A New World Monetary Order By James Reed
I am no finance expert, but here are some folk with a better grasp on the situation than me. It seems that we are seeing the birth of a new world economic order, as the world is now clearly divided between West and East, Russia moving firmly into the China sphere, taking its bats and balls, and nuclear weapons with it. Thus, in real time, the de-dollarization of the world continues. Some comments follow.
“Former Federal Reserve and U.S. Treasury Department official, and now Credit Suisse (CS) short-term rate strategist, Zoltan Pozsar has written the U.S. is in a commodity crisis that is giving rise to a new world monetary order that will ultimately weaken the current dollar-based system and lead to higher inflation in the West.
"This crisis is not like anything we have seen since President [Richard] Nixon took the U.S. dollar off gold in 1971," wrote Pozsar.
Negotiated by 44 countries as World War II was winding down, the Bretton Woods agreement (named for the conference location in Bretton Woods, New Hampshire) pegged gold as the basis for the U.S. dollar, with other currencies then pegged to the greenback. This structure began to fray in the 1960s as U.S. trade deficits became too large to ignore, and it fell apart completely in 1971 when the U.S. abandoned the link between the dollar and gold.
As the initial Bretton Woods era (1944-1971) was backed by gold, and Bretton Woods II (1971-present) backed by "inside money" (essentially U.S. government paper), said Pozsar, Bretton Woods III will be backed by "outside money" (gold and other commodities).
Pozsar marks the end of the current monetary regime as the day the G7 nations seized Russia's foreign exchange reserves following the latter's invasion of Ukraine. What had previously been thought of as risk-free became risk-free no more as non-existent credit risk was instantly substituted for very real confiscation risk.
What occurred surely isn't lost on China, and Pozsar sees the People's Bank of China (PBOC) faced with two alternatives to protect its interests – either sell Treasury bonds to buy Russian commodities, or do its own quantitative easing, i.e., print renminbi to buy Russian commodities. Pozsar expects both scenarios mean higher yields and higher inflation in the West.
Pozsar concluded his note with a comment about bitcoin (BTC). He expects it to benefit, but only "if it still exists."”
“If Russian Currency Reserves Aren’t Really Money, the World Is in for a Shock
Sanctions have shown that currency reserves accumulated by central banks can be taken away. With China taking note, this may reshape geopolitics, economic management and even the international role of the U.S. dollar.
By
“What is money?” is a question that economists have pondered for centuries, but the blocking of Russia’s central-bank reserves has revived its relevance for the world’s biggest nations—particularly China. In a world in which accumulating foreign assets is seen as risky, military and economic blocs are set to drift farther apart.
After Moscow attacked Ukraine last week, the U.S. and its allies shut off the Russian central bank’s access to most of its $630 billion of foreign reserves. Weaponizing the monetary system against a Group-of-20 country will have lasting repercussions.
The 1997 Asian Financial Crisis scared developing countries into accumulating more funds to shield their currencies from crashes, pushing official reserves from less than $2 trillion to a record $14.9 trillion in 2021, according to the International Monetary Fund. While central banks have lately sought to buy and repatriate gold, it only makes up 13% of their assets. Foreign currencies are 78%. The rest is positions at the IMF and Special Drawing Rights, or SDR—an IMF-created claim on hard currencies.
Many economists have long equated this money to savings in a piggy bank, which in turn correspond to investments made abroad in the real economy.
Recent events highlight the error in this thinking: Barring gold, these assets are someone else’s liability—someone who can just decide they are worth nothing. Last year, the IMF suspended Taliban-controlled Afghanistan’s access to funds and SDR. Sanctions on Iran have confirmed that holding reserves offshore doesn’t stop the U.S. Treasury from taking action. As New England Law Professor Christine Abely points out, the 2017 settlement with Singapore’s CSE TransTel shows that the mere use of the dollar abroad can violate sanctions on the premise that some payment clearing ultimately happens on U.S. soil.
To be sure, the West has frozen Russia’s stock of foreign exchange, but hasn’t blocked the inflow of new dollars and euros. The country’s current-account surplus is estimated at $20 billion a month due to exports of oil and gas, which the U.S. and the European Union want to keep buying. While these balances go to the private sector, officials have mobilized them. Stopping major banks like Sberbank from using dollars and excluding others from the Swift messaging system still plunges the economy into chaos, especially if foreign businesses are afraid to buy Russian energy despite the sector’s explicit exclusion from sanctions. But hard currency will probably keep gushing in through energy-focused lenders like Gazprombank, and can theoretically be used to pay for imports and buy the ruble.
Yet the entire artifice of “money“ as a universal store of value risks being eroded by the banning of key exports to Russia and boycotts of the kind corporations like Apple and Nike announced this week. If currency balances were to become worthless computer entries and didn’t guarantee buying essential stuff, Moscow would be rational to stop accumulating them and stockpile physical wealth in oil barrels, rather than sell them to the West. At the very least, more of Russia’s money will likely shift into gold and Chinese assets.
Indeed, the case levied against China’s attempts to internationalize the renminbi has been that, unlike the dollar, access to it is always at risk of being revoked by political considerations. It is now apparent that, to a point, this is true of all currencies.
The risk to King Dollar’s status is still limited due to most nations’ alignment with the West and Beijing’s capital controls. But financial and economic linkages between China and sanctioned countries that are only allowed to accumulate reserves—and, crucially, spend them—there will necessarily strengthen. Even nations that aren’t sanctioned may want to diversify their geopolitical risk. It seems set to further the deglobalization trend and entrench two separate spheres of technological, monetary and military power.
China itself owns $3.3 trillion in currency reserves. Unlike Russia, it cannot usefully hold them in renminbi, a currency it prints. Stockpiling commodities is an alternative. The conundrum creates another incentive for Beijing to reduce its trade surplus by reorienting its economy toward domestic consumption, though it has proven challenging.
What can investors do? For once, the old trope may not be ill advised: buy gold. Many of the world’s central banks will surely be doing it.
Since Russia invaded Ukraine, the U.S. and allied countries have imposed heavy sanctions on Russia. WSJ’s Shelby Holliday dives into how they are affecting everyone from President Vladimir Putin to everyday Russian citizens.”
“America cutting off Russia’s central bank from its U.S. dollar reserves could carry huge consequences that the D.C. establishment hasn’t considered.
Here’s how the Wall Street Journal’s Jon Sindreu framed what happened: “After Moscow attacked Ukraine last week, the U.S. and its allies shut off the Russian central bank’s access to most of its $630 billion of foreign reserves. Weaponizing the monetary system against a Group-of-20 country will have lasting repercussions.”
Reserves are globally accepted foreign currency that a foreign central bank holds to back and protect its own currency — the pound, the yen, and the euro are considered reserve currencies, but the primary reserve currency is the U.S. dollar. The dollar is the world’s reserve currency because a large amount of global commerce is priced in dollars, and the U.S. legal system and open capital markets mean American dollars can buy American assets while the owner is protected by the rule of law.
This status as the world’s reserve currency gives Washington immense power, because at the end of the day all dollar transactions must undergo clearing and settlement (fancy words for transferring ownership then recording who owns dollars) at U.S. banks connected to the institution that controls the U.S. dollar, which is the U.S. Federal Reserve.
That power from the global reserve status of the dollar allows America to sanction foreign countries even when they don’t do any trade with America, in part because foreign institutions — say, in Europe — trading with potentially rogue regimes desperately need access to this U.S. dollar system.
Increasingly, America has upped its use of this sanctions power. The latest examples are with Iran under the Obama and Trump administrations, and Afghanistan under the Biden administration after the American-backed government in Kabul collapsed. Again, use of the dollar abroad can violate sanctions even if no American is involved in the transaction, because clearing and settlement occur on American soil.
Russia Cut Off from the Dollar
After Russia’s invasion of Ukraine, the Biden administration cut off the Russian central bank’s ability to use its $630 billion in reserves. Money is only money if you can use it to buy something, and if it keeps its purchasing power. This is why Bitcoin, which trades more like a commodity with higher volatility and is correlated with the Nasdaq and inverse VIX volatility gauge, is not money, while gold is money.
According to the Journal’s Sindreu, the move will prompt Russia to shift its central bank holdings, which back the value of the ruble, toward Chinese assets and gold. Sindreu correctly points out this will lead to more trade regionalization and deglobalization.
It also boosts the Chinese renminbi’s (RMB’s) status as a competing reserve currency. Previously, the knock on the RMB was that China lacks rule of law and one might not actually be able to use the RMB to buy Chinese assets, or one might not be able to eventually get money out of China. Now, for many parts of the world, the dollar increasingly has similar problems.
D.C. Elites Don’t Know What They’re Doing
But the impacts could be even further reaching. Aside from simply making the RMB a slightly stronger competitor against the dollar, in a fight where the dollar still clearly has the upper hand, the move emboldens China and helps its economy.
Sanctioned countries, or countries that might get sanctioned, are now dependent on doing business with China, and the Western elite is likely too dependent on China to fully penalize or sanction China for being the central economic hub for the growing list of countries excluded from the West’s economic system. This gives China a monopsony-like status to buy Russian or Iranian energy at a discount.
Lest you think the countries on the sanctions list are only the ones that keep neocons up at night, Europe ran the risk of being sanctioned because of trade with Iran. The Biden administration has also recently and stupidly threatened India with sanctions, because of its ties to Russia.
This overuse of this sanctions power, which increased also under Obama and Trump, risks much of the world losing confidence in the dollar as the world’s reserve currency, and attempts to circumvent the current monetary system that gives the D.C. elite so much power. Russia and China are already looking for ways to completely de-dollarize and trade outside of the dollar system.
Impact on Americans
The impact for normal Americans is complicated. The dollar’s reserve status has been a drain on Middle America and a boost to D.C. elites, because it means D.C. politicians can overspend and boost the financialization of the economy even while America’s manufacturing base has atrophied since the 1970s (which happens to be when the current system of the fiat dollar, not backed by gold, was started).
Normally, buying too much from countries like China would require American politicians to spend less, and the American economy to eventually import less and produce more here at home. Because the dollar is the world’s reserve currency, foreign trading partners have sat on the dollars they received instead of demanding the U.S. produce goods in return. This is a bad setup, and clearly not sustainable.
Pursuing monetary reform to rectify these imbalances would be how a forward-thinking and well-informed political class transitioned America smoothly into something better. But that’s not our political class, and most Republicans and Democrats are completely clueless on these issues. Instead, America’s current corrupt political class behaves like the sanctions power and dollar’s reserve status can never run out, treating it carelessly and rashly.
Far from ushering in a smooth transition away from a system that has benefited the coastal elite over Middle America, they are rushing Americans toward less purchasing power and massive shortages and price increases here at home. It’s incredibly dangerous and shortsighted.”
Comments