There’s been an odd failure to question the claims about the dollar being past its sell-by date date even as it trades at lofty levels, including relative to the Euro, renminbi, and rouble. For instance, the dollar is at .93 Euro, well above its 5 five-year low of .82 in January 2020, as in well before the US shock-and-awe sanctions against Russia and ring-leading an asset freeze (EU banks actually hold way more than US banks). As we will discuss below, a new column in the Financial Times describing how other data shows that the dollar’s position is still solid.
We have repeatedly said that even though the dollar is destined to become less important over time by virtue of the US economy becoming a smaller percentage of global GDP. However, it took two world wars for the US to replace pound sterling as the dominant international currency, and that was with the US actively weakening the UK in how America went about assisting Britain’s military.
In addition, many of the anti-globalists (and this includes some officials in BRICS states) are not helping themselves by wanting to create a new currency out of thin air, much like Athena emerging from Zeus’ forehead. But since World War II, only two currencies of any significance have been created, the euro and the SDR. The SDR is not a freely tradeable currency, is not used for trade transactions, and is not something private parties can invest in. The euro took three years of planning and eight years of execution to get off without a hitch. And this was far simpler than launching a de novo currency, since existing national currencies were being converted into the euro, and all the participants were subject to the same legal system. As one of a myriad of issues, it’s hard to see a new currency being implemented without the participants consenting to which legal system would apply. Agreeing to the jurisdiction of a non-home court system for transaction disputes would amount to ceding of sovereignity, when one of the points of the emerging multipolar system is to support more national autonomy.
However, those seeking to escape the punitive use of the dollar do not need to create a new currency system to escape most US abuses of sanctions. Trade transactions represent only 1% to 3% of total dollar trades outside the US; the rest are for investments.
These dollar refusniks need to be able to conduct trade transactions outside the dollar system. It has long been possible to do so, as witness that China was buying Russian oil using renminbi in 2015. It is particularly cumbersome, which means now it’s been occurring mainly for very large trade transactions.
Notice that what Sergey Lavrov said on June 10 to a meeting of BRICS finance ministers is entirely consistent with having an aim of facilitating bi-lateral trade outside the dollar system, as opposed to creating a new currency. From RT:
Lavrov said BRICS was “actively working to implement the decisions of the Johannesburg summit last year, particularly when it comes to improving the international monetary and financial system, developing a platform for settlements in national currencies in mutual trade.”
He added that the bloc, which recently underwent a process of unprecedented expansion, is also looking to harmonize the framework of interaction between BRICS partners.
“Harmonize the framework” is clearly not the establishment of a new legal system, but to get legal terms and procedures with in the BRICS states more in synch.
To put it more bluntly, “new BRICS currency” crypto touts promoting their own schemes and their journalistic enablers are out over their skis.
What about the investment side? The US has considerable advantages via incumbency and is thus set to remain the least dirty shirt in the laundry for some time:
1. Liquidity. This is a scale advantage that is hard to reverse. That includes for professional traders significant depth in hedging instruments and strategies. The SEC regime for public securities, with its extensive disclosure requirements and regulations to curb insider trading and front running, is still best in class despite considerable creaks with age (such as not cracking down on HFT, which is basically predatory by adding liquidity when not needed and draining it when it is).
2. Established and reliable institutional procedures for clearing and settlement, including (critically) dispute resolution. Part of this is having well-settled legal precedents
3. Large range of investable assets. The US has an advantage here via having moved a lot of our lending out of banks and into capital markets (or more accurately, banks may still originate transactions and then securitize them). By contrast, most other major economies have much larger banks relative to GDP and smaller bond markets.
I could make many additions to this list, but this suffices to make the point.
Hence the conditions described in the Financial Times article, Dollar Doomsters Have Got It All Wrong, should not come as a complete surprise:
The share of global central bank reserves held in dollars has declined in recent decades. Back in 2016, the currency made up more than 65 per cent of official reserves, according to data from the IMF. By the end of 2023, that had shrunk to 58.4 per cent. The amount held in Chinese renminbi at the start of 2016 was zero. Between the end of that year and 2023 it jumped 188 per cent. But while that sounds huge, it is still just a 2.3 per cent slice of the total.
However, a recent blog from the New York Fed argues that the apparent pullback away from the dollar is not down to a global cooling on the buck. Instead, the shift is attributable to a small number of countries, including Switzerland, where a long-running effort to hold down the franc just over a decade ago led to a huge accumulation of euros. “Indeed, increasing US dollar shares from 2015 to 2021 were a feature of 31 of the 55 countries for which there are estimates,” economists at the New York Fed wrote in late May. “The decline in the dollar preferences of a small group of countries — notably China, India, Russia, and Turkey — and the large increase in the quantity of reserves held by Switzerland explain most of the decline in the aggregate dollar share of reserves.”
Meanwhile, central banks globally have ramped up purchases of gold, in an apparent effort to avoid the risk of sanctions, since gold is not controlled by any national authority. Yet, as the New York Fed stresses, even after a rapid accumulation of gold in 2022 and 2023, the precious metal still accounts for a relatively modest 10 per cent of the global reserve total. Narratives about declining dollar shares and increasing roles for gold “inappropriately generalise the actions of a small group of countries”, it says.
In fairness…gold holdings do appear poised to rise further. A survey of reserve managers by the Official Monetary and Financial Institutions Forum think-tank said despite record high gold prices and a taming in global inflation, for which gold is often seen as a hedge, reserve managers are keen to build up holdings of the metal.
However, demand for the dollar remains extremely robust. This survey does not capture every country, but it does cover 73 central banks, with a combined stash of $5.4tn. Of them, OMFIF said a net 18 per cent expect to increase not decrease their allocation to the dollar, lured in by higher interest rates and a robust US economy. The euro is the next most popular currency on the wish list, suggesting reserve managers are keen to stick to the bigger, more liquid currencies.
Now with the US determined to continue to behave badly, there is every reason for dollar worries, particularly among countries that are geopolitically significant and not solidly on Team Global Hegemon, to continue. However, a brake of sorts is the efforts of the financiers to stop the monumentally stoopid plan of seizing Russian assets. This might be an EU sacrifice too far, since as we mentioned above, far more of the frozen Russian assets are in Euros rather than dollar, exposing Eurozone institutions even more to blowback. Euroclear in particular is concerned it could be sued in jurisdictions where it operates, like Hong Kong, where courts would be more receptive to Russian arguments about the lack of a legal foundation for expropriation than in the Collective West.
Mind you, the US is still arm-twisting at the current G-7, but protracted talks are generally signs of serious differences. From Al-Jazeera:
US officials are trying to get European allies on board for a deal to present at the G7 leaders summit later this week on how to use the interest from Russian frozen assets to support war-torn Ukraine. But with the meeting in southern Italy starting on Thursday, discussions are still ongoing.
Some European countries are not yet fully convinced over the United States-led proposal, diplomatic sources told Al Jazeera.
Rome was not built in a day, and the same applies to a new currency regime. But the normal succession path, of the renminbi over time replacing the dollar due to China’s economic heft, is unlikely to happen even as soon as in a decade, with obstacles including China’s economic model of running persistent, large trade surpluses (which prevents meaningful accumulations of renminbi outside China) and China’s use of currency controls. So at this point, the most likely next regime is of fragmentation, of multiple major currencies used for trade and investment rather than a dominant currency. At the margin, it discourages trade since it forces importers and exporters to deal with more currencies, increasing their risks and forcing them to operate in a more financialized manner (witness the rise of Treasury as a profit center at pretty much all major multinationals).
So this remains an unsettled area. Stay tuned.
Update 5:45 AM EDT: As this post went live, the pink paper announced a deal of sorts about the Russian frozen assets. It is still awfully sketchy. The key bit is that it exploits only the income, and not the principal, of the frozen assets. Because reasons, Euroclear believes it has much stronger rights to that than the corpus. Recall again that even though this update describes the deal in dollar terms, it is the Europeans that are eating more of the risk than the US in this scheme. From the Financial Times:
G7 negotiators have reached a deal to use profits from frozen Russian sovereign assets to help Ukraine in a bid to shore up support for Kyiv while they grapple with a barrage of domestic political difficulties.
A deal on a scheme for G7 members to provide “approximately $50bn” to Ukraine backed by the future proceeds from Russian assets was struck by G7 officials, two people involved in the talks told the Financial Times. The financial aid is set to be the centrepiece of the group’s annual summit in the southern Italian region of Puglia.
Details over its design — including who would bear the ultimate risk of the loan to Ukraine, and how the money would be distributed — were not specified in the agreed statement.
So the takeaway would be that wars are bad for a countries currency status.
We’re in the midst of a Thirty Years War of our own making, and in the original version, money went to hell when Copernicus’s Law, written well before Gresham got all the glory for it, stated:
Being the cleanest dirty shirt is as good as it gets, as far as the almighty buck is concerned, boy howdy.
But the quantity theory of inflation is simply wrong.
Not really, If you print enough money, you will destroy the value of the currency. Why do coins have milled edges?
OTOH, a shortage in a critical import, like oil or food, can drive inflation in spite of fixed money supply.
Similarly, the importation of vast amounts of silver plundered from the new world led to very significant inflation in Spain.
So quantity does matter.
The FED printed zillions of dollars in the aftermath of the 2008 crisis. No real inflation, except for some short-run spike. Quantitative theory is indeed wrong, one can claim in Keynesian terms that the expansionary LM wouldn’t make any difference for AD in that particular scenario, as it in fact didn’t. But for serious macroeconomics, you’re probably better off with MMT
QE was not money printing. It was an asset swap. But the Fed and Bank of England both ran monetarist experiments in the early 1980s and found that changing money supply aggregates correlated with no important macroeconomic variable, particularly inflation.
https://www.cnbc.com/id/100760150
IT blows me away that we are still having this debate after all some like NC has put out and so much more e.g. the economy is not about currency i.e. its about productivity and trade.
That is what effects FX exchange rates and vis it Sovereignty e.g. attempts to buffer exposure to USD.
Sorry for the slip, I went along with the hype and had my Bernanke moment. No, it’s not money printing, but it’s a huge increase of the monetary base.
Since this sparked some interest among commenters, a few things for us to keep in mind: the government isn’t printing money and using it to pay its bills or something, nor borrowing tax dollars (taxing doesn’t bring money in anyway; the government makes as much fiat money as it wants, tax is just for redistribution, for leveling out the relations). The “money created out of thin air” has as its counterpart the purchased securities (as clearly explained in the link above), so it’s not just freely given or even created. And yes, QE would probably be inflationary under normal conditions. The reason it isn’t is because the economy was lagging too bad and, although the banks would like to lend the money, there just wasn’t demand for investing, buying etc., no one wanted to borrow that money. So the money sits there and goes to crypto Ponzi schemes or whatever can take it.
I hope I didn’t make a mistake again. I disagree with what the link said “The money simply goes from one asset to another and does not contribute to expenditure that boosts growth and, ultimately, inflation.” Hopefully it would boost growth and likely inflation, that’s the justification, it doesn’t because it’s a dysfunctional economy. Although this is acknowledged in the end of the article, that if the risk of lending is too high or there isn’t demand for lending, banks won’t/can’t lend.
One thing I always wanted to know, but it’s a subject for another day, is whether banks aren’t making money off these asset swaps, due to IOR, or selling bonds for a higher price, or if (junk) bonds go bad or devalue, or whatever else. I suppose it’s very little, but I have no idea
print zillions with no real inflation = export inflation
https://inflationdata.com/articles/2021/06/22/how-does-a-country-export-its-inflation/
Difference being sovereign currency was attached to a physical commodity, gold/silver, and how that effected price. Your example was when it was free floating, no gov fixed price or central banks.
Now that has been removed and markets conditioned by decades since, mindsets and accounting have changed. Just saying everything has to be put in historical context e.g. you can’t apply one time with another when things are so different.
Per se the bail out of the GFC could not get a whiff of in inflation but, covid shock and sanctions against Russia and China sure did … had nothing to do with QTM IMO …
That’s what many people intuitively think, but it’s not supported by the evidence. If it were true, the Japanese economy would have spiralled and collapsed decades ago.
Ultimately the value of any given “money” results from the intersection of supply and demand. Yes, duh, but the factors driving supply and demand are complex and variable, particularly the latter. Which is why the linkage between the quantity of money and prices is frequently, at least in the short to medium term, so frustratingly spongy.
Sentiment, or, differently put, the willingness and desire to hold money balances, intangible and difficult to define though it is, plays (arguably) the critical role.
So with Japan, their strong culture of trust and internal unity kept Japanese savers relatively comfortably parked in ever-increasing amounts of cash. Which in turn, even after the debt deflation was largely finished, helped keep inflation low in a virtuous reflexive circle. That may be finally starting to crack at the edges.
And so on . . . every case is unique.
Actually it’s because most Japanese never saw the money, big Japanese corporations are flush with cash but ordinary Japanese people have barely seen their salaries increase even after years of money printing. https://edition.cnn.com/2023/02/03/business/japan-workers-wages-inflation-intl-hnk/index.html
Also it’s too early for the “money printing will not cause inflation” crowd to declare victory, because the Japanese Yen has lost quite a bit of value against the USD.
“Cash holdings [at the end of 2023] increased 1.0% to a record ¥1,127 trillion, accounting for 52.6% of the assets held by Japanese households.” (The Japan Times)
https://www.japantimes.co.jp/business/2024/03/21/japan-household-assets-record/
https://english.kyodonews.net/news/2024/03/48b565a0c6cd-focus-gains-from-rising-stocks-proving-elusive-for-most-japanese.html
Person A, Person B, Person C and Bill Gates walk into a diner, and their total wealth is tabulated to be around 135 billion USD. What a rich country!!!
By the way, forgot to say I entirely agree with your last comment. The relationship may be spongy but imo it’s very real.
Especially when private debt is excluded, and it always is.
Politoco.eu published yesterday an insightful piece on US/EU divergences about using frozen Russian assets :
https://www.politico.eu/article/us-eu-war-in-ukraine-loan-russian-assets-negotiations-g7-us-election-western-support-joe-biden-olaf-scholz-emmanuel-macron/
“What Washington is proposing is, ‘We [the U.S.] take a loan, Europe takes all the risk, you [Europe] pay the interest, and we [the U.S.] use the money for a U.S.-Ukraine fund,’” said one senior European diplomat. “We might be stupid but we’re not that stupid.”
“we’re not that stupid”
Ahem, the level of stupidity being as high as it is, this scheme would only mean a minute step up in the idiocy ladder. Yesterday I read the EU was planning a 48% tariff on Chinese EVs. All these are moves towards financial and commercial de-globalization (de-risking?) by the so-called globalists. Global here meaning under the Western sphere of influence. The result might not be de-dollarization but fragmentation in less interconnected regions with a fight for control of many countries and regions that will be forced to choose sides. Given the example of Russian assets many might be thinking about the risks associated with the Western sphere of influence including the “vassal-ization” of their economies and their cannibalization as proxies in armed conflicts, not to mention financial risks.
The FT article cited above looked to have been based on comments from only at most 3 anonymous sources. One said everything was agreed at the sherpa level.
Cynically, they could all be from the US (or the US + UK, with the UK even more Russia-rabid than the US and even less exposed to risk of this scheme).
And as someone who has been involved in or close to the kitchen in deal-making, one regularly-deployed practice is to depict an agreement as more imminent than it is to pressure the foot-dragger(s). So your skepticism is warranted.
Lord knows the Biden team love using this tactic on the Israelis, it hasn’t worked, of course. In fact, it has backfired as Netanyahu makes political hay out of telling the US to take a hike.
However, this sort of thing is more likely to work with the Europeans, who have a track record of just accepting US bullying…eventually. Nordstream being the most egregious example.
I would say the JB/BN interplay is pure political theater. This is the standard script for US presidents who want to distance themselves from Israeli crimes: pretend like you want Israel to stop or moderate their actions. Then Israel refuses on cue. Nod Nod, wink, wink. JB is following the old, tired script.
The US pres could stop Israel in a matter of hours if there was genuine will to do so. There clearly is none
El Pais is citing some European source involved in the negotiations saying that the agreement is nearly done. This saves the day for the G7 meeting I guess.
I have a question here about the agreement on the seizure of the benefits to finance Ukraine. Is the G7 the proper forum for such an agreement? If I understand correctly those funds stand blocked in Banks in Brussels. If these assets are frozen in the EU and this affects the whole EU financial monetary system IMO the G7 decision doesn’t hold water until this accepted by EU financial authorities not by a selected group of countries. Just asking.
If I was the one holding the Russian assets, I’d made sure there’s a binding court order telling me to yield the money, so when Russia comes to collect, it’s not my pound of flesh they’re asking.
I forgot to mention, and genocides allowed when considered necessary.
Still looks O.K. at the high level, but if you look at actual demand for dollars from the ECB, according to the New York Fed it has dropped from the usual level of 225 million a week to about 114 million a week since the sanctions started. Would be interesting to know if this is due to the moribund European economy or if that grass roots demand has switched to other currencies.
The Saudi Arabias of the world know that the US can punish any country through its dollar dominance. They don’t need RF’s current situation to tell them that. Venezuela, Syria, and Afghanistan should be sufficiently instructive. The current actions against RF and PRC simply show that the West is willing to commit such actions even when it is to their great disadvantage to do so. AKA the whities are crazy and self destructive.
But the alternative hasn’t been stood up yet, so the dollar is still the reserve currency at a time when everything else is also sketchy. So that plus what I suspect is a lot of pressure on national governments and banks, is propping up dollar valuation.
But I don’t think the replacement process would take 20-30 years. Michael Hudson has talked about this pretty extensively – the real reason the dollar replaced the pound is because after WWII, the US forced Britain to disgorge its empire. Once the empire went, Britain was no longer able to cream the surpluses it extracted from its colonies into financial stability for itself.
We’re seeing the US empire of unequal trade arrangements backed by military bases and comprador elites in other countries crumble in front of our eyes. We’ve long financialized ourselves out of industrial basis of power, decades of police action style wars against guys in sandals and MIC featherbedding has completely wrecked a previously pretty decent military, and the SMO and Gaza showed that we can’t even supply sufficient artillery to beat a “gas station with nukes” and some starving barefooted guys firing homemade weapons. So the empire hanging by a string and with corrupt bagmen like Biden and Blinken at its head, has zero credibility beyond inertia and nukes.
Yes, the Euro rollout turned out to be a mess, but it was sabotaged from its very inception. The BRICS has every motivation to come up with something that’s workable and soon. The cost and uncertainty of transitioning is still there, but will decrease once the system proves itself and as the cost of being hostage to an increasingly deranged US government escalates.
The switch from dollar to BRICS alternative also provides one time get out of jail free card for a lot of global South countries with heavy dollar denominated debts. They get to renounce it and potentially nationalize Western companies/concessions within their borders. Of course, once they’re out, they’re firmly out of the dollar zone and can never return.
Once the BRICS system is set up, I see heavily sanctioned and desperate countries like Venezuela, Cuba, Syria, and Yemen quickly signing up. Once it’s tested out well, the rest can follow quickly.
Please do not misinform readers. Repudiating debt will make the country a pariah and will make its businesses unable to borrow in dollars, which many need to do to import supplies. It will also crater its banking system. Most economies that have borrowed in dollars are dollarized to a fair degree and this would produce a banking crisis. In addition, they would be unable to export to any US friendly country since banks in the US/EU orbit would no longer provide them with financial letters of credit, which many need to trade.
I agree with you Yves that the creation of a trade settlement system within BRUCS should not be misconstrued as a window for a voluntary third world debt default. But… Pariah? Never borrow again? The biggest counterexample is Argentina but there are plenty of others. For somebody in finance playing with other people’s money, just like it is always Morning in America, this time it is different. All of the serial defaulters get allowed back in to last chance saloon to run up another tab….
If a bloc of important commodity exporting global south companies chose to default and had financial backup from BRICS institutions for critical imports (food, pharmaceuticals), they might have the trade leverage with the West to make their Autojubilee stick and live to borrow another day. Uncle Sam cannot invade everywhere at the same time!
Argentina defaulted as part of an effort to restructure its debt. That is not in the same universe as repudiating all of your dollar debt (which is probably pretty much all of their external debt) which is what Emma was proposing. Moreover, Argentina’s defaults were the result of inability to pay, starting in 2001 during a very severe economic crisis. and not choosing to stiff creditors. Argentina is markedly, if not wildly different, than what Emma was proposing.
I was probably not expressing myself well, but I do agree with you Yves that such a default constitutes a crossing of Rubicon. There’s no going back and ever after, these countries would be reliant on the mercies of the rest of the BRICS trade block and would see any assets still reachable by American/European courts confiscated.
And yet… For a country like Cuba or Venezuela or Syria, the situation is already so desperate that would such a move be so extreme? It’s not as if as of they were previously connected to the dollar denominated world trade. And if this trench proves successful while America/Europe has less and less to offer the rest of the world, then less desperate but still pretty desperate countries might decide that permanently cutting themselves off of a shrinking dollar system is an acceptable cost to getting rid of odious debts and Western hegemony.
Which is why nobody has done it yet. It’s like having 3 bankruptcies plus 2 evictions plus a baker’s dozen court judgments against you. Those countries would only be able to pay ready cash for everything with very sympathetic counterparties. I didn’t say it would be easy or cost free, just that it may well become very tempting for a lot of debtor countries drowning under odious debt.
If a country is already under crushing debt or crushing sanctions and China/Russia are sympathetic, then why not? Plenty of countries have renounced or debased their currencies in the past in order to pay off debt. Italy did many times before it got tied to the Euro and had been paying and paying for that mistake. Why not give themselves a jubilee to get rid of odious debt? They can get everything they need outside of the dollar system.
Yes it’s a one and done so they better behave under whatever system the Russians and Chinese set up, but it’s far less odious than being perpetually forced to do IMF structural adjustments because someone twenty years ago borrowed and wasted money.
For a country like Syria or Venezuela, who are already so sanctioned that BRICS is the only lifeline left, it would be a no brainer. Others less desperate may follow suit if the process goes well for that vanguard.
I do want to clarify that I don’t think yuan or whatever BRICS comes up with will replace the dollar as the reserve currency. I suspect it’ll be something Bancor to facilitate settlement of trade. China has long understood the dangers of deindustrialization and financialization as a reserve currency, so I don’t think they’ll go down that path even if it can make them extremely powerful and rich for a time.
Massive dollar holdings by non-US actors was always about being on the other side of the US trade deficit and free riding on the US ability to export inflation to other countries are comparatively little cost. I think post-dollar, it’s back to holding real capital goods and species, or perhaps an electronic basket of currencies.
Yves made some excellent points in the OP and it’s honestly great to see some skepticism over the de-dollarization bulls. But I also agree with some of the points of your first comment. I think they also shed light on why the follow-up comments seem wrong.
Where I tend to disagree with Yves and agree with your points is in regard to the interest in de-dollarization. Russia and China don’t need mentioning in that regard {maybe a brief comment: while for now China is afraid of US banking sanctions, the reality is that they’re inevitable in the future (Russia comes to mind), particularly with a Trump presidency that will always antagonize and push for some war with China, even more than now}, Brazil’s president made bold statements last year on the need of de-dollarization of international trade, if Modi has a brain he’ll welcome an alternative to the dollar (as he tries to extract maximum concessions of the US-Nato and China-Brics at the same time), the other BRICS+ also have an interest in de-dollarization (esp. Iran). Do “The BRICS [have] every motivation to come up with something that’s workable and soon”? Of course they do, as soon as possible.
On the other hand, you also stated that “We’re seeing the US empire of unequal trade arrangements backed by military bases and comprador elites in other countries crumble in front of our eyes.” Are we? The bases and the comprador elites are still there. The comprador elites, btw, are most interested in keeping their tax haven dollars safe. This is a point Varoufakis repeats, these elites aren’t particularly interested in de-dollarization. The bold plan you envisioned for the Global South to force a jubilee lacks the necessary agents. As Yves mentioned, Argentina isn’t a good example, for the reasons she pointed out. It’d be great if the odious debt that was enforced on the Global South mostly by military juntas propped up by the US (or France, UK etc. to a smaller degree), and then upgraded by IMF and World Bank ransacking, would be defaulted upon. I’m not holding my breath for it, at least not while the US is still the emperor (a crumbling one, but an empire nonetheless). But it’d be great if, e.g., Greece would switch to an alternative and default on its unpayable, and increasing, debt.
I also agree with the Michael Hudson mention. He said recently that what he expects is not a currency like the Euro for the BRICS, but something like Bancor (closer to SDR then), for settling commercial imbalances. I.e., state money, not exactly ordinary people’s money. He said this is what Putin and Lavrov have been talking about. And that’s what I expect too. Maybe NDB debt could be used instead of US securities? Or some ppl toyed with the idea of R5, a new (Bancor) money based on a basket of BRICS currencies (their names start with an “R”, thus “R5”). Instead of having multiple bilateral swaps, this could make more sense, otherwise you’d end up like Russia holding a lot of rupees that have nowhere to go. The reasons Yves pointed out against enthroning China’s renminbi all stand, it’d go against China’s whole strategy up to this point to want to become the new reserve currency.
But I’m not a finance person, so reader beware.
““We’re seeing the US empire of unequal trade arrangements backed by military bases and comprador elites in other countries crumble in front of our eyes.” Are we? The bases and the comprador elites are still there.”
(Barring Communism) The comprador elites will always be there and will try to have as much control as possible. But I tend to think that their recent display of open and absurd fascism on repressing dissent is a sign of significant weakness. They can no longer get their way by managing public opinion covertly but have to resort to heavy handed approaches that are backfiring, as we’re seeing in EU elections. They can no longer promise anything good to their public but resort to fear mongering tactics that are increasingly ineffective. These elites are also showing themselves to be deeply deeply mediocre people, so that the likes Orban or Fico appear like statesmen in comparison and Putin seems like a world historical Colossus.
On the military bases. For now, they’re still there but American military recruitment has been absolutely disastrous in recent years so staffing is an issue. The cost, even with a reserve currency printing press, is starting to add up into a debt whose interest is soon going to dwarf all other federal non military expenditures. And then there’s the example of Sahel countries and Houthis taking direct action against the Americans and apparently winning. And the inability to up production on vital munition stock show the limitations of money. Despite a far lower budget, Russia is outfiring all of NATO in Ukraine 7 to 1 or better. When it really counts, it’s domestic production and capabilities that really counts. This is what Iran also uses in its construction of its Axis of Resistance. It shares know how but Hezbollah and Hamas and Houthis mostly or entirely built their own weapons and they’re winning against sophisticated weapons systems that cost 4 or 5 orders of magnitude more.
The inertia of this empire and the extreme reluctance of Russia, China, and Iran to directly challenge it (for fear of blowback and in hoping that historical processes within the West can do much of their work for them) is slowing down possible changes. But I see the fissures everywhere and I see a completely decadent Western elite that lives in their own world of make believe. So I think the end is pretty close. With better leadership or absent emergencies, the Western system could have continued on unhappily for several more decades, but we have the opposite of that. And climate change is going to add a lot of fuel in the coming years.
It seems reasonable to observe that the existence of the dollar as the dominant reserve currency system – dollar hegemony if you like – cannot be assumed to exist as a stand alone systemic structure and process which is immune to outside pressures.
Systemically, it is part of the wider system of US hegemony. The dollar reserve currency system will stand or fall dependent upon the US remaining and maintaining hegemony across the full spectrum.
Right now, as observed and implied in other articles on this site (among many others), that hegemony is, lets go with the understatement, experiencing a degree of outside stress.
It cannot keep up with the Chinese in terms of productive capacity. Hence the recent trip by Yellend to China essentially admitting that the Chinese system is outperforming the US neo-liberal system by “overproducing.”
It cannot keep up with Russia industrially as we are seeing in Ukraine where just in military terms the bang per buck of NATO – ie the US – is a damp squib and they cannot supply value – ie they can supply mountains of dollar bills but nothing of practical use to turn the military tide.
Quite what comprador elites in various parts of the globe – not the most brave of souls – are thinking in regards the credibility of the US to maintain the full spectrum of systems necessary to continue that hegemony as they daily watch and assess such present debacles of an incompetent Western elite will certainly be something which needs to be factored in to any analysis.
The bottom line is, that as a result of the dollar system as described most definitely not being a stand alone system immune to wider outside systemic pressure, if US hegemony declines at whatever rate and goes beyond a certain trigger point that dollar system will definitely end.
consequently, the only variable in question, given that the US/Western hegemony is under serious challenge and the at least implied if not explicit acceptance that its elites are incompetent, is the time frame for when that inevitability occurs.
People – including comprador elites as well as financiers and bankers – go with winners not losers.
As to the mystery of why the smarter members of the elites do not defect – look at what happens to Fico and what happened to Lula, for wanting just some autonomy and neutrality for their countries. Quashing dissent from the “rules based order” has been continuing since the Pinkerton days, and it was extremely powerful and universal in its hay day (Olaf Palmer, Patrice Lumumba).
It’s just that with social media, weakening actual industrial and military power (and even legitimacy, as they’re openly ignoring laws that they put in to protect themselves), and complete inability to ever take an “L”, that whack a mole is looking more like trying to whack a mega ant colony.
Quite. Another driver which seems to be ignored in regard to the argument that dollar hegemony is not going to collapse anytime soon and continue to be around for some time to come is the external factor – which goes beyond the sanctions issue – of the increasing theft of other people’s assets (dollar or otherwise).
The Russians recently commented on this point:
https://sputnikglobe.com/20240614/putins-full-speech-at-foreign-ministry-brics-nato-expansion-and-ukraine-peace-talk-conditions-1118955280.html
“The issue is even deeper. By stealing Russian assets, they will take another step towards destroying the system they created themselves, which for many decades ensured their prosperity, allowing them to consume more than they earned, attracting money from around the world through debts and obligations. Now it is becoming clear to all countries and companies, sovereign funds, that their assets and reserves are far from safe — in both legal and economic terms. And the next in line for expropriation by the US and the West could be anyone — these foreign state funds could be among them.
Distrust of the financial system based on Western reserve currencies is already growing. There has been an outflow of funds from securities and debt obligations of Western states, as well as some European banks, which until recently were considered absolutely reliable places for storing capital. Now even gold is being withdrawn from them. And they are right to do so.
I believe that we need to seriously intensify the formation of effective and safe bilateral and multilateral foreign economic mechanisms, alternative to those controlled by the West. This includes expanding settlements in national currencies, creating independent payment systems, and building production and distribution chains bypassing channels blocked or compromised by the West.”
President of RF: V Putin
Regardless of whether its the ‘Fed’ the State Department or whichever bit of The Blob is involved, the “indifferen[ce] to the impact of its policies on other countries” also very clearly extends to being indifferent to the impact of such policies on its own country – ie the USA.
No serious person, investor, State entity or whoever is going to continue to be part of such a system in which they risk having their assets appropriated at will by what is nothing more than the State equivalent of a spoiled and mardy child.
Defining the term Globe in its literal and practical sense – rather than simply as that minority part of the world which is the Collective West – basically the G7 + Australia/New Zealand – that external factor alone will significantly accelerate the velocity of the demise of the dollar system.
For sure, it may survive as rump system in a rump corner of the planet in the USA and its Western vassal States too dumb to bail out. However, as a truly Global system its a dead system walking.
Necessity, as has been the case throughout history, will provide the required systemic structures and processes to replace it for the majority of the sensible and grown up majority of the planet.
To Dave Hansell:
Stealing the assets of a country with which one is at war is in fact very common historically. That goes beyond seizing central bank assets but also those of citizens of the opponent state, including real property.
The difference here is that the US and EU are maintaining that they are not at war with Russia militarily, while being at war in the financial realm.
And as the article points out, depsite the US and EU having seized Russian assets in 2022, here we are in 2024 with the US still having more central banks wanting to buy dollars than not.
You also greatly underestimate the lead times, operational and legal difficulties in setting up new international financial institutions. The BRICS already have an IMF analogue, the New Development Bank, and it has done close to bupkis despite no shortage of currency/fiscally stressed countries that are very eager for an alternative to the hair-shirtery of IMF programs.
The gap between what players want and what can get done near term is very large, and you appear to lack the patience to make even a feeble effort to understand what it entails. If merely wishing for things to be different were tantamount to having them happen, the US would be winning in Ukraine by having magicked artillery shells into existence.
Finance has very large infrastructure and coordination requirements. Informed people have no trouble understanding the message of Alex Vershinin’s The Return of Industrial Warfare article, that it will take the West ten years to catch up with Russian weapons production, assuming they commit resources to it in a serious way. Financial architecture has similar long lead times to work at scale.
Shorter: Your comment is a textbook example of MBA thinking.
It would seem reasonable to surmise from the record of theft of assets of a range of States other than Russia that the US is at war, economically or otherwise, with quite a number of other countries at whatever time it is deemed convenient to those who get to make these decisions?
Whilst such a situation – according to the wisdom of Official Narratives we are told about how markets work – might not necessarily be conducive to the kind of stability investors prefer, that kind of consideration is likely to be a factor to only a minority of players in the system in overall percentage terms.
The point being that it also seems reasonable to consider that the key metric on central bank dollar holdings is not only the number of central banks wanting to buy dollars – at any one snapshot in time – but also the actual amounts involved?
That metric in percentage terms would likely reflect the relative wealth of those States holding dollars? With most of those holdings being in the wealthiest economies. With two of the present top four economies – China and Russia – seeking to reduce their share of dollar holdings the majority, but by no means all, of that holding is likely to be spread across the Collective West?
Ultimately, I am talking here about a rate of change process rather than a static snapshot of what the position is now. The argument being that as an alternative system develops and progresses, in a context in which no State outside the ‘garden’ can be certain they will be the subject of such economic warfare that rate of change process will likely increase and accelerate..
Simply because that is the logic of a multipolar system compared to a unipolar one. Dollar hegemony is a feature of a unipolar system. If dollar hegemony remains than by definition you do not have a multipolar system. As would be the case if some other currency replaced the dollar to produce the same advantageous outcomes for the State whose currency that would be.*
That’s not “my” argument. Or that of some Micky Mouse MBA doctrine. Its the systemic logic of the principle of a multipolar system, its structure and its process.
What I am arguing is:
(a) That rate of change could well be quicker than a lot of us anticipate at this moment in time;
and
(b) In such a multipolar context – where even alternative institutions are being planned – the dollar system may well end up being confined to operating across the minority Collective West whilst other parts of the world may operate under alternative systems?
*It would aid my understanding if I knew explicitly whether or not the argument presented is implicitly saying that a multipolar world is not possible because only a single global mechanism is viable?
Thanks.
I think the difficulty of standing up an alternative and unwinding from the dollar is overstated. Yes, it would be a substantial challenge but it’s one that happened before in a comparatively short time (basically the back half of the 1940s). Yes, such moves are beyond the technical capabilities of Greece in 2008 or Brexit (which isn’t currency related but present related complexities). But those are small, intellectually depleted countries who continue to be dependent on the US/EU nexus. You can’t even compare them to the likes of Hungary or Belarus, who are small players in the middle of Europe, but persistently defending their national prerogative.
By contrast, look at what Russia and China are accomplishing when they put their mind to something. Chinese accomplishments in HSR (I recall when it was widely mocked, including by most Chinese, as a crash prone white elephant) and advanced computing (Huawei putting up an entire ecosystem of hardware and software in a few years) are proof of that capability. We see companies with more R&D staff than the entire headcount of major Western companies. Is solving a known solvable problem so difficult by comparison?
As for lead time and getting the various parties together. That’s why BRICS and SCO are talking about these structures now, so they’re as far along as possible when they’re really needed. My expectation is not that the changeover will be frictionless or low cost, but that the cost and danger of continuing to be beholden to the dollar system will soon be unbearable for most countries that want any kind of independence from the US rules based order. That’s a great motivator to cooperate and change together, on an ASAP basis.
While confiscating Russian reserves while not officially at war is a first, the US stole Venezuela’s reserves and assets easily by simply announcing Juan Guaido as its recognized president despite zero legal basis for the recognition.
Then look at Gaza. The US is not at war with Hamas or Hezbollah or Iran. But it’s willing to jail American citizens peacefully protesting against genocide in accordance with the ICJ interim decision and invade its Dutch allies at the Hague if ICC arrests Bibi and Benny.
Against such a lawless and non-negotiation capable hegemon, any sane state and person would want a backup plan. Its like banking and getting protection from Tony Soprano, except Tony is now addicted to bath salts and has started to whack random people for no reason.
Argentina or even Brazil are not the guinea pigs I’m thinking of. I’m thinking about Cuba, Syria, DPRK, Yemen, Afghanistan, and perhaps Venezuela in that vanguard. These are countries so wreaked by sanctions and direct US military intervention that they didn’t have much to lose. If the West was reasonable, it would try to bring them back into the fold by normalizing relationships and letting their neighbors help with their reconstruction. But the West is intent on their utter destruction so they need an alternative that’s completely outside of the US dominated system. But any sane country will recognize that they need to have a backup plan to the deranged West just for self protection.
“Argentina or even Brazil are not the guinea pigs I’m thinking of.”
Especially thoughtful series of comments. Thank you.
Great series of comments.
“Debt” IS the issue, or should be for Latin America/other nations, but no one talks about it how the BRICS are dealing with this matter. All the US has to do is throw its hammer upon Latin America, other nations to destroy them. So why isn’t the US doing that?
We rely a lot on Hudson, but we can find none of his articles or interviews that explain how these nations can deal with their immense DEBT.
At present there’s a big conference going on in Russia w/ Brics Nations, but we’re never privy to whether they are dealing with that huge issue.
Can anyone provide online sources in how these nations can bypass or reduce these Debt Obligations? Please help.
I see no evidence that anyone has that concern. The big aim is to be able to trade without the US being able to meddle via sanctions. The priority Lavrov describes, that of creating information networks to facilitate bi-lateral trade, gets you a long way there. Then you have the problem of trade imbalances, where Hudson is recommending a son-of-bancor settlement currency. But for that to work, it has to punish creditors and debtor countries, and creditors more than debtors, since creditors get economic benefits from their mercantilist policies. I can’t see China agreeing to that.
Yeah, the global majority have a big incentive for an alternative. Hudson’s talks with Radhika Desai have also exposed the big obstacles and challenges – this will be very difficult and also a huge watershed moment in modern history, like Bretton Woods was. (barring no nuclear wars or climate/environmental collapse). They have also concluded that it could take many years to set up alternative currency unit, intl institutions etc. We are talking about a new framework that involves dozens of countries.
There will not be a new international currency. The users would have to agree on a new legal system in which it would operate, among other ginormous obstacles. Na ga happen. I wish people would stop talking as if this were a viable idea. The most viable would be China taking over as reserve currency but China does not want to run deficits nor does it want to give up capital controls. So that cannot happen until China radically changes its policies.
I don’t think it is a viable idea in the short term either. You are probably right, but we speculate on future events. Bretton Woods was forced on most of the world as the US enjoyed an historically unprecedented position at the end of WWII. The situation today is quite different of course. I do not disagree about the huge obstacles, as my comment below shows. Setting up new institutions, legal framework, hammering out details that are acceptable to the global majority govts may be near-impossible at the momement.
I don’t see how a national currency, China’s or anyone’s, would serve as reserve as the USD does. Would the rest of the world agree on using a national currency? As my island friends would say “Dat nah go happen eidah.”
It’s striking that most commentators are either chicken little or “nothing to see here” about this issue. Thanks for gathering points for a more sober assessment.
Which side am I on if I think this ultimately doesn’t matter because accelerating climate catastrophe will cripple global industrial capitalism within the next few decades?
I’ve been following NC more-or-less daily for over a decade now and it’s always interesting to observe Yves and companys’ vacillation between live-charting collapse and an academic affinity for the financial system. You can take the gal out of McKinsey…
Solid analysis from the Financial Times, and like any respectable speculator, they even hedged their position with the following statement at the end of the article: “It is not impossible to imagine, in the current political climate, a deterioration in US institutional resilience that ends up posing a serious threat to the dollar’s long-term standing.”
My TLDR on that is: all bets are off if there’s a Civil War in the US. Chances of the later happening is zero in the short term, but the chances of the US continuing on its current path for the next 10 years also look pretty low IMHO. I also think this global reserve currency thing is overrated, when the time calls for it, people will use whatever that’s acceptable to trade. Central Banks obviously think Gold has value, trading using the later will be SLOWER, but there’s nothing that says that it’s impossible.
Which gold? My understanding is that, for much of the postwar era, the “gold” that has been traded between countries and int’l institutions etc have been gold deposited in US, ie the claims to them have been moved around, but not the actual gold. In other words, everything could be disrupted by US. There have been recent instances where governments have been taking gold out of US, I’ve read, but I could never get a good sense of its magnitude in a big picture sense (more info, pls?). Trading with actual physical gold seems like madness, though. So we’d be back to the status quo–some institutions with credibility are needed, if only to serve as the depository of the gold. And institutional credibility is hard to build.
https://en.wikipedia.org/wiki/Gold_repatriation. Also AFAIK countries like China, Russia, do not store their gold in the US. Countries can also just re nationalize their gold mines. “everything could be disrupted by US”, in other words the US has become a single point of failure, and I think that pretty much rings the bell on the idea of another country’s currency ever becoming the world’s reserve currency ever again, because what stops this new country from becoming another US years down the line?
If trade settlement were to be done in gold once again, I see cities like Singapore, Hong Kong and countries like Switzerland playing their traditional middle men role for a price.
Look, I did say a lot about gold, but the question that I am trying to raise is the following : is the presence of the US an essential component to the concept of trading as in will countries be unable to trade ever again from now on absent the US? My answer to that is necessity and greed will find a way, US or no US, gold or no gold.
I used to get in a whole lot of arguments with people because after COVID I said we were likely heading for a period of relative dollar strength rather than the “demise” of the dollar a lot of cranks were talking about. I also said emerging markets were going to be the ones taking it on the chin, because they had a lot of dollar denominated debt and they wouldn’t be able to keep up with the Federal Reserve hiking interest rates. This is basically what happened. All this talk about the collapse in the dollar and the loss of its status as the primary reserve currency falls apart the minute you start talking about alternative scenarios.
To be replaced with what, the Euro? As if that were any better. the RMB? I guess, maybe at some point in the distant future China could take on more of that role but with the hostility of the PRC towards foreign investment that isn’t really on the menu any time soon. Crypto? Don’t make me laugh. The people making that case act like the full faith of the US government as a store of value is too risky but shady exchanges run by the likes of Sam Bankman-Fried are somehow secure. No, none of it adds up and never has.
Nothing brings quacks, cranks, and crypto shills out of the woodwork like talk of the death of the dollar.
Well, when the full faith in the dollar can be crushed by the US stealing your money, in time you’ll limit your exposure. The settlement of trade between Russian and China in their own currency is an example; they are the top and fourth largest economies in the world. (Russia is determined to improve it’s standing.)
In time, the value of the dollar will decrease and the inflation in the US will increase. Soon enough political turmoil will make the Fed candy store seem a mirage.
I’m going to repeat myself here. To be replaced with what? All the dollar doomers stop short of offering up any kind of alternative scenario. The idea that the rouble has any chance at becoming a major reserve currency is risible, frankly. I get that you hate the Fed, the anti-central bank crowd is predictable, usually wrong, and boring.
As I stated previously, this talk falls apart immediately when people such as yourself are made to actually describe what the alternative would be. Because you don’t have anything remotely possible. It’s just “I hate the Fed, the dollar is doomed, inflation will destroy you.”
I propose both approaches to the question, “I hate the Fed” and “Replace with what?” should be looked at with computational power in mind. When the Euro was created computational power was much less than it is now. Consider AI (I understand its foibles) and the speed of processing variations and possibilities, a system could develop that seems unimaginable at this time.
AI arriving deus ex machina to somehow replace the Fed and the dollar as the reserve currency is even less plausible than the rouble.
He’s saying that something currently unimaginable could take the dollar’s place, just as current AI capabilities were not technically imaginable several decades ago. Rather like no one predicted the collpase of the ussr; it seemed unimaginable but happened anyway.
You are forgetting how the dollar became accepted as a reserve currency in the first place. Gold received a fixed price, in US dollars, in 1944 under the Bretton Woods Agreement, and a system of fixed exchange rates (to gold via the US dollar) and capital controls were put in place.
The current system was established in 1971, with the US severing the link to gold. That was a unilateral decision by the United States, which other countries actually were quite unhappy with. The world did come to accept the new arrangement basically by inertia, though with some hitches on the way, like the OPEC countries demanding a 4x increase in oil prices to reflect the devaluation of the dollar in gold terms, and the gold price increasing 20 times during the course of the 70s.
It’s quite bizarre however to argue that the reserve currency status of the US dollar fell down from the sky and has no imaginable alternative, given that the reason it was ever accepted in the first place was its (assumed to be eternal) convertibility to gold. Many would in fact argue that the monetary system of 1944-1971 was better than the one we have today, not least because it placed a constraint on the ability of the United States to pay for wars overseas. (US officials actually admitted at the time that part of the motivation for European countries to cash in their dollars for gold was their dissatisaction with the war in Vietnam, see for example the 1968 article “The Sieve of Gold” by Michael Hudson, which is available online.)
I suppose that if conditions in the US get so politically bad that the dollar becomes very unattractive, but at the same time there is no viable alternative to the dollar, it would mean replacing the dollar with the collapse of the international financial system as it currently stands. Now, I wouldn’t argue that that is going to happen, but given the two constraints it would seem to be the likely outcome.
I agree with this. The only real way the dollar loses its reserve status in the foreseeable future would be due to politics here getting so bad that most other central banks felt like they had no choice. I think you are also right that such an event would also take the financial system as we know it today with it .
That could take a while: inertia can keep the status quo going for a very long time, especially when all the alternatives are sketchy. I have this hunch that if and when a collapse comes, it could be extremely sudden, but it’s more likely to take the form of chaos everywhere, rather than any stable institution taking over the reins. The big concern to me is that US political “leaders” seem determined to take things over the edge, though.
I don’t think there’s a rule that says the world needs a reserve currency – it’s a thing of convenience. It lessens friction in international trade and lessens currency risks, but as we can in real time, international trade is actually possible without using reserve currency.
When the inconvenience of reserve currency out-weights the convenience of the reserve currency, you can expect countries to drop it. Even more so when the reserve currency holder actually forbids other countries to use the currency.
As far as I can understand, BRICS is not looking an alternative reserve currency, they are looking an alternative for reserve currency. Then they use the system that is least inconvenient for them at the time.
Appreciate the thoughtful analysis in the article and the comments. Too often where this subject is concerned I encounter wild speculation absent either much in the way of data or understanding of the nature and heterogeneity of currency flows.
We are in somewhat uncharted financial territory, as there has never been anything similar in history to the digital Dollar, and just how to go about debauching it, were you a rival suitor wanting to be top of the heap. A number 1?
Has there ever been another era where all the currencies of the world were fiat currencies?
Another interesting point…
The last circulating silver coin was 31 years ago~
It’s weird that the word “fiat” has such a negative connotation when, in fact, it is pure genius. It’s the magical transformation of human cooperation and consensus into (now) fungible digits. It’s mind boggling. But we are nothing if not tokenizers. Symbolize and tokenize and just carry on. It makes me smile. The only missing element is reverence for Nature. That’s the part that has me worried. Because we can’t do Justice to Nature symbolically, we have to actually be there with “boots on the ground,” as they say.
Fiat also sounds like “faith.”. I joke that no one who thought seriously about fiat currencies can be an atheist, even when they “know” for sure that there is no god.
Even the metallic currencies were fiat, since the sovereign determined the conversion rate and the circumstances under which conversion would be allowed.
All currencies in this respect are creatures of state law and hence essentially fiat, regardless of the medium out of which its tokens were made.
Many people are not concerned about the use of the US dollar because they believe that sanctions are only used against “rogue states” like Russia.
LOL, like Angela Merkel thought that the NSA/CIA only spied on “enemies”. I wonder if her outrage was genuine after she found out that her own BND had kept her in the dark for years?
Leadership, or something like that, on a need-to-know basis.
The key is, who, whom.
More important than the dollar as a medium of exchange is the treasury as a store of value, which is circularly caused by/the cause of US trade deficits.
The problem with SDR (the original dollar replacement) is that by design it punishes both trade deficit and surplus countries, which means no one of importance wants it to work. I think China et. al. don’t have a problem with someone having the exorbitant privilege of running a sustained deficit, just so long as it’s not the US.
One way I could see detreasurization working is for the trade surplus contingent of BRICS+ to make SDR2 with built-in minting privileges for unimportant global south countries to buy surplus nation goods. Call it SDR-eco and sell it as climate justice if you want (too bad the eco is already claimed) but that would mostly be an excuse – the point is for trade surplus countries to keep running a surplus without enriching the US.
Of course this plan has lots of its own problems, the first of which is that it’s more transparently an exercise in giving stuff away for free. I predict that that will be more palatable if the perception of the safety of treasuries is ever lost.
So what happens when the USA gives in and officially admits that it’s a multi-polar world/economy and that all they (USA) can really offer is the dollar? Collapse?
How much can we afford if we nationalize the wealth of our oligarchs and trim back our military to whatever Mexico or Canada has?
Considering Cuba and North Korea haven’t really collapsed despite being small resource poor countries that have been heavily sanctioned during their entire existence, I don’t think societal collapse is inevitable. But dollar collapse might be.
>>> the dollar? Collapse?
No, in my opinion. Currencies are relative instruments, if the neighbors house is on fire, your leaky roof looks like a palace.
if there ever is a US “collapse,” the EU and Euro will fall apart well before that event.
The US can become a relative autarky, but any transition will be painful—no more (relatively) cheap widgets at Mega-Lo Mart. Less Starbucks and Dunkin, more PBJ sandwiches.
Just look at newspaper adverts from the 1950s—goods were much more expensive when compared to the average wage back then.
The winners will be the natural resources states (OK, TX, CO, MN, etc), the losers will be the service-economy states (NJ, DE, CT, etc)
A consummation devoutly to be wished. CT especially.
Should have said….all we have to offer is “Exorbitant Privilege .”
It’s curious that everyone from Judge Napolitano to Jimmy Dore, and many lessor stars in the alt-MSM universe, are paid sponsors for companies specializing in diversifying retirement funds (assuming you have one) into metals. I’ve been sitting on the fence on what to do with my little savings now that I’m nearing retirement. I want to hedge against a currency meltdown and/or hyperinflation, but I’m too confused. I’ve moved just about everything into bank CD’s that are earning slightly more than 5% and just sitting tight for the moment.
You are in good company on rates with Warren Buffett, who is reported to control about 3% of the T-bills. He said, paraphrasing, that he could earn around 5% with low risk versus plunging into expensive and riskier equities. Us mere mortals can find similar tiny offerings at numerous local outlets like those bank and credit union CDs.
Look around at what credit unions are offering for opening a new account. I’ve found multiple ones recently that are giving an interest rate for the first 13 months that is equal to any of the CD offerings. You’re basically getting a CD that you still have access to if you need it.
I wonder if CDs are covered by federal deposit insurance, the FDIC?
Invest in yourself and your community. Metals just fuel more mining and resource wars.
I am not claiming you won’t “make money”, people made money in crypto, just that gold comes with a huge environmental and social cost and will be useless to you during the jackpot while knowledge of wild foods and a community forest or microfarm and the relationships formed creating that could make a huge difference.
Who knows what events might bring, but yes, it will likely take decades for the Global Majority to figure out a way of creating an international currency unit to replace the USD. As Yves and others point out: bilateral currency swaps are ok for limited transactions, but what about large scale multilateral trades? What about BoP settlements? What about reserve currency? What about loan denominations? An alternative system, complete with international institutions acceptable to the majority is a tall order.
There would need to be summit meetings and widespread agreements made, after the details are hammered out. Who knows how long that could take, unless unforeseen events spur the process.
I don’t agree with everything in this paper, but it does raise important issues, and I do agree that USD near-hegemony will be around for quite awhile.
https://blogs.lse.ac.uk/internationaldevelopment/2024/02/29/long-read-the-beginning-of-the-end-for-the-us-dollars-global-dominance
And of course, Michael Hudson has been writing about this for decades. I have learned a lot from reading Super Imperialism and other great books from him. I also learn daily from visiting NC, comments included.
An alternative POV – point of view, USD operates as an unit of measurement and what’s important is the static collateral like hard assets. What we see is a slow process of gold displacing US long bonds with bullion bars and that is the new collateral to insure the Int’l trade settlement . Bullion bars in the vaults in Dubai instead of 10 Yr US bonds allow traders , producers and customers to trade the discounted aka sanctioned energy and commodities. As long as collateral is available UAE bankers can settle / clear the int’l trade in any currency. In a case of a credit event, we can always reprice the collateral. In summary, the USD long bond is no longer an acceptable collateral for the trade within the BRICS zone. Turbulent times ahead, unless one is accumulating hard assets.
There is not remotely enough gold in the world to serve as collateral for trade.
And bonds are not used as collateral for trade either. The security is a bank letter of credit, either a documentary letter of credit (to substantiate that the goods are what they are purported to be) or a financial letter of credit.
And commodities are volatile.
Hi Yves
Are you considering how overpriced US stocks are compared to gold in real inflation adjusted terms? Also we don’t know how much gold China has, it is definitely under reported…
Ps You are doing a great job.
That was not the topic at hand.
We do not give investment advice.
There is not remotely enough gold in the world to serve as collateral for trade. There certainly isn’t because we live under the dollar system, and there is ZERO demand for Gold to serve as collateral. It’s an either/or situation. But countries can agree to revalue gold (or whatever collateral they’ve agreed on) to serve as the basis for trade. Once that collateral has been agreed upon, there will be a flight from the Dollar to the new collateral where the later will just shoot up in price.
Again, I am not saying this is possible in a short period or even a good basis for “investment”, it might never happen. I am just thinking about centuries past where countries traded without the presence of international bodies for settlement. Trade will find a way.
Also the peak oil guys have been wrong for quite some time now, but there are credible people arguing that we might have at most 30 to 40 years of oil left. Presumably trade will be seeing a drastic reduction in volume way before that happens, so I wonder if the concept of international reserve currency will survive that event.
“Turbulent times ahead, unless one is accumulating hard assets.”
Why is anyone selling them then? How can you accumulate these hard assets when everyone is buying them? The people selling them the hardest are the same people telling you that you need more. How does this make sense?
The paternal arrogance of your sort of sucker is entertaining. “Do as I say, not as I sell….”
“Details over its design — including who would bear the ultimate risk of the loan to Ukraine, and how the money would be distributed — were not specified in the agreed statement.”
As far as distribution, I’m guessing that most of it will end up on the books of western corporations, and any risk will be absorbed by western governments, privatizing the gains and socializing any risk.
What I have trouble working out re: bilateral trade is how a cumulative imbalance gets settled.
For example, in an Argentina/China trade if the Chinese export more into Argentina than they import from Argentina, then I believe that the Argentines would wind up having a cumulative balance due the Chinese in Renminbi.
If that continues over 5 or 10 years, where do the Argentines get the Renminbi required to pay off that balance?
Yes, you have put your finger on the key point. Bilateral trade is a stopgap unless the trade surplus country is willing to hold financial assets of the deficit country. Recall how unhappy Germany was with respect to Greece. Yet Germany did not admit to the contradiction of having policies that would have them run sustained surpluses in the Eurozone and being unhappy with the consequences.
When building complex systems, one strategy for dealing with the complexity is to start somewhere useful, get that working, and then layer on additional features.
The place I’d start is with a few big players that do a lot of trade with one another. Let’s use Russia and China as the initial players, and let’s use a transaction size of 100K USD as the minimum transaction size.
Let’s also assume that the parties agree to settle (in USD, or gold, or whatever) any outstanding balances annually, so no one’s left holding a big bag.
Let’s also assume that the exchange rate between the players is reset according to a fixed formula once a week.
When a company in Russia buys from a company in China, the goods are priced and invoiced in Yuan. When the goods are shipped, the Russian company consults the current exchange rate, and pays the appropriate number of rubles.
The regional and local banks conduct electronic transfers to the respective countries’ central bank. The central bank in Russia pays the central bank in China the appropriate number of Yuan, and the Chinese central bank credits the Chinese company’s regional/local bank accordingly.
So both parties are using their native currencies, the currency reserves and exchanging is done at the respective central banks.
This system’s scope is just for commercial buy-sell transactions. The only party holding sizeable foreign currency amounts is the respective central banks, and those “sizeable amounts” are cleared (settled / brought down to comfortable limits) on a regular basis.
So except for the central banks, no one holds foreign currency, or notes denominated in these currencies. It’s just a payments clearing system.
The objective of this scheme is to make it simple and low-risk to buy – using your native currency – from the other country’s companies.
And of course, if this actually works, then additional countries could be added to the system.
It seems likely that this sort of system is already in place, but it’s way more complicated that I am representing here.
Due to my ignorance on this subject, it seems likely that I am over-simplifying, so I ask the knowledgeable people reading this to explain why this model is deficient.
Thanks!
This is very similar to what I imagine too. But with linked CDBCs (in the style of mBridge, but possibly a bilateral link between Russia and China in this case instead), the transactions could also be routed via the respective central banks.
For example, if a Russian company wants to pay an invoice in yuan from a Chinese company, they could make a bridged CBDC transaction: Essentially they pay the corresponding amount in rubles to the Russian central bank, and the Russian central bank then pays the Chinese company in digital yuan. (There is already a swap line in place that the Russian central bank can draw upon whenever it needs yuan, and it could then convert those new yuan deposits at the PBoC to digital yuan.) This could all appear as a single, atomic transaction in the digital ruble system (with the platform offering a certain exchange rate).
To the extent that the Russian central bank ends up holding more yuan than it wants to hold, or the PBoC ends up with too many rubles, they could settle these imbalances in gold. It should be noted here that gold wouldn’t be needed to “back” all transactions between countries, but instead only for this netting between central banks.
This is basically what Michael Hudson has been arguing for if I understand him correctly: Not a gold standard, and not anyone substituting their national currency (read: the Chinese yuan) for the dollar as the world’s reserve currency, but ultimate settlement of the balance of payments between countries in gold instead of in US dollar assets.
Ebolapoxclassic:
That was terrific. Thanks for taking the time to write that post. Your use of more precise terminology, identifying existing technologies (CBDC, mBridge), and ID of existing facilties (swap line between Russia and China) really helps me understand the moving parts, what’s extant now, and what the likely trajectory of the problem-solving will be.
As I consider this more, seems like the risks that have to be addressed – just for purchase transactions across currencies – include:
a. counter-party risk. Will the other party perform as contracted
b. currency rate-fluctuation risk. Will the exchange rate between currencies move too much between the point the order is placed and the point the invoice is paid
Item A is a contractual issue, and is not avoidable in any currency-clearing scheme.
Item B may be a problem that would get resolved at the central bank level; they’re the ones best equipped to address it. Possibly some sort of rate-lock mechanism would be implemented on behalf of the transaction parties by the CB. It would be in the national interest of both Russia and China to provide this service, and eat the losses if there were any, in order to spur trade between the two countries.
Using Ebolapoxclassic’s input, I did some reading on BRICS mBridge.
That’s the search keyword, there’s a lot of discussion on it, most of the discussion is perfunctory (announcements, “we’re working on it”, etc.)
I saw some hints that it’s in testing and early-stage rollout now, can’t provide a decent link, sorry.
Russia is heavily promoting this mBridge concept because it currently has the most to gain due to financial sanctions on it by the West.
This is territory I’m definitely not the most informed on. I agree with all the arguments that while China is unwinding their treasury positions & trade is de-dollarizing, most countries aren’t rushing for the exits with their cash holdings.
There seems to be an assumption in all of this though that the parties involved (US and foreign) have perfect agency. Instead of arguing over why countries would choose the dollar or some alternative (which I also agree doesn’t exist), what if the dollar goes down because of something nobody chooses? What if instead of the world suddenly withdrawing their dollar assets, the assets themselves just blow up one day? So less like boycotting apartheid in South Africa and more like the “and it’s gone” scene from South Park?
Looking at it like an investment thesis, it seems like the arguments for holding dollars is largely based on momentum and depth, not fundamentals of the underlying real economy. And let’s say for the sake of argument the government can maintain a competitive, nominal return on US treasuries.
If the overwhelming value in holding US assets becomes just to withdraw them again, to other currencies in economies where you can buy things & actual productive assets, then doesn’t it ironically become a lot like the Bitcoin bubble? Nominally strong until people actually decide to exit to invest or import from growing real economies, whereupon the exchange rate collapses to eat up any nominal return.
China has been to a large degree replacing Treasuries with higher-yielding Agency securities. So anyone who talks about China and mentions only Treasuries and not dollar assets is either not informed or intentionally misleading.
Similarly, and I forgot to mention, the degree of selling by the Saudis is overstated. The central bank has been selling but the sovereign wealth fund has been buying, and some thing it could be a fairly high portion of what the central bank has sold.
So again, even though the balances are generally falling for both countries, only some experts seem to be tracking carefully enough to see the full picture, which is not as adverse for the dollar as more cursory views would have you believe.
Ah, good to know. I’d seen headlines about both but wasn’t aware of those details. Since we’re still piling up a trade imbalance with both and the exchange rates haven’t blown out, I figure they must be parking their dollars somewhere.
I still think there is an argument for being bearish on the dollar, not in the short-term but not generations out either. But it’s less from the sort of intentional “punishment” or that countries will rationally choose alternatives like the doomers say. It’s more that maybe the Ponzi-scheme dynamics of contemporary America are even infecting lower-risk assets, and there’s a non-zero chance of a panicked run on the dollar.
the feverish that want to stop globalism, its really the free trade. globalism has been around for over five centuries.
they need to step back and look at whats really happening. sure, the dollar backs finance. and to a free trader, finance, the stock markets, ect. are everything to these cretins.
but, a real economy based on the production of goods and services, because service exits to service production. is a completely different sort of economy.
a much more sustainable and equitable economy.
the finance economy is parasitical, and very very unstable.
so go slow, set up a clearing house for barter. take other countries currency. in the end, you will probably be able to use it sooner or later.
build powerful manufacturing economies, based with highly skilled people who were educated for free, who have high wages, and a solid social safety net.
the west has the dollar, the rest of the world becomes the powerful new first world.
in the end, it will be hard to keep the lid on western populations, as they see well feed, healthy russian and chinese citizens, gain height and longevity, riding massive fast trains and airplanes built by them, all over asia.
touting the next big thing in manufacturing and medicine.
Rome was not built in a day
In point of fact, it was never actually completed.
To put it more bluntly, “new BRICS currency” crypto touts promoting their own schemes and their journalistic enablers are out over their skis.
They would need to get permission from the transnational bank cartels and shadow banking industry, and they seem to lack any thick percentage to offer. Those guys like things the way they are just fine and the proposed changes are just overhead to them.
I wonder if Saudi Arabia’s June 9th announcement that it will not renew its agreement around Petrodollars with the U.S. will have any major impacts on the systems described here?
This is fake news. The sort of bona fide news outlets reporting it do not cite any sources, just “several reports”.
I read the State Department archives, where the deal and its rationale were discussed EXTENSIVELY, including detailed minutes of key meetings with the main actors, including Kissinger and the famed Saudi oil minister Sheikh Yamani.
The deal was for the Saudis to put a certain percentage of their US oil sales (IIRC 50% but I would need to check to be sure, may have been higher) in dollar holdings in US financial institutions. The fear was that the Saudis were quickly getting such large positions in dollars due to the price spike created by the oil embargo that they could throw their financial weight around in a huge way (in the US! As in go on massive buyup spree). There was NO concern about other currencies, it was concern about their suddenly massive dollar holdings
The deal was also pretty short term, and never made into a treaty.
The Saudis may have continued to adhere to those practices due to the lack of great investment alternatives (European markets in the 1970s and 1980s were fragmented and not very liquid) plus a desire to keep good relations with the US.
The Saudis were already negotiating to sell oil for renminbi last year, and even set up a currency swap line last November to facilitate that, so the idea that they were constrained in doing so is disproven by the fact that Saudi-China discussions about how to get this done have been going on for well over a year (which means private discussions were probably in the works even further back). The US also tried pressuring the Saudis not to go ahead. There was no mention in any of the article on that of any formal obstacles . It’s more reluctance to ruffle the US since the Saudis still buy all their military gear from the US. But the Saudi unhappiness with the Gaza genocide makes this shift a useful way to push back against the US while getting something done it has been wanting to do for a while.
Also the US military presence in KSA and surrounding region is a big factor. If/when KSA and/or other Gulf states trade outside of USD to any significant degree, the US has some powerful incentives and methods of coercion to change their minds. Although extreme, maybe even regime change, drastic times and all that.. And the unhappiness about Palestine appears to be for public consumption, not much action by KSA to pressure the US or Israel that I can see. The Saudi elite always squawk, but they threw Palestine under the bus years ago.
None of the Arab elites care about Palestine but their people do. The popularity of largely Shia resistance movements in their struggle against the US occupation of Syria and on Palestine should and do concern them, as does their track record of failure against Yemen and Iran.
MBS is also a fairly independent actor and have publicly humiliated the US several times in recent years. He has already successfully resisted multiple attempts to dislodge him, so I’m not sure regime change is an option at this point. On military forces, my understanding is that direct US military presence is KSA is quite light compared to neighbors like Jordan, Bahrain, and Qatar.
I’m not a finance person, but could it be that the FED hike in interest rates is also aiming at making the dollar more attractive? I’d love to hear what more knowledgeable ppl think, but it seems to me that, besides being an attack on the working class by the Fed — which NC was quick to point out (kudos on the quality reporting btw) –, the higher interest rate would discourage countries to dump treasury bonds (since their value depreciated, like in the case of SVB) & would make it more attractive to get these new bonds. I’m not sure how relevant this is though.
Also: is China’s forex reserves going up rather than down? https://tradingeconomics.com/china/foreign-exchange-reserves
No, the Fed has always been indifferent to the impact of its policies on other countries. That means their currencies and the impact of hot money running in and out based on US interest rate changes. The Fed is strictly domestically driven.
Everyone is getting the idea of dedollarization wrong. It isn’t about changing to a new reserve currency with all the old rules. With all the same problems of the old system just copied and pasted over. That is such dumb linear thinking.
First we must understand what the problems with the dollar system are. 1) Build up of massive and ever increasing trade imbalances signifying worsening unsustainable trade relationships. 2) a very expensive and unstable international market for goods and capital that puts many countries at constant risk of severe financial crisis. A real alternative has to solve both of these problems not just redux them but with the us cut out.
The real alternative is a growing mutual trade pact with mutual defense of each other’s currencies and capital stock. This is exactly what the BRICS is. A mutual trading block with cooperative sustainable mutual trade and then mutual defense of each other’s currencies and each other’s capital stock.
Once this trade block becomes powerful enough. It’s members will be able to move away from unreliable and unsustainable trade relationships to reliable sustainable ones, solving problem 1). It’s members will also be able to avoid having to build up large costly fx reserves to insure against attacks on its currency and domestic capital stock, solving problem 2).
So in summary the dollar will not be dethroned by another equally flawed currency. It will be replaced by reducing the trade imbalances that exist today and in so doing also largely eliminate the need to hold fx reserves at all. The future is a world with balance sustainable trade and no large pools of fx reserves and no reserve currency at all. That’s the kind of future Kynes and his true disciples actually envisioned for the future.
That is your idea. That is not what any BRICS leader has said. South Africa is calling for a new BRICS currency, for instance.
And please tell me how one arrives as sustainable relations, which is balanced trade, when the most powerful player, China, is committed to running sustained trade surpluses? They would have to agree to a regime like Keynes’ bancor, which enforces more severe penalties on chronic surplus than chronic deficit countries, since most countries want to run chronic surpluses amount to stealing the demand of other countries.
I think that the situation is different for China. You’re right that Bancor would be bad for an exporter, but only if we think in terms of US/UK imperialism. The US was against Bancor because it wanted to keep nations indebted, prevent competition from developing in import countries, have the dollar replace the sterling as a reserve currency and so on (and there were also a few fair args against the idea). China has a different development model. It doesn’t want to replace the dollar with the yuan, it doesn’t want to pile huge debts of nations either, it wants to develop its real economy and have trade partners (securing the goods it desperately needs from other countries). Varoufakis said in a Q&A that when he was Greece’s FM he saw the debt to China was unsustainable, so he called the Chinese and said they’d have to renegotiate it and they accepted it without a fuss. This obviously didn’t happen with the Germans, the IMF, and the usual gangsters. In spite of corporate media’s reporting, China hasn’t engaged in the debt restructuring gangsterism of the West. As for developing the colonies, China invests in the partner countries, there’s a section of Lee’s ‘AI Superpowers (despite the title and it being a best-seller, it’s actually a good enough book) that explains this well . If you invest the money in the partner country, then you don’t get the Bancor penalty as an exporter.
Here’s AI Superpowers, passim:
China is awful at understanding Western or non-Chinese sensibilities, so instead of creating Apple that will be Apple everywhere, they prefer to invest in the local “Apple” everywhere.
And I think you meant Brazil instead of South Africa? I only recall South Africa dismissing reports of a new BRICS currency https://www.reuters.com/markets/currencies/what-is-brics-currency-could-one-be-adopted-2023-08-23/ . South Africa is more embroiled with the West than Brazil. Brazil’s trade with China dwarfs all other trading partners https://wits.worldbank.org/CountryProfile/en/Country/BRA/Year/LTST/TradeFlow/EXPIMP/Partner/by-country , for South Africa the West is the winner https://wits.worldbank.org/CountryProfile/en/Country/ZAF/Year/LTST/TradeFlow/EXPIMP/Partner/by-country
This entirely misses the point and is also inaccurate
Bancor punishes chronic trade surplus countries more that deficit countries.
At the end of WWII, the US was half of world GDP and wanted to export to rebuild Europe. It did not want to be punished for doing so.
There was not even a Eurodollar market then. International capital flows were low. The debt motivation you assert was not there.
China does not want to be punished for running trade surpluses or to be forced into running a balanced trade model. Why do you reject the obvious? Mercantilist policies are very beneficial for the party that practices them successfully and over time harmful to the debtors and the system. That is why Keynes recognized it was central to constrain the surplus countries.
This point on China wanting to consistently run huge trade surpluses is a very good one. I’m by no means an expert on this, but my reasoning is that it could be mitigated if China recycled the surpluses in the import countries. China wants a stable exchange rate, it achieves it by buying dollars and keeping the yuan artificially low. Maybe not Bancor, but a new international reserve currency is definitely desired by China. Not only because of US incoming sanctions, but also due to possible dollar instability (it needs to diversify its holdings anyhow). I think China recognizes this https://www.scmp.com/economy/global-economy/article/3245467/china-must-cut-us-treasuries-orderly-fashion-maintain-balance-trade-amid-rising-risks-ex-central . On a parallel note, I found this lecture by Steve Keen illuminating https://youtu.be/FoLyd_Hq32Q?si=unk3pdnjocMrjrTz&t=2630 he also says there that a sort of Bancor proposal had the support of the Governor of the People’s Bank of China in 2009.
And I went too far ahead with the “keep nations indebted” argument, but what I meant was dollar hegemony, the US would pick and choose who gets loans as a weapon
Without a remotely viable replacement, the USD half-life decay as a reserve currency will be very long – longer than the half-life of the US gov’t itself.