Thread by @andymok

Not sure why dollar hegemony is so important? Check out this thread to find out why (Part 2)

The dollar two-step: A fiat currency becomes global reserve currency

Before Aug 13, 1971 the $ was backed by gold-meaning that it could be converted into a certain amount of gold, a physical commodity with real value.

However on that fateful day, President Nixon declared that dollars could no longer be exchanged for gold or any other reserve asset and turned the dollar in fiat money (meaning a currency with no intrinsic value).

But to sustain global demand for the dollar, the U.S. also reached an agreement in the 1970s whereby Saudi Arabia would only accept payment for oil in dollars irrespective of whom or where the buyer was.

With oil being the world's most valuable commodity, this ensured that countries everywhere would need to secure dollars to both settle oil purchases and hedge against oil price changes and to manage the value of their own currencies.

As noted above, this allowed the U.S. to enforce the dollar as a global unit of account. Combined with the ability to print money, this provided the fuel for unlimited spending and American hegemony.

Launched in 2018, Shanghai oil futures are not only priced in RMB but can also be converted into gold. A currency backed by a valuable physical commodity may have much great appeal than one without intrinsic value like the dollar.

Not surprisingly, trading volume for these futures has exploded. Moreover, more and more central banks are increasing their holdings of gold instead of dollars, which is reducing the importance of the dollar as a global reserve currency.

Countdown to the demise of dollar hegemony

Both those the U.S. deems adversaries such as Iran, and Russia as well as ostensible allies like France, Germany and the UK have increasingly compelling and urgent reasons to circumvent dollar hegemony.

While appearing unassailable, the dollar may be much more vulnerable than many suspects.

The reporting by some well-known western business media outlets only reinforces these erroneous perceptions since those doing the reporting seem to not have a sufficient grasp of the underlying accounting and economic principles underpinning dollar hegemony.

Events described above demonstrate that the countdown to the demise of dollar hegemony has begun. Given the accelerating pace of technological, social and political change, its end may be arrives sooner than expected.