawned as East and West once again bifurcate and globalization slows down and begins to reverse.
Not surprisingly, what plays out over the next few years will have a significant impact on investors. But first, let us strip away the hyperbole and describe what exactly is happening.
A Crash Course on the History of Reserve Currencies
Before the Great Depression, the United States and most other countries had a gold-backed currency. In other words, citizens could have their dollars redeemed in gold bullion. This remained true until Franklin D. Roosevelt severed that link during the Great Depression.
While most currencies had been convertible to gold, this was rarely done. And during most of the 19th century and the first half of the 20th century, Britain’s pound sterling was the reserve currency of the world. It was World War II that changed this, as Britain put itself into such enormous debt to pay for the war (peaking at 270% of GDP) that the position of the pound was severely eroded.
So much so, in fact, that when Britain, along with France and Israel, invaded Egypt during the Suez Crisis of 1956, the United States effectively vetoed the action by pressuring the International…