De-dollarization Has Begun...

[rSin]

american institute for economic research

As the world’s reserve currency, the US dollar is essentially the default currency in international trade and a global unit of account. Because of that, every central bank, Treasury/exchequer, and major firm on Earth keeps a large portion of their foreign exchange holdings in US dollars. And because holders of dollars seek returns on those balances, the ubiquity of dollars drives a substantial portion of the demand for US government bonds in world financial markets.

The switch from dollars to a yuan-real settlement basis in Chinese-Brazilian trade is only the latest in a growing trend. Discussions of a more politically neutral reserve currency have gone on for decades. The profound economic disruption experienced by Iran, and more recently Russia, after being evicted from dollar-based trading systems like SWIFT, however, have led many nations to consider imminent contingency plans. India and Malaysia, for example, have recently begun using the Indian Rupee to settle certain trades, and there have been perennial warnings about Saudi Arabia and other energy exporters moving away from the dollar. On that note, China also recently executed a test trade for natural gas with France settled in yuan.

https://www.aier.org/article/de-dollari ... has-begun/

[rSin]

De-dollarization is increasingly making headlines and you don’t have to look too hard to find examples.

New sources of non-dollar finance are emerging. There are new bilateral agreements to trade and lend in currencies other than the US dollar. Even more importantly, major oil trade buyers and sellers – Moscow and Riyadh as much as Beijing and New Delhi – are agreeing to trade it in non-dollar currencies. These deals are destroying one of the main pillars of dollar dominance since OPEC quadrupled and then doubled oil prices in the 1970s, giving countries around the world a major reason to demand and hold dollars.

However, many analysts continue to write as if the dollar’s dominance remains intact. Of course, these arguments are based on all sorts of false assumptions. For instance, they claim the dollar will continue dominating until another country’s currency replaces it or that this will only happen if other countries pursue forms of internationalization that mimic that of the US dollar today.

In a sense, the discussion is a little like that depicted in The Big Short, a film about a small band of bankers who bet against the housing market and the securities resting on it in the 2000s. Having made their bets, they waited for the market to collapse. It did. However, for a time, while mortgage defaults increased, the securities they are based on continued to rise in value. Prices were buoyed by investors primed by Alan Greenspan’s famous claim that there could not possibly be a housing market bubble. Nor were the securities downgraded. The rating agencies had not only given high scores to investment rubbish, they had come to believe their own lies. Only when the losses piled up and actually began to filter through the system in the form of payment shortfalls was the truth acknowledged.

De-dollarization also has its equivalent of the losses and payment shortfalls. Consider the recent Financial Times story, ‘China’s ‘men in black’ step up scrutiny of foreign corporate sleuths’. It describes the Chinese Ministry of State Security using “methods familiar to spies and private detectives” to crack down on “foreign corporate sleuths” performing “due diligence” on investments. They cite the process of checking whether a supply chain involved “forced labor from Xinjiang” as an example, stating that such due diligence is critical for attracting US investment.

The piece adds that earlier, “the due diligence groups felt they had ample space to operate and that authorities understood their importance,” but now Beijing has stepped up scrutiny of these scrutineers on grounds of national security. They lament that “spy companies were the gatekeepers for money,” but now, “[t]hat sense of a mutually beneficial relationship is gone.”

Now, the Chinese government has no shortage of reasons for stepping up its scrutiny of the information being gathered by foreign, particularly US entities. After all, it is the target of a US hybrid war whose fronts multiply daily. However, this is not the only significance of the story. It goes deeper than that and testifies to de-dollarization.

Since 1971 the US currency’s global role has rested on the claim that the dollar-denominated financial system was the world’s most sophisticated, with the broadest and deepest pools of capital from which the rest of the world’s investors could drink their fill. Certainly, the expansion of financial activity, also known as financialization, has been critical. By increasing financial demand for the dollar, it counteracted the Triffin Dilemma caused by the US deficits that provided the world with liquidity, meaning that the larger the US deficits, the greater the downward pressure on the dollar.

Needless to say, claims about the attractions of US finance were exaggerated. As far as most of the world was concerned, rather than providing beneficial productive investment, the US dollar-denominated financial system only unleashed torrents of short-term ‘hot’ money that has only profited mostly Western speculative investors, while regularly wreaking havoc on the rest of the world’s economies. Only China and a handful of other much smaller, favored, investment destinations benefited from a certain (easily overstated) amount of productive investment. Ironically, it was part of the hollowing out of US manufacturing through a little foreign direct investment and a lot of outsourcing.

Now, however, the US dollar-denominated system’s internal contradictions are mounting. While it is ceasing to provide its US and Western short-term investors with opportunities for speculative profit and to furnish the modest productive investment it once did.

The most fundamental of these mounting contradictions is the bind into which the rise of inflation puts the wizards at the Federal Reserve. On the one hand, the only way they can deal with inflation without eroding the power of capital is by raising interest rates, but that promises to crash the very financial structures of unproductive debt and speculation on which the wealth of the financial elite it serves relies. On the other hand, if the Fed does not raise interest rates, and permits inflation to run rampant, it will destroy the same system even more directly by undermining the value of the monetary unit, the US dollar, on which the entire system rests. What’s the point of accumulating your wealth in dollars if they are losing value at a rate close to or even higher than the rate at which you are accumulating it?

If the US financial system is losing its charm even for speculators, the very financialization over which it presides and on which the US dollar system rests has, over the last several decades, strangulated the alternative source of gain, the US productive economy. For decades, it was deprived of the long-term, patient investment that alone can make it dynamic. Today, therefore, neither the financial system nor the US productive economy will keep dollars flowing into the US dollar system. The former, which once yielded profits – via interest or speculation – by skimming off production incomes kept capital flowing into the US dollar system based on a reasonable expectation of gain. That situation has been eroded.


It is no wonder that a recent Financial Times story comparing the US and European financial systems explained that, today the EU, with its proportionally larger base of productive corporations able to generate dividend income rather than merely uncertain and increasingly risky speculative gains, is likely to attract more money. And if Europe looks good compared to the US, China looks even better.

Money from around the world is flocking into Chinese IPOs (initial public offerings). By contrast, IPOs in the US and the UK, with the most financialized and productively weakened economies, have performed abysmally. The simple reason is that China still has a productive economy and far more of the sort of steady dividend-paying productive companies investors will now increasingly seek.

So, China cracking down on Western ‘due diligence’ sleuths is just another sign that the US financial system, and with it the dollar, is fast losing what few charms it once had. China may have tolerated a certain amount of espionage from Western financial investors when they constituted a major source of investment in China’s productive economy and US-China relations were miles better. Today, not only must it be more vigilant on national security grounds, with the US waging an ever-expanding hybrid war against China, its productive economy is winning the favor of the very capital that is fast falling out of love with the US financial system. China has no incentive to tolerate US “sleuthing.”

[rSin]

https://finshots.in/archive/what-is-de- ... on-anyway/



As we wrote in March 2022: “If every country starts thinking along these same lines, then it could challenge the dollar supremacy. Perhaps even give rise to an alternative financial order, with some other country leading the pack.”

That’s de-dollarization — An attempt to break the dollar’s iron grip over international trade.

But the question is — Is it so easy to break the dollar? Or is it simply wishful thinking?

Well, let’s try and understand how the US dollar became a powerful currency by rewinding a bit into history, shall we?

So there’s a popular story everyone turns to when they want to explain the dollar’s rise. They begin in 1944 when the second World War was coming to an end. Countries back then realized that they needed to set up a new financial world order for the advent of globalization. So 700 representatives from 44 countries gathered in the mountains of Bretton Woods (US) to hash things out.

And the US emerged a winner because it had an ace up its sleeve. It had accumulated massive reserves of gold thanks to a couple of things.

Firstly, the government had banned its citizens from buying and storing gold just a decade ago. And the government accumulated the gold instead. Secondly, during the second world war, it exported military equipment and took payment in gold.

The end result was that over 70% of the world’s gold reserves were with the US.

So the US used that to its advantage. They said they’d use the base as gold since everyone was used to saving in gold anyway. And they said they’d peg the dollar to gold. It would keep the rates steady. And then, other countries would simply have to piggyback on this and peg their currencies to the dollar.

This one Bretton Woods meeting changed everything. The dollar became powerful. Countries parked their reserves in dollar assets. And it served as the primary currency for international trade.

But, that’s just one part of the story.

In reality, the dollar dominance was already a work in progress by the time Bretton Woods came about.

You see, since the 1820s at least, the British pound had been the reserve currency of the world. Maybe partly because it had a massive empire and forced its colonies into trading with the pound. Or maybe because the country absorbed 30% of the world’s exports. Either way, for nearly 100 years, the pound wore the crown.

But things began to change during the first world war. Britain was neck deep in it and was struggling for money to fund its military. So was France. The US on the other hand had stayed away from the war initially. It had money that the others didn’t. So the American government and bankers hatched a plan to lend money out. And in October 1915, a massive $500 million ‘Anglo-French’ loan was granted. The US was making inroads. And by the 1920s, the dollar had become quite popular.

But it still couldn’t dethrone the pound quickly enough. And there came a point when there were actually two dominant reserve currencies — the pound and the dollar. This shared status continued for at least 20 years before the Bretton Woods meeting.

As you can see, the dollar dominance wasn’t an overnight affair led by one event. It was slow. It was gradual. And even though the British economy was stumbling, it took time for the dollar to really come into its own.

So maybe when everyone talks about de-dollarization, it’s more of a, “Hey, we see this happening in the next couple of decades kind of thing.” Sure, countries are getting increasingly annoyed at the US weaponising its dollar. They want alternatives. But the problem is TINA or There is No Alternative. Unlike how the dollar emerged to replace the pound, we don’t have a like-for-like option today.

What about China, you ask? That’s the direction everyone’s pointing towards anyway.

Well, think about it, will people really trust China more than the US? Of course not. There’s a massive trust deficit here. There’s zero transparency when it comes to economic policies. It doesn’t allow capital to flow freely. It restricts foreign investment into its bonds. The economy is tightly controlled by the ruling party.

Okay, what about India? We’re an emerging superpower, no?

Sure. We may be a lot more transparent about our affairs when compared to China. And we’re increasingly trying to get folks to settle trade in rupees. But we’re still not a completely open economy like the US. We have restrictions on how much of our government bonds foreign investors can buy and such.

Also, as some folks point out — while such bilateral deals have been attempted in the past, they’ve all been short-lived.

So at the end of the day, the dollar is still supreme. Nearly 88% of global trade and 60% of the world’s $12 trillion foreign exchange reserves are in dollars even today despite all this talk about de-dollarization.

To paraphrase the idea of investment professional Brad McMillan, think of switching between Amazon and Flipkart when you want to order something. It seems straightforward but it’s easier said than done. You probably already have a wishlist on Amazon. You have Amazon Prime which gives you insanely quick delivery. You’re used to dealing with it — you know the reputed sellers.

So yeah, the dollar is Amazon. And everyone else is Flipkart. They could share the podium, but as long as the US remains a large and open economy that everyone else wants to play in, switching out of the dollar may not be easy.

And that means we’ll probably be talking about de-dollarization even a decade from now.

[Solid Gold Butt Plug]

As long as I can buy a taco with a USD I don’t care.

[smokebreaks]

As long as I can buy a taco with a USD I don’t care.

It’ll be $3.00 a taco

[rSin]

but were well on tract for the only taco you can afford being made with bug meat!

and that without the crash in value de-dollarization will impart on it...

[smokebreaks]

I think I can splurge the $3

And so long as they’ve got feral animals meat will never be scarce.

I got a cucina down the road from me that will give you a burrito with the whole cat in a tortilla for $5

[rSin]

always will be available?!?!
trust me, if their sign was forced to be honest by that time it would 'the best pigeon and rat in town!!!'

[smokebreaks]

Don’t knock it til you tried it.

Tastes like chicken.

[rSin]

i know how to filet a pigeon. never cooked a rat before but OF COURSE both of them can be served in a mighty tasty fashion...