The storming of the Capitol caused shock and consternation around the world.
Aside from being an affront to democracy and the rule of law, it’s significant because it impacts the confidence the world has in the United States. And anything that impacts confidence in the United States affects everyone and everything. As they say in economics – the markets do not like instability.
Global confidence and trust in the United States has already been greatly diminished due to the Trump years. While the make America great again mantra might have appealed to insular Americans dreaming of basking in splendid isolation; doing so at the expense of all her allies, even dissing her friends, neighbours, the UN, NATO, Europe, Africa, Asia, the environment, did I miss anyone? All that dissing undermined America a great deal, but such was the good will and capital that the United States has accumulated over the last century, that even after all that – the United States gets a pass. I’m of course overlooking all of America’s foreign wars, misadventures, backed coups and overthrows. But you get my point, it wasn’t perfect but by and large America was the good guy that championed for freedom and democracy for all, and lest we forget – free enterprise. The main ingredient of its success has been stability and predictability.
As I argued in a previous video, America’s Democratic system will survive and no civil war will ensue; and in fact America will do what it does best, it will re-invent itself, and come out stronger.
That having been said, this was significant on many fronts not the least of which is economics. The actions of those yahoos who stormed the capital did not do any damage to the US dollar or erode confidence in the US dollar, but make no mistake about it, that was what was attacked. The US dollar as the world’s reserve currency is intimately pegged to the fact that the US is a stable predictable democracy. That’s one of the main reasons its still the world’s reserve currency. Maybe the rioters don’t care or maybe they just don’t get the connection. Either way they’re playing with fire and could get burnt themselves via increased unemployment, increased mortgage and credit card payments and generally a lower collective standard of living, because that’s exactly what happens when you frighten capital away (pun intended) and erode trust.
Fortunately for everyone, political analysts and international investors – basically the rest of the world did not see any real threat to the integrity of the US or by extension the dollar. We all looked on from our armchairs and surmised – no need to panic – they got this. They as in the US government and the US public.
The United States derives a huge amount of benefits by being the world’s main reserve currency, not the least of which is trillions of dollars of interest free loans. It’s a huge privilege and it is absolutely mind boggling to see that privilege being undermined by Americans themselves – I’m talking about the rioters, and the ‘stop the steal’ crowd here.
This is all layered on top of the fact that the Trump administration undermined the US dollar by creating a lot of resentment from friends and foes alike, by politically weaponizing the dollar to impose sanctions on, for example, European companies vis a vis Iran, as well as on Russia. This has resulted in a push to look for an apolitical non-United States reserve solution.
Despite these internal attacks, the almighty dollar still reigns supreme. Let’s not forget also by the way that ultimately the dollar is backed up by brute strength – the United States military. Plus, the US is almost a quarter of world GDP.
Barring some crazy developments in the US, the US will maintain its position as the main reserve currency for a while as there are no other real standard currency alternatives. By standard currency alternatives, I’m referring to currencies backed by central banks backed by governments that have the power to tax to pay back debts. What other currencies can you go to? The Euro is the only other alternative and frankly the Euro Zone has its issues. Forget about the Yuan. All the other safe currencies – the Yen, the Canadian and Australian dollars, the Pound – they simply cannot absorb global volume.
So those goons that stormed the capitol didn’t manage to make investors flee out of the US dollar, and neither did the Trump administration manage to upend the dollar’s reign. It remains the safe haven because…well, where else are you going to go? The rioters did not damage the US dollar, but them there shootin’ themselves in the foot can’t be good, because that’s exactly what those rioters were doing.