In a world narrative dominated by the latest news, the shadow of all in war in the old continent of Europe reigns sovereign.
Reports of conflicts and people displacement come in with on a daily basis, alongside the hard stance undertaken by the Western front in punishing Russia with economic sanction, slowly — but steadily crippling its economy
Lyn Alden, a brilliant financial analyst, stated in her latest newsletter:
“ After a massive global fiscal response to a pandemic-related disruption of a highly-levered global economy, now we can unfortunately throw kinetic war into the mix as well, and then a secondary financial/geopolitical war happening in the background, with frozen sovereign reserves, global sanctions, shifting geopolitical alliances, and so forth. The world, in many ways, is becoming bifurcated or multi-polar”.
What is becoming a starker reality is that the language of the monetary policy has turned “militaristic” with the phrase “dollar weaponization” , and is generating a huge controversy on the global stage.
AN OVERHEATED MARKET
The decision to remove several Russian banks from the SWIFT financial messaging system and sanction the country’s central bank has been popular among the general public but has raised concerns on Wall Street.
Further sanctions on Russian commodity exports might roil the global market and further fuel the inflationary dynamics that have caused food and energy prices to skyrocket in recent months — as we see it has already started with the price of oil, wheat, and minerals (most notably nickel).
The decision has potentially destabilizing consequences for the emerging and developing world that cannot be ruled out.
A scenario which sees the centrality of the U.S. dollar attacked on multiple fronts: the aforementioned concerns from investors and markets alike (which are pricing in the instability and further escalation of the conflict) on one side, while the other is still facing the supply-chain shock caused by the pandemic (which seems to have resurfaced, in a new variant in China, last month).
The distress that the pandemic shock had struck, has raised concerns about the future of the U.S. dollar-centric global monetary order.
The dramatic expansion of the Fed’s balance sheet and the explosive growth in public debt levels have led some to fear potential fiscal dominance of monetary policy in the years ahead.
The problem is, when the government prints more money, it decreases the value of our dollar because there are now more dollars in circulation — inflation 101.
Furthermore, as stimulus-fueled spending patterns shifted from services to goods, the U.S. ran up a sizable trade deficit with China over the past couple of years.
Now the U.S., faced with the concrete possibility of a China-Russia economic and strategic partnership, may be entering in a new phase that involves a geopolitical contest for global influence across multiple spheres. China has been open about its long-run desire to supplant the U.S. dollar-centric post-WWII global monetary order. Given recent geopolitical developments, the renminbi internationalization agenda will likely regain momentum.
DISPLACING THE PETRODOLLAR FOR A PETROYUAN SYSTEM?
China’s has been actively pushing to establish a digital yuan and create an alternate payments system is part of the plan to overthrow the U.S. dollar hegemony.
Along with the massive Belt-and-Road Initiative (BRI), China is accelerating its attempts to broaden international acceptance and usage of its currency.
Back in 2020, given already rising geopolitical tensions, China and Russia agreed to ditch the U.S. dollar for bilateral trade settlements.
But the real game changer came in a couple of weeks ago.
As reported by worldwide media, China was in active talks with Saudi Arabia to price some of its oil sales in yuan.
The move, which has been in the process since 2016 in an endless on-and-off series of talk between the parties, seem to have concretized (or at least accelerated) due to the Saudis’ unhappiness towards Washington politics and decades-old promises to defend the Kingdom, especially blaming the U.S. for their lack of support in the Yemen region along with Mohammed bin Salman’s shock from the prompt & unforeseen withdrawal of U.S. troops from Afghanistan last year.
THE HUGE MARKET OF THE DRAGON
China is undeniably an immense market and it accounts more than 25% of the oil that Saudi Arabia exports.
If priced in yuan, those sales would boost the standing of China’s currency.
The Saudis are also considering including yuan-denominated futures contracts, known as the “petroyuan”, in the pricing model of Saudi Arabian Oil Co. , known as Aramco.
It would be a profound shift for Saudi Arabia to price even some of its roughly 6.2 million barrels of day of crude exports in anything other than dollars. The majority of global oil sales — around 80% — are done in dollars, and the Saudis have traded oil exclusively in dollars since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom.
One notable aspect is that the dragon has never been ceased to move:
despite hovering closer to earth, it was able to pursue, undisturbed, his goals of complete economical control over nations, as the Belt & Road Initiative (BRI)- a monumental global network of infrastructure building, with deep geopolitical views, aimed to restore the glory of the ancient Silk Road:
And Saudis were not spared from being in the dragon’s bullseye: over the last years Beijing has helped the kingdom to build its own ballistic missiles
and investing heavily in Mohammed bin Salman’s projects, such as “NEOM” — a futuristic city worth more than $500 billion to build an high-tech city from scratch in the middle of the desert.
The move to a potential “petroyuan” comes in contrast to the diminishing U.S. reliance on Saudi black gold: the U.S. is now among the top oil producers in the world. It once imported 2 million barrels of Saudi crude a day in the early 1990s but those numbers have fallen to less than 500,000 barrels a day in December 2021, according to the U.S. Energy Information Administration.
As the U.S. & Saudis financial relationship change, China might take the chance to establish itself as the bin Salman’s major trading partner, while Chairman Xi internal reforms and establishment of the digital yuan might open the Chinese market to foreign investors, still put off by the dual-circulation economy system of the country.
From an American perspective, there is still the hope that Chinese leader Xi Jinping’s increasingly inward-looking policies may limit the attractiveness of Chinese currency and assets, and slowdown the pace of renminbi internationalization. Any genuine moves to increase the global acceptance of the renminbi/digital yuan will require China to fully open its capital markets to foreigners.
But such a step may not be in accordance with Xi’s dual-circulation economic strategy.
HOLDING FIRMLY THE FIRST PLACE… STILL
The bottom line is that the US dollar remains in the first place by a wide margin, followed by the euro, the yen, and the pound sterling. Some 47% of global payments currently are in dollars, compared to 31% in euros. Furthermore, 88% of foreign-exchange trading involves the dollar, almost three times the euro’s share (32%). And central banks hold 62% of their reserves in dollars, compared to just 20% in euros.
The dollar also dominates on other measures of currency use in trade and finance.
As for China, the renminbi is still in eighth place in terms of foreign exchange market turnover. But it rose in August to fifth place in SWIFT payments, and, after leapfrogging the Canadian and Australian dollars, ranks fifth in central banks’ foreign-exchange reserves.
Although the dollar’s share of foreign-exchange reserve and trading has dwindled, the trend has been slow and gradual — but it still dominates the scene as the most suitable option for reserve currency worldwide, in particular in emerging markets.
FUTURE & LEADERSHIP: THE INCEPTION OF A NEW WORLD ORDER?
Given the emergence of the China-Russia alliance and, considering China’s continuing rise as an economic and military power, we cannot underestimate the future risk to the U.S. dollar’s global status. Strengthening U.S. alliances with emerging powers (like India and Brazil) and establishing closer ties with the African continent will be essential for the West as we enter a new era of geopolitical competition.
But it’s easier said than done… especially when it comes to countries and politicians to cooperate…
What we are witnessing is essential the erosion of trust in the dollar as the common denominator for international trade.
The weaponization of such instrument is leading countries, many as historical allies of Washington, to question the dollar and its role as mean of coercion and leverage tool from the U.S. to pursue its political goals.
When you put on the table that your dollars will be seized or you can’t move dollars, what you are telling the rest of the world is basically to embrace other currencies in their portfolio, substantially diminishing the value of the dollar as the world’s currency.
A commodity-based world order?
Countries, central banks, and private citizens want to preserve their purchasing power.
If foreign exchange reserves of a specific type (dollars) can be frozen in an instant, the central bank will not hold them. Period. If economic sanctions evolving around a specific currency are crippling, people and states will do everything in their power to avoid exposure to this currency.
They won’t need to search much for a reliable store of wealth though:
looking back in time will give us the answer: a commodities-backed currency/ies.
The distrust in fiat currencies that can be frozen will place us on a road to a new commodity world order that in many ways will be like ancient eras we can only read about in history books — eras when ownership of physical assets was the only way to accumulate wealth.
This moves the global financial system into uncharted territory, hence why we are seeing huge volatility in the markets as the system is at risk in this point of transition where really no one knows where the system is going.
Despite I don’t see banks quite ready yet to ditch the dollar, this whole uncertainty is, and will likely hurts not only Americans, but entire countries in a profound and irreversible way.
For updates & the latest news and analysis — follow me on Twitter @FilandroMi
Extra Resources:
- Belt & Road Initiative and the huge financial pressure on Pacific nations:
https://www.lowyinstitute.org/publications/ocean-debt-belt-and-road-and-debt-diplomacy-pacific - List of countries involved in the Belt & Road Initiative (BRI):
https://en.wikipedia.org/wiki/List_of_projects_of_the_Belt_and_Road_Initiative - BRI in depth:
https://www.lowyinstitute.org/publications/understanding-belt-and-road-initiative - Is Globalization over?
https://medium.com/coinmonks/the-turning-tide-for-globalization-4da1fc591ea9 - The Petrodollar system: a brief analysis of the financial system in place for the past 50 years:
https://medium.com/the-capital/the-rise-and-fall-of-the-petrodollar-is-the-international-financial-system-doomed-493a4fb8c726 - Inflation & Money Printing: the dark faces of the FIAT money system:
https://medium.com/the-capital/the-spectre-of-inflation-770f9ef8369d - Lyn Alden site & access to newsletter:
https://www.lynalden.com/ - Inflation: the number one enemy of wealth:
https://medium.com/the-capital/the-spectre-of-inflation-770f9ef8369d
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