De-Dollarization is a Good Thing
Especially for the United States
The world wants to de-dollarize itself and the US should too.
While, it might seem contrarian to avoid world reserve currency status, it actually makes sense. In this brief, we’ll discuss the international movements away from the dollar, why the dollar is a problem and why the United States should embrace this inevitable outcome.
De-Dollarization by World Powers — Russia, China, EU and India
Russian President Vladimir Putin is making good on his commitment to de-dollarize the country and no longer holds any dollars in their $600 billion sovereign wealth fund that stashes the government’s energy proceeds. They divested $41 billion in less than a month. They’ve increased holdings of euros (40%), yuan (30%) and gold (20%). De-dollarization for Russia is no small task as 80% of their currency is still traded in dollars, however for the first time they’ve reduced energy exports traded in dollars to below 50%. Six years ago, Russian exports to China were 98% dollar based. As of 2020, exports are 33% in dollars, 50% euros and 17% in their own currencies.
This trend continues with Russian exports to Europe and India. European trade with Russia has changed from 69% to 44% in dollars and 18% to 43% in euros. Indian trade with Russia has changed from 100% to 20% in dollars.
Energy has always been a contentious issue between international powers, mainly due to the 1974 deal between the United States and OPEC countries solidifying the dollar as the sole currency for trade, creating the Petrodollar System. In addition, countries are buying less US treasuries and increasing their central bank holdings of gold. Gold investment had a record year in 2019. China and Russia bought a total of 251 tonnes of gold, along with Turkey, Poland and Kazakhstan. In 2020, 21% of central banks around the world intend to increase their gold reserves of the next 12 months. In fact, this has been in motion for years.
In 2020, China confirmed that they will decrease their treasury holdings from $1 trillion to $800 billion, losing it’s status as the largest international US creditor behind the Japan. Instead, China has used their dollar surplus to invest in other foreign hard assets vs. treasuries. The Chinese Belt and Road initiative is one example of China investing in other developing countries in Asia, Africa, Latin America and Eastern Europe by providing infrastructure through dollar denominated loans. If the loans are defaulted on, China gains ownership and access to infrastructure, trading partners and hard commodity assets.
Why Nations Want De-Dollarization
The United States has weaponized the privilege of having the world reserve currency. The US controls the international SWIFT payment system and uses the dollar to sanction international countries that don’t fall in line, such as Russia and Iran.
This isn’t the first time the countries have tried to move away from the dollar, especially when trading energy. In 2000, Saddam Hussein of Iraq started selling oil in euros and a couple years later the United States waged war with Iraq at the cost of 4,500 American soldiers and $2 trillion in funding to reverse the euro for oil trend.
Nord Stream Pipeline 2
These aggressive reactions aren’t only pointed against bad actor states. Recently, the US has threatened sanctions against European countries such as Germany for their involvement in the Nord Stream 2 pipeline strengthening oil transport between Europe and Russia. Sanctions have also been placed on European countries for dealing oil with Iran.
Economic explanations can also address the moves away from the dollar. For example, the US economy only represents 15.9% of GDP (adjusted for inflation) and is projected to continue it’s decline. However, the dollar is used in 80% of global transactions and over 60% of international reserves are held in dollar denominated assets. While this may seem great for the US as it can monetize its trade deficits via international investment, this makes the majority of countries susceptible to sanctions, and perhaps more importantly, dollar shortages.
Global debt is sitting around $280 trillion. This is a huge issue for any country who needs to service their debt in dollars, especially emerging market countries who’s debt is ~90% in dollars. The dollar has become the largest export for the US and it comes with profound implications for economies struggling to meet their payments. In many cases, this results in inflationary scenarios by printing easy local currency to pay for hard dollar debt.
It’s understandable why countries are looking for US dollar exits and working together to find them. The US can’t go to war with everyone.
Why the US Should Embrace De-Dollarization
Muscling nation states and kicking the can down the road can only work for so long before gravity and social unrest takes over. The world reserve currency creates network effects. The US dollar is the most highly liquid asset and greases the wheels of global trade, therefore everyone needs it which creates demand for a strong dollar. If the dollar is strong, it means other currencies are weak which props up other country’s exports and in turn benefits US companies with cheap labor and materials. However, as technology makes things more efficient and naturally destroys jobs, the dollar creates an accelerant for companies to offshore domestic jobs to increase their bottom line. The incentive to sharpen a company’s focus on efficiencies becomes absolutely necessary for survival when taxes and the money supply (below) increase YOY, which makes costs more expensive and cash a liability.
This flywheel of destruction is a result from the world reserve currency incentive structure. Incentives matter and drive human behavior. The world needs dollars to service debt and trade. As a result, exporting nations manipulate currencies to incentivize the flow of dollars and investment which leads to US companies offshoring jobs. The US needs foreign investment in treasuries to monetize trade deficits and export dollars. This results in more money printing which devalues cash, inflates asset prices, increases costs of production and materials and drives inequality. As the loop continues, more US jobs disappear and evaporate the middle class. This then creates more social unrest which gets disguised as the rich stealing from the poor and heightens ideas around systematic racism.
Conclusion:
While this isn’t a perfect picture of what’s happening and its simplicity is incomplete, this is an accurate lens to view what’s happening around the world. The endlessly bloating debt loop is forcing the hands of central banks and international leaderships. Everyone is scrambling for solutions and scapegoats, however like most things, the money is to blame.
The dollar system is the debt anvil weighing on the global economy suffocating progress and cooperation.
We need to embrace the facts and see things for the way they are. The dollar and the competing fiat system is broken. The world has changed and technology is here to help. All we have to do is open our eyes and make the hard decisions.
“I cant change the direction of the wind, but I can adjust my sails to always reach my destination.” — Jimmy Dean
