There has been a strange failure to question claims that the dollar has passed its sell-by date as it trades at higher rates, including the euro, renminbi, and rouble. For example, the dollar is at .93 Euro, more than the five-year low of .82 in January 2020, and before the shocking and terrifying US sanctions against Russia and the leading asset freeze (EU banks. actually hold way more than US banks ). As we will discuss below, a new column in the Financial Times explains how some data shows that the dollar’s position is still strong.
We have said many times that although the dollar is likely to become less important in the long run because the US economy is a small percentage of the world’s GDP. However, it took two world wars for the US to replace the pound sterling as the dominant international currency, and that was because the US weakened the UK in the way that America did to aid the British military.
Furthermore, many anti-globalists (and this includes some officials in the BRICS states) are not helping themselves by wanting to create a new currency out of thin air, like Athena from the forehead of Zeus. But since World War II, only two currencies of any significance have been created, the euro and the SDR. SDR is not a freely tradable currency, it is not used for trading, and it is not something that private parties can invest in. The euro took three years of planning and eight years of execution to come down without a hitch. And this was much easier than introducing a currency de novo, since the existing national currencies were converted into the euro, and all participants were subject to the same legal system. As one of the many problems, it is difficult to see the new currency being implemented without the stakeholders agreeing on what legal system would work. Agreeing to the jurisdictional powers of a non-domestic court system for commercial disputes would be tantamount to granting sovereignty, where one of the points of the emerging multilateral system is to support more national autonomy.
However, those who want to escape the punitive use of the dollar do not need to create a new currency system to escape the US’s many abuses of sanctions. Trade represents only 1% to 3% of total dollar trade outside the US; the rest is investment.
These dollar refusniks need to be able to trade outside the dollar system. It has long been possible to do so, as evidenced by the fact that China was buying Russian oil using renminbi in 2015. It is very difficult, which means that now it is happening mainly because of the biggest commercial transactions.
Note that what Sergey Lavrov said on June 10 at the meeting of BRICS finance ministers is completely consistent with having the intention of facilitating bilateral trade without the dollar system, instead of creating a new currency. From RT:
Lavrov said BRICS “is actively working to implement the decisions of the Johannesburg conference last year, especially when it comes to improving the international monetary and financial system, improving the platform for settlement of national currencies in trade.”
He also added that the bloc, which has recently experienced an unprecedented growth process, is also looking to harmonize the cooperation framework between the BRICS partners.
“Harmonize the framework” is clearly not the establishment of a new legal system, but to find the legal principles and procedures and the BRICS regions more compatible.
To put it plainly, the “new BRICS currency” crypto proposes to advertise their schemes and give them their journalistic power out on their skis.
What about the investment side? The US has huge advantages in transition and is therefore set to remain a slightly dirty shirt in the laundry for some time:
1. Liquidity. This is an advantage of scale that is hard to reverse. That includes professional traders essential depth in hedging tools and techniques. The SEC’s public securities regime, with its extensive disclosure requirements and regulations to prevent insider trading and front-running, is still the best in class despite years of significant growth (such as not cracking down on HFT, which is fraudulent by investing if not needed and withdrawing it where it is).
2. Established and reliable institutional procedures for resolution and resolution, including (essentially) dispute resolution. Part of this is having well-settled legal precedents
3. A large list of assets that can be invested. The US has an advantage here in that it has taken most of the money we borrow from the banks and into the financial markets (or more accurately, the banks can create jobs and ensure they will be available). In contrast, most other major economies have very large banks relative to GDP and small bond markets.
I could make many more additions to this list, but this is enough to make the point.
So the circumstances described in the Financial Times article, Dollar Doomsters Have Got It All Wrong, should not come as a complete surprise:
The share of the world’s central banks’ reserves held in dollars has declined in recent decades. Back in 2016, money made up more than 65 percent of official reserves, according to data from the IMF. By the end of 2023, that had dropped to 58.4 percent. The value held in Chinese renminbi at the beginning of 2016 was zero. Between the end of that year and 2023 it jumped 188 percent. But while that sounds huge, it’s still a mere 2.3 percent of the total.
However, a recent blog post from the New York Fed says that the apparent pullback in the dollar is not due to a global cooling of currencies. Instead, the change has been driven by a small number of countries, including Switzerland, where a protracted attempt to hold onto the franc over the past decade has led to a massive accumulation of euros. “In fact, the increase in the shares of the US dollar from 2015 to 2021 was a feature of 31 of the 55 countries measured,” wrote economists at the New York Fed in late May. “The decline in the value of the dollar of a small group of countries – mainly China, India, Russia and Turkey – and the large increase in the amount of reserves held by Switzerland explain the large decrease in the value of reserves.”
Meanwhile, major banks around the world have piled up gold purchases, in an apparent attempt to avoid the risk of sanctions, since gold is not controlled by any national authority. However, as the New York Fed emphasizes, even after the rapid accumulation of gold in 2022 and 2023, the precious metal still accounts for 10 percent of the total global reserves. Narratives about declining dollar shares and rising roles for gold “unfairly portray the actions of a small group of countries”, it said.
In fairness…gold reserves seem poised to rise further. A study by the Official Monetary and Financial Institutions Forum says that despite record gold prices and slowing global inflation, where gold is often seen as a hedge, central bank managers are willing to build on the metal. .
However, demand for the dollar remains very strong. The survey does not include all countries, but includes 73 major banks, with a combined total of $5.4tn. Of them, OMFIF said the 18 percent expected to increase rather than decrease its share of the dollar, due to the lure of higher interest rates and a strong American economy. The euro is the next most popular currency on the wish list, suggesting that reserve managers are willing to stick with larger, more liquid currencies.
Now that the US is determined to continue its misbehavior, there is every reason for the dollar to be concerned, especially among the geopolitically important and unstable countries on Team Global Hegemon, that it will continue. However, some kind of brake on the financiers’ efforts to stop the long-running plan to seize Russian assets. This may be the EU’s sacrifice too far, as we said above, the frozen Russian assets are much more in Euros than in dollars, which exposes the Eurozone institutions even more to go back. Euroclear is particularly concerned that it could be sued in jurisdictions where it operates, such as Hong Kong, where the courts will be more receptive to Russia’s arguments about the lack of legal basis for expropriation than in the Collective West.
Remember, the US is still arm-twisting in the current G-7, but lengthy negotiations are often signs of major differences. Response from Al-Jazeera:
US officials are trying to find European allies in a deal they will present at the G7 leaders’ summit later this week on how to use interest in frozen Russian assets to support war-torn Ukraine. But with the meeting in southern Italy starting on Thursday, talks are still ongoing.
Some European countries are still not fully convinced by the proposal led by the United States, media sources told Al Jazeera.
Rome was not built in a day, and the same applies to the new financial empire. But the usual way of succession, of the renminbi over time instead of the dollar due to the rise of the economy in China, is unlikely to happen as soon as ten years, with obstacles that include the Chinese economic model of using a continuous, large trade currency (which prevents the rational accumulation of the renminbi outside of China) and and China’s use of currency controls. So at this point, the next most likely regime is a split, with multiple major currencies being used for trade and investment instead of the dominant currency. In the end, it does not encourage trade as it forces importers and exporters to deal with more currencies, increasing their risk and forcing them to operate in a more financial way (witness the rise of the Ministry of Finance as a profit center for all large international companies).
So this is always an unstable place. Stay tuned.
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