Cracks in the dollar system once again - global macro update - 3/4/2022
Mega post today on Eurodollar jitters, dollar system doubts, Russia and gold, layered money narratives, and so much more.
It feels like we’ve experienced a decade of global macro events in the past two weeks. All of a sudden, the narrative of a waning dollar system turned the corner from an immediate concern to a blistering reality. Today’s post is my most important global macro update ever. Fasten your seatbelts.
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The Wall Street Journal article that shook the internet yesterday.
We live in a layered-money world, and first-layer money is recognized as either seizable (US Treasuries) or not (gold and bitcoin).
Zoltan Pozsar discusses inside money versus outside money. Layered Money is based off the framework of Pozsar and his mentor Perry Mehrling. I introduce bitcoin as “outside money.”
Signs that the Eurodollar market is cracking.
The role of fossil fuels in this current crisis and associated bitcoin mining implications.
Conclusion: we are entering an era of “us versus them” dueling monetary systems.
World is in for a shock
This article made serious rounds yesterday, and for good reason. The layered money framework, in which monetary instruments and financial institutions follow a hierarchy, has finally made it to the mainstream thanks to the latest sanctions on Russia. Reading Layered Money or a simply googling “monetary hierarchy” will explain that our financial system is made up of a hierarchy of IOUs. The top instrument in today’s hierarchy (first-layer) is US Treasury debt. After US Treasuries, central bank reserves would be considered second-layer money. Historically, gold was the first layer of money, as it was nobody’s claim.
Why was the WSJ’s short piece so widely shared? It suddenly brought everyone’s attention to an error of thinking: reserves are money.
Recent events highlight the error in this thinking: Barring gold, these assets are someone else’s liability—someone who can just decide they are worth nothing.
Translated: gold is the only first-layer money that is free from the hierarchy of IOUs, including US Treasuries, which can be used as a financial weapon in sanctions.
Layered money: seizable or not
More importantly, central bank reserves should not be considered money because they can be withheld, like in times of war or even disagreement. We know that third-layer money, such as commercial banking deposits, can be frozen by the government if misaligned politically as we witnessed with Canadian truckers. All money in the hierarchy can be frozen or seized as long as the political will and power is present. What does this mean for Russia, gold, bitcoin, and the international monetary system?