The offensive against the dominance of the dollar has begun.
Well it is true, to be fair, every few years the end of the dollar as the major international
currency is announced, its replacement by the Chinese renminbi – let's call it Yuan
– and the disaster that this will mean for the US economy.
And then nothing happens.
This never comes to pass.
But...
This time...
This time things could be different.
The dollar, VisualPolitik viewers, has been the basis of the world's financial and commercial
system since at least the Breton Woods agreements in 1944.
That has been almost eight decades.
And guess what?
Now the urgency to overcome dollar dominance seems increasingly evident among dictatorships
and emerging economies.
These countries are beginning to dread the consequences of their enormous dependence
on Uncle Sam's banknotes.
Some because of the possible sanctions they may end up facing.
In this line, the sanctions against Russia and the freezing of its Central Bank's assets
in the United States and Europe have put the spotlight on the threat that the dollar could
pose to the "money" of the tyrants.
And then the others, the emerging economies because they fear the economic consequences
of the Federal Reserve's policies.
For example, the rapid rise in interest rates between 2022 and 2023.
And why do I say this?
Because companies in emerging economies mainly use the dollar to set their export prices
and also to finance themselves.
And if rates rise or the dollar appreciates, then they may have a problem.
Well, these are the two reasons why the offensive against the dollar is gaining new momentum.
For the first time, there seems to be a clear political will to overcome the dominance of
the greenback.
("We are seeing a gradual erosion of the dollar.
The picture that emerges is one of a multipolar monetary system".
– Massimiliano Castelli, head of strategy for global sovereign markets at UBS)
Now, to what extent is the dominance of the dollar in danger?
Will the Yuan be its new alternative?
Is there any currency that could shake Uncle Sam’s financial foundations?
What consequences could this campaign have?
Well, here on VisualPolitik we are going to answer all these questions.
Don’t get ahead of yourselves and pay close attention.
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After years of speculation, it seems that the Yuan is now taking a step forward to end
the global dominance of the dollar.
For example, the Yuan's share of global finance trade has more than doubled since the Russian
invasion of Ukraine.
Why?
Well, largely because Russia is using the Yuan to try to overcome Western sanctions.
Take a look.
("There is no question that the Russians have been forced to de-dollarize and also de-Euroize
their trade [...] There is evidence that Russia in particular is making greater use of the
yuan, and it is also clear that the Chinese and others are looking for opportunities to
expand the use of the yuan in the trade agreement."
– Brad Setser, former U.S. Treasury Department economist and former advisor to the U.S. Trade
Office)
To give you an idea, trade between Russia and China exceeded $185 billion in 2022 and
in 2023 it will pass the $200 billion mark.
The most interesting thing about all this?
That Russian companies are already paying for most of their Chinese imports in Yuan.
And that's not all, yuan exchanges on the Moscow Stock Exchange have soared and banks
excluded from SWIFT now use CIPS, the Chinese Cross-Border Interbank Payment System.
And there’s even more.
Vladimir Putin has said he wants to use the Chinese currency not only to trade with China,
but also as a form of payment for Russian trade with Asia, Africa and Latin America.
In fact, as confirmed by Russian Deputy Prime Minister, Alexander Noval, Russia already
settles more trade deals in yuan than in dollars.
Of course, we are not only talking about Russia.
Other countries such as Saudi Arabia, Bangladesh, India, Argentina, Pakistan, Iraq and Bolivia
have started – or seem to be close to doing so – to negotiate and trade with China directly
in Yuan.
And yes, it is possible that we are also talking about a good chunk of the Saudi crude oil
trade, which is exactly what explains news headlines like this.
(9 December 2022: China's Xi calls for oil trade in yuan at Gulf summit in Riyadh.
– Reuters)
In a similar fashion, on 29 March, China and Brazil announced concrete plans to operate
with their own currencies and abandon the US dollar in their commercial exchanges.
Furthermore, under these plans, Brazil will allow all South American countries to settle
their trade agreements in Yuan.
Of course, its president could not have been clearer.
Check it out.
Even a French company such as the oil and energy company Total completed its first liquefied
natural gas exchange in yuan with the China National Offshore Oil Corporation at the end
of March.
The exchange consisted of 65,000 tons of liquefied natural gas extracted in the United Arab Emirates.
And speaking of Emirates, India, it seems, is using Emirati dirhams in much of its dealings
with Russia.
So you see, we are facing an all-out offensive to unseat the greenback.
Or at least to reduce its enormous international influence.
Strictly speaking, this is not something new, China has been trying to internationalize
the Yuan since the 2008 financial crisis.
Here on VisualPolitik we already told you how in mid-2017 the "petroyuan" was born to
trade oil between Russia and China, something that as we have just seen, has now been generalized
to most of the trade between these two countries.
Be that as it may, the fact is that this operation has gained new momentum.
As you can see, China and other countries want to avoid at all costs that when the time
comes, the United States could freeze their foreign reserves as it has done with Russia
or block their economies by preventing them from trading in dollars.
And that, that's exactly what has put this matter back on the agenda.
The question is: Could the Yuan really unseat or at least compete with the dollar?
Will the Arab countries decide to switch from the petrodollar to the petroyuan?
Will a new offshore yuan market be born to trade and invest with this currency throughout
the world in the image and likeness of the eurodollar?
(DOLLAR VS.
YUAN: THE OUTCOME)
It seems VisualPolitik viewers that the dollar is so very, very important in the international
monetary system that even in comparison it makes the economic influence of the United
States seem very insignificant.
Look at this graph: As you can see, while the United States accounts
for approximately 24% of world GDP and around 15% of trade, the dollar is dominant.
Nearly 60% of foreign reserves and half of all international financing and trade transactions
use this currency.
If we’re talking about finance and currencies, it is clear that today we are talking mainly
about the dollar.
And yes, it's true, you may have heard: since 2000, the proportion of international reserves
held in dollars has fallen from about 70% to less than 60%.
This is something that is always alluded to by doomsayers regarding the future of Uncle
Sam's banknotes.
Hold on, however, because that data, in a way, has a catch.
You see, firstly it is tricky because the international reserves have multiplied by
4, so today the amount of reserves in dollars is much higher than ever before.
And secondly, because the main beneficiaries of this drop in "market share" have been,
in addition to the Chinese currency, the currencies of Canada, Australia, Sweden, South Korea
and Singapore.
Well, all these countries maintain dollar exchange lines with the Federal Reserve.
In other words, this means that in practice, not only are these countries close allies
of the United States, but their currencies are almost totally convertible with the greenback.
And that is precisely why many institutions have no problem using them.
In other words, whichever way we look at it, the dominance of the dollar remains overwhelmingly
widespread.
It is the major international currency.
And yes, I know what many of you want me to say: that this is about to change completely.
That the Chinese are beating the Americans to the punch.
That Shanghai will beat Wall Street.
Well...
I'm sorry, but it seems unlikely that that will happen.
With the data in hand, it does not appear that the Yuan represents a major risk today.
Yes, it is practically certain that the Yuan's market share will grow in the coming years.
That's a given, China is becoming more and more important in the international economy.
However, in March 2023, despite many years of effort, the yuan accounted for only 2.4%
of international payments channeled through the SWIFT system, which is the world's leading
banking transfer system.
The dollar, on the other hand, accounted for more than 40% of all transactions.
But to see this more clearly, let's take a look at the case of South Korea.
China is by far its largest trading partner: it is its largest supplier and, at the same
time, also its largest customer.
Well, the presence of the Yuan in the exchanges of these two countries has grown: from 0%
before 2008 to almost 6% in 2020.
[Which is evidently no more than that, 6%].
To give you an idea of South Korea's exports to China, which have nothing to do with the
United States, the dollar is still the predominant currency.
In 2020, 87% of all these transactions were still in dollars.
And as for international reserves, what can I say?
It’s much the same story.
In this case, the greenback's share is 58% compared to only 2.7% for its rival.
And yes, we've said it before, the Yuan's market share in global trade is sure, absolutely
certain to grow over the next few years.
Well, that's something that's already happening.
Check it out.
(Renminbi's share of trade finance doubles since start of Ukraine war.
– FT)
However, it is one thing to trade in a currency and quite another to be willing to keep your
money in that same currency.
And here the US has the upper hand.
Specifically, we can highlight three major advantages.
First...
Well, it's the markets.
The American superpower has the largest and most liquid capital markets on the planet.
It is very easy for foreign investors to place their dollars there in order to make a profit
with them: stocks, government debt, funds of all kinds.
In the US you can put in, move around or take out practically all the dollars you want without
any problems or market collapse.
It's just too big.
This is something that does not happen in China.
And do you know what?
In a way, this may remind us of the case of the Euro.
The Euro is the currency of a gigantic economic bloc and since its inception it has gained
considerable international relevance.
But not enough to compete with the dollar.
Yes, it has a lot of influence in commercial transactions, but in all other parameters
this currency is much smaller than the greenback.
And take note because in the case of China, it is not only that the financial markets
in this country are much smaller, but also that the legal security is not equivalent.
This would be the second advantage of the dollar.
Let's see, be honest, what would you be more comfortable with?
With dollars in your pocket or with Yuan?
I’m pretty sure those of you watching from Latin America would have no doubt.
[Dollars are much safer.]
The Arab countries have exactly the same impression, let there be no doubt about it.
And then to top it off, the third big advantage for the United States is that China has a
lot of capital controls.
That is, you can't freely handle, convert or take money out of the country.
And obviously that makes it difficult for you to consider putting your savings in Yuan.
In fact, one of the reasons why these capital controls exist is to prevent the Chinese themselves
from moving their savings out of the country en masse.
Which is exactly what happened between 2014 and 2016 when the conditions were relaxed
somewhat.
You don't remember?
Well, here’s a recap...
(China Capital Outflows Rise to Estimated $1 Trillion in 2015.
– Bloomberg)
The consequence?
The government tightened its grip again.
(22 December 2017: China Tightens Overseas Investment To Reduce Risks.
– Forbes)
So I'm sorry, but no, it doesn't seem likely that when push comes to shove the Yuan will
be a real alternative.
Now, does all this mean that the dollar will simply never be rivaled?
Well...
Nothing could be further from the truth.
Listen up.
(JOINING FORCES)
Okay no, it doesn't look like the Chinese Yuan can oust the dollar.
It will become more important and more visible...
But it doesn't look like the best option for beating Uncle Sam.
And do you know what?
The US's adversaries know it.
And this is where a game strategy comes up, the big move they have in mind.
In March 2023, Deputy Chairman of the State Duma, Russia's chamber of deputies, Alexander
Babakov said that Russia is leading the development of a new currency for use in BRICS cross-border
trade.
You know, Brazil, Russia, India, China and South Africa.
A group that represents more than 40% of the world's population and almost a third of the
entire global economy.
So it’s no joke.
We are talking about a group that countries such as Saudi Arabia and Iran may now be eager
to join.
Well, what would happen if, as the Deputy Speaker of the Duma warned, this group were
to launch a currency?
What if this currency, in addition, were backed by gold and other valuable metals, such as
rare earths?
That would make it easier for this currency to be used as a repository of value.
Well, that seems to be precisely the point.
What’s more, the BRICS are big enough to drag other countries into trading with their
new currency.
From Thailand to Kazakhstan to half of Africa to Latin America.
This means that it could easily become a currency used for international trade by countries
representing 40 to 50% of the world's GDP.
And not only that.
As its value is backed by real assets and lacks capital controls, a financial market
could also be created that would allow it to be used as a reserve or store of value.
Of course, this would not solve all the problems.
It remains to be seen who is in charge of this currency, if a supranational central
bank will be set up, if it is even feasible to bring together so many countries with regimes
so unaccustomed to transparency and respect for the rules...
But it is a possibility that is currently on the table.
And it would not even need to defeat the dollar.
We could very well be witnessing the birth of a new, much more multipolar monetary system.
At least this seems to be the objective of its promoters.
But...
What about the United States?
Are they worried about this move?
Well...
Let’s see.
(THE END OF UNIPOLAR HEGEMONY?)
VisualPolitik viewers, it is very likely, whether it is the BRICS currency or any other,
that sooner or later the dollar will be overtaken.
Or, at the very least, it will come up against a rival capable of overshadowing it.
In other words, what was once referred to as the "exorbitant privilege" of the dollar
will come to an end.
What's more, it is quite possible that this moment is not too far away.
The Asian push has caused the US economy to have less and less influence in the global
economy.
From 40% of global GDP in the 1960s to around 24% today.
And, keep in mind, in monetary terms, size is important.
You see, in order for the dollar to remain the great reserve currency, the US economy
has to supply the rest of the world with more and more dollars and more and more dollar-denominated
assets.
Well, these are the operations that finance, fuel and even promote the federal government's
debt and the chronic trade deficit that the country suffers from.
And this is where there is a major division of opinion.
For some, the United States has succeeded in making finance a hyper-productive sector
whose production should almost form part of the balance of trade.
In other words, the United States exports goods, services and also financial products.
Products that in turn have financed the enormous technological development of this country.
Silicon Valley?
That's right.
For others, on the flipside...
All of this could actually be a blow.
Why?
Well, because the global demand for the dollar makes its value higher than it should be,
which punishes local production: making products more expensive in dollars, reduces the competitiveness
of its industry and reduces industrial jobs, which, moreover, are usually very well paid.
That's what Jared Bernstein advocates for instance.
And who is this guy?
Well, none other than the head of the Biden Administration's Council of Economic Advisors.
The chief economist of the White House [So, he's not just anybody].
Well, according to this perspective...
The creation of another major currency would not shake the power of the dollar – especially
in absolute terms – but it would alleviate the strong pressure on this currency.
This could reduce some major imbalances, such as the trade deficit, and curb the relative
overvaluation that, according to many, is severely hampering the competitiveness of
the US's industrial companies.
But, be that as it may, and whether we agree or not, one thing is certain: not everyone
is so happy with the dominance of the dollar on a global scale.
But when it comes down to it, perhaps Washington is not so worried.
Because of its enormous economic influence, financial markets and legal certainty, the
dollar will surely remain a leading currency.
But what other currency will accompany it?
Well...
To begin with, the Biden Administration does not seem to be overly concerned about this...
In fact, as you have seen, quite the contrary.
The question is: Are they right?, would the US gain or lose from this new alternative
currency?, will a currency really emerge that is capable of squashing the power of the dollar,
and would you entrust your savings to a currency led by China and Russia?
Leave us your thoughts in the comments and let's open a debate.
And now if you found this video interesting, don't forget to like and subscribe to VisualPolitik
if you haven't already done so.
Once again thank you very much for watching.
All the best and see you next time.