On March 20, 1602, after a few years of painstaking negotiations, a deal was struck amid the cobblestone streets and legendary waterways of Amsterdam that changed the world of finance forever.
The Dutch Republic (as it was known back then) was already a major economic power in the early 1600s; Dutch merchants boasted an enormous fleets of thousands of ships and lucrative trading posts around the world. Money was pouring in to the economy.
But at the same time, competition was fierce. England, Spain, Portugal, etc. all wanted in on the vast wealth that Dutch merchants were minting from the spice trade.
So in an effort to fend off international competition, Dutch traders unified their operations; merchants in Amsterdam merged in 1601. And, the following March, the remainder of the country’s prominent merchants joined.
They called their new venture the Verenigde Oostindische Compagnie (VOC); it is known to history as the Dutch East India Company.
What made VOC so innovative is that investors could buy shares in the company, and hence enjoy a piece of the profits proportionate to the number of shares they owned.
But on top of that, they also launched a stock exchange… creating a secondary market where investors could buy or sell shares of VOC.
This was game changing.
These innovations by themselves were not new; other ‘joint-stock’ companies had been formed in the past. And other rudimentary financial exchanges had already been in existence.
But the Dutch put the two together, combining a major business enterprise with a formalized stock exchange. It had never been done before… and the idea marked the beginning of the country’s economic dominance, known as the Dutch Golden Age.
Naturally, as the Dutch Republic became Europe’s most powerful economy, its currency– a gold coin known as the guilder– became the unofficial reserve currency around the world.
From Eastern Europe to Japan, Indonesia, and parts of India, traders often exchanged goods and services for Dutch guilders because they had confidence that the coins would be universally accepted.
And the guilder’s status as a de facto reserve currency lasted for centuries.
But history is very clear that no empire, and no reserve currency, lasts forever.
Eventually the dominance of the Dutch republic was displaced by the British Empire, and the guilder by the British pound. Britain, in turn, was eventually displaced by the United States and the US dollar.
But only someone willfully ignorant of history would believe that America’s and the dollar’s dominance will last forever.
And this should hardly be a controversial assertion anymore.
Politicians within US government have routinely demonstrated an outrageous level of pettiness, incompetence, and the inability to solve even the most basic problems.
They have absolutely no control over abhorrent deficit spending. They go into debt to pay people to NOT work. They ignore downgrades of their sovereign credit rating. And they actually cheer themselves when the deficit is “only” $2 trillion.
America’s central bankers, meanwhile, conjured trillions of dollars out of thin air without any clue of the repercussions. They failed to predict inflation. They failed to diagnose it. They failed to do anything about it.
And when they finally did take action, they failed to anticipate any negative consequences of raising interest rates so quickly.
Literally two days before Silicon Valley Bank went bust earlier this year, the Chairman of the Fed told Congress that “nothing about the data suggests we’ve tightened [raised interest rates] too much.”
These people are clueless. And everyone has noticed.
Confidence in the dollar is waning, and foreigners are starting to diversify to other assets. Data from the IMF showed that the US dollar’s share of foreign exchange reserves had fallen to a multi-decade low.
Similarly, foreigners’ appetite to own US government bonds is dropping rapidly. A decade ago, foreigners happily owned 43% of all US government bonds. Today foreigners’ share is 30%, and falling.
These trends show very clearly that the dollar is simply not as dominant as it used to be.
In a recent interview, Aerdt Houben, a senior official at the Dutch central bank, said the quiet part out loud, and explained that the Netherlands was already preparing for a world in which gold (and NOT the US dollar) is the primary global reserve currency.
“The beauty of gold is that it’s stable in value, it retains its value. That’s one of the reasons why central banks hold gold… Gold is like solidified confidence for the central bank… If we ever unexpectedly have to create a new currency or a systemic risk arises, the public can have confidence in [the Dutch central bank] because whatever money we issue, we can back it with the same value in gold.”
The Dutch understand this concept very well; after all, they once held the world’s #1 reserve currency position… and then lost it. So they know the same thing will happen to the dollar. It’s inevitable.
I agree entirely with this view and have written about it extensively: I believe there is a very high likelihood that the dollar loses its reserve dominance within the next 10-years, and probably sooner.
The Congressional Budget Office has already forecast (rather optimistically) that interest on the debt, plus mandatory entitlements like Social Security, will consume 100% of US federal tax revenue by 2031.
This means that everything else, including the military, will have to be financed by debt.
Two years later in 2033, Social Security’s primary trust fund will run out of money, according to the program’s annual trustee report.
These are not conspiracy theories; rather, these are the government’s own forecasts. And I believe that either event could trigger a reset of the global financial system in which the US loses its dominance over the rest of the world.
Personally I don’t think that anyone trusts China enough to anoint its yuan as the new global reserve currency.
But gold is an asset that has a 5,000+ year history of trust and confidence.
And if gold does become the global reserve once again, you can likely bet that gold prices will go to the moon.
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He is an international investor, entrepreneur, and a free man. His daily e-letter, Sovereign Letters, draws on his life, business and travel experiences to help readers gain more freedom, more opportunity, and more prosperity.