Exactly 50 years ago, on Sunday evening August 15, 1971, US President Richard Nixon addressed the nation with a message. In the name of protecting the economy from all instability, the head of state announced a temporary suspension of the exchange of dollars for gold at the request of foreign banks, as well as freezing salaries and prices for basic goods. It seemed that it was about another “squiggle”, of which there were many in that era, but the result was the formation of a completely new financial reality, in which we all had to live.
The essence of the change provoked by the American authorities is a revision – neither more nor less – of the nature of money. For five thousand years, they were objects that had an internal and recognized value by all, mainly precious metals. Any modifications of financial systems were reduced to differences in the mechanism of exchanging symbolic signs for “real” money. And only half a century ago it was said that in the new world there is no more “real” money and will not be. Banknotes of our time are promissory notes – similar to those that appeared in Europe more than five hundred years ago – but not private banks, but state ones. By accepting the dollar as taxes, the American state supported the demand for it, which was strengthened by the fact that this currency remained “its” in the world’s largest market and for almost a quarter of a century until 1971 was the only one accepted everywhere in the world as freely exchangeable for gold.
Of course, the rejection of the gold backing of the dollar caused a large-scale crisis. Oil exporters demanded price indexation in proportion to the increase in gold quotes. The cost of oil rose 6.5 times from 1971 to 1974 and another 3.2 times from 1974 to 1980. This shock ended 30 years of post-war prosperity in the Western world. Inflation spiraled out of control, and the Fed’s interest rate in March 1981 reached an unprecedented 20% per annum.
However, the difficult period is over, and America emerged from it seriously strengthened. High rates provided capital inflows, cheap dollar added competitiveness. The technological revolution has reduced the need for resources. The fall in raw material prices in the 1980s ruined half of Latin America and then the USSR. On the other hand, developed countries received an unprecedented instrument of state support for the economy: borrowing in dollars – that is, in their own currency, not tied to any equivalent, the Americans eliminated the division of debt into internal and external, and at the same time forgot about foreign trade. Due to the growth of public debt, the United States could get out of any economic crises, which was visibly demonstrated first in 2008, and even more so in 2020.
Today, if we compare the US economy in 1950 and 1985. and in 1985 and 2020, one can understand the scale of the change. The gross product in the first case increased by 3.5 times, in the second – by 2.6 times, and stock indices soared 9 and 23 times, respectively. The new quality of money led to the emergence of new payment systems, and the financial sector became the main consumer of information technology. Huge “bubbles” in the stock markets turned into a kind of safety cushions: each new crisis affected the real sector to a lesser extent, and its consequences were forgotten more and more quickly. After the Great Depression, the US stock market recovered for 23 years, after the collapse of 1973 – 8 years, after the crisis of 2008 – 6 years, in 2020 – only 7 months.
A potentially unlimited amount of money and its transformation from some objective value into an instrument of public policy has largely ended their history as a rare resource. After 2008, zero interest rates became commonplace, and almost 27% of top-end bonds at the end of 2020 were generating negative returns. In 2000, the United States allocated 12.3% of budget expenditures to service its debt (then it was 55% of GDP), and in 2020 (when the debt increased to 129% of GDP) – only 5.22%. In the future, this figure will decrease even more, until eventually it approaches zero.
The events of the past year ushered in the final arrival of a new era. If before that it was decent to sell public debt to investors at competitive auctions, then almost all of the “pandemic” debt was bought by the American Central Bank – the Federal Reserve System: the national debt in 2020 increased by $ 4.16 trillion, and the Fed’s balance sheet – by $ 3.19 trillion Most of the Fed’s revenues are returned to the budget next year, so the real cost of debt service is even less than it seems. However, this is not the most interesting thing. By increasing debt by an astronomical amount equal to 20% of GDP, the American authorities provoked a flow of money to asset markets – as a result, from the lowest point of decline in April 2020, the stock market added $ 13.4 trillion by August 1, 2021 – 3.3 times more than the government has occupied. For the first time in history, an increase in debt led to an explosion in wealth. In the era of “real” money, such alchemy was simply unthinkable.
Despite the fact that the economies of developed countries today are developing according to new laws (Europe also followed the path of America, creating its own single currency at the turn of the century, and introducing a zero-rate policy in the mid-2010s), it is not becoming less stable. Inflation, as a result of huge injections, grew non-catastrophically (in the United States in the second quarter of this year, it amounted to 4.5% in annual terms, in the euro area – 1.9%); stock markets are storming new heights; assets of pension funds are growing, real estate is becoming more expensive.
Over the past half century, the world has split into two parts: one in which government spending is determined by needs, and one where it is limited by opportunities. In the first six months of the pandemic, the United States increased its debt by more than China has accumulated in reserves over the past 25 years. To better understand the magnitude, we can say that in the 12 months after the start of the pandemic, the United States injected into its economy funds equal to the entire volume of the Russian National Wealth Fund every two weeks. What clouds do you need to hover in to talk about the possible victory of China in the economic confrontation with the West?
I am deeply convinced that most modern economists and politicians still do not understand what consequences the financial revolution, which began fifty years ago, brought to the world. New opportunities, in fact, have eliminated the very concept of scarcity: if necessary, the volume of material production can be increased by 1.5-2 times in three to five years on a global scale. The main limiting factor has always been demand, and it is this limitation that is now beginning to be removed. However, all of the above applies only to those economies that are flexible enough and at the same time have the ability to issue major currencies – because in any other open financial system, an increase in government debt and emission will only lead to an increase in demand for a more reliable asset, a fall in the exchange rate and inflation with all the attendant consequences.
The notorious de-dollarization today is an escape from the most liquid and profitable asset into highly unreliable and non-universal ones. The stories that the dollar’s share in the reserves of the world’s central banks is declining is a psychotherapy session for losers, since the real central banks of the modern world, the Fed and the ECB, have no reserves at all. Judge for yourself: the US gold reserve at the current market value is equal to 6.5% of the Fed’s balance sheet, the ECB’s reserves account for about 1% of its total assets, while the Bank of Russia’s gold and foreign exchange reserves are equal to 60% of its balance sheet, but at the same time, it is the ruble that has depreciated threefold in 15 years against the dollar and the euro, and not the other way around.
Shocks 2020–2021 only confirm the scale of the previously launched changes. In Russia, where the authorities are proud of the fact that they are pursuing a “tough” financial policy, prices for vegetables have increased by more than 30% over the past six months, and in the United States and Europe, where public debt has grown by 20-25% of GDP over the past year, they practically did not budge. Therefore, instead of talking about the “inevitable end of dollar hegemony,” it is worthwhile to carefully analyze the risks existing for Russia in the new world economy and soberly assess the opportunities we have.
In 1971, the United States carried out a hidden devaluation – it de facto devalued the dollars that foreign holders had, and then launched inflation in their own country. In 2021, America can achieve the same result in a much less “dumb” way: it has the ability not to devalue other people’s money, but to multiply its own. No one will refuse to accept dollars or redeem Treasury bonds: they can always be paid from a new issue. It’s just that most of the world will redistribute wealth over the coming decades, while developed countries will create it.
Of course, this system will not be eternal, just as nothing is eternal either in the economy or in society as a whole. However, it is becoming more and more obvious that the past half century was not a period of painful dying of the old system, which is about to collapse, but the time of the formation of a new one, which is just getting ready to show its temper. And this means that we need to adapt to the world, which, of course, we are capable of destroying, but, alas, we cannot change …
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