Defaults, Downgrades and De-Dollarization Dominate the Daily News

The dollar is slowly disintegrating.

Apr 24, 2023

Wall Street is waking up to the risk of a US credit downgrade or default. Back in 2011, I predicted Republican brinkmanship over the debt ceiling would cause the nation’s first credit default even though Republicans would never take the nation into actual default. I explained that Republicans were confident they could walk right to the edge of default to negotiate the best deal possible on their terms because they knew they would ultimately accept whatever they had to at the last minute and avoid default. What they were not realizing, I pointed out, was that no one else knew that. Credit-rating agencies did NOT know for sure they would accept a deal at the last minute, so, at least, one agency would downgrade US credit before the US got to the absolute edge at the last minute of negotiations. One agency — S&P — did.

The risk from the default debate (not the risk of actual default) has intensified in the past week because it has become apparent that US tax receipts are not as great as expected due the declining economy. As a result, deadline day for a default is likely sooner than expected, while no headway has been made on an agreement with Republicans demanding major budget cuts before signing on, and Dem’s holding fast to no negotiation.

On the subject of credit downgrades, Moody’s has cut the credit rating of 11 regional banks, including the fairly large US Bank. Moody’s says the US banking industry is facing greater instability amid regional banks after the recent banking crisis that included Silicon Valley Bank. Surprisingly, two conservatively managed banks in Hawaii, which were ranked as the most sound in the nation during the Great Financial crisis, were put on Moody’s downgrade list.

Small banks were badly hurt by US rescue efforts that gave infinite deposit insurance exclusively to the nation’s largest banks. That syphoned a lot uninsured major deposits out of the smaller banks and into the too-big-to-fail banks because the Fed loves to make big banks bigger as its constant answer to every crisis. Serious losses of value in commercial real-estate and rising defaults, even by the nation’s largest real-estate investors, are also putting some banks at risk.

None of that, however, is the big news. The pervasive news over the weekend has been the big moves away from the US dollar by other governments and even by US states. While the dollar is still by far the world’s largest in circulation with the Chinese renminbi a very distant and fractional fifth place, the dollar has lost a lot of ground due to weaponization and Fed inflation fighting. China has dumped three-quarters of a trillion dollars in US Treasuries and is hoarding gold for international exchange. Many other nations are moving away from the dollar because rising interest rates make it hard to pay their sovereign debts, so they seek to refinance in other ways. Plus, some fear what they have seen done to Russia.

Within the US, two interesting turns have begun. Nearly half of US states have initiated moves at this point to create their own state currencies backed fully with gold and silver, and the Biden administration and the Fed are getting pushback from some Republicans against the Fed’s new experimental central bank digital currency (CBDC) that was scheduled to role out in a limited beta test version of some kind this June. Banks are also pushing back against the Fed’s CBDC because, for some peculiar reason, the Fed, which is entirely owned by banks (literally), thought it could roll out a CBDC that sidestepped banks as the middlemen.

As financial conditions tighten and shortages continue, civil unrest is spreading. Water theft has become a major problem in some nations with government workers finding themselves surrounded by hostiles when they attempt to patrol water against theft. Food banks are increasingly running short on food, and outbreaks of civil unrest over wages and inflation are becoming more common. In the US, the most violent cities are the ones with the strictest gun laws.

(As always, the headlines related to these stories can be found in boldface among the many other headlines in this morning’s Daily Doom. There is also some interesting followup on the past two week’s coverage about the exponentially growing artificial-intelligence alarm. As developers already report AI is on the threshold of becoming “godlike,” one woman in China, where Covid restrictions were patrolled with robodogs, has had all she can take and decided to attack a hospital reception robot with a club … on video. The rebellion has begun. Vive la résistance!)