Why China & Its Trading Allies Are Well Placed To Topple The U.S. Dollar

After decades meting out sanctions and financial coercion, the US may soon feel its grip on world trade beginning to loosen...

Change is good, but dollars are better, a US author of romance novels once wrote. A similarly light-hearted sentiment often inspires discussions about the future role of the US dollar as the world’s leading currency. The consensus view is that the dollar is safe. I think the consensus is wrong.

The dollar is the foundation of US global leadership, and the future of the dollar is therefore intricately linked to the debate about geopolitical fragmentation.

Brazil’s president, Luiz Inácio Lula da Silva, asked during his recent visit to China:

The perhaps surprising answer is that he himself made that decision, together with the former leaders of the other “Brics” group of nations: Brazil, Russia, India, China and South Africa. Their economic-development models have succeeded but have also critically depended on the US dollar. During the period of hyperglobalisation – which I date from 1990 to 2020 – the US became the global importer of last resort, and let its trade deficit against the rest of the world increase. China and many other fast-developing economies built up savings in the currency they were paid in – the US dollar. They invested those savings into US bonds and other assets. The willingness of the US to absorb the world’s savings surpluses was the engine of globalisation. It ensured that the dollar would maintain its status as the world’s leading currency.

This mechanism explains what happened in the last 20 years, but it won’t tell us what will happen in the next 20. Yet the dollar fans assume that the geopolitical and geo-economic environment will stay broadly the same.

If the five Brics countries wanted to end their dependence on the dollar, they would have to do more than just choose another currency to trade in. It is not a menu choice, as Lula suggested during the same speech. He and his fellow Brics leaders would have to change how they interact with the rest of the world, and with one another.

China is key. In 2021, the country derived 43 per cent of its GDP from investment. This is approximately twice the level of the US and other Western countries. If China managed to shift some of its GDP to consumption, it would reduce its external trade surplus, as consumers tend to buy more imported goods. If you wanted to be less reliant on the US dollar, this is where you would have to start. As a second step, China and the other Brics countries could start trading more with each other, become more self-reliant in their supply chains, and set up their own financial infrastructure.

Changing economic models is hard. Three years after Brexit, the UK is still struggling to move away from a model that depended on close integration with the EU. Germany is finding it hard to maintain competitiveness without cheap Russian gas and with impaired global supply. It takes decades to build industrial production lines and supply chains. In China, there are an awful lot of vested political interests at the regional level, which rely on the investment boom continuing. If President Xi Jinping was really keen to extricate China from the US dollar, he would need to impose policies that would meet with resistance from regional leaders. In parallel, China would also have to start a long process of shifting at least part of its $3.2trn worth of foreign reserves held in dollars into other currencies. All of this would take a long time – one or two decades, perhaps.

The reason I think China, Brazil and others will ultimately go down that difficult route is the overuse of economic sanctions by the US. When the war in Ukraine began, the first decision taken by the Western alliance was to freeze Russia’s central-bank reserves held in the West. Previously, the US had threatened German firms involved with the Nord Stream gas pipeline, by cutting off their and their banks’ entire dollar cash-flows. If two people transact in dollars via their banks, at some point the transaction goes through US jurisdiction. This is why it is possible for the US to impose sanctions in the first place.

It was the Obama administration that began developing dollar-based economic sanctions as a primary policy tool. Dollar sanctions have since become a mainstay of US diplomacy. The most insidious version are so-called secondary sanctions. European companies, for example, were forced to comply with US sanctions against Iran because they would otherwise have lost access to dollar markets. On top of those financial sanctions, the US has become far more aggressive in the use of targeted trade sanctions. The Trump administration banned Huawei. The Biden administration has banned high-performance semiconductor sales to China. The EU is also now cautiously starting to subject trade policy to geopolitical considerations.

Sanctions can bring short-term policy successes, but they come with a long-term cost that is often not accounted for. That cost will be a reduced role for the dollar as the world’s largest currency. Sanctions give incentives to countries to reorganise their economies. We are seeing this happening in Russia right now.

Having the world’s leading currency is an “exorbitant privilege” – an expression often attributed to Charles de Gaulle. But if you use a privilege too often it ceases to be seen as a privilege and begins to lose its value. This is the mechanism I see at work here.

This is the non-fiction version of a story in which dollars are not better after all.

It’s already happening.

No, actually it's not - except in these articles written by people who don't understand how debt-based economies work.

We are in the midst of global monetary deflation.

This means other countries can't get enough US dollars (Euro dollars to them) to trade with - which is a real economic danger, since places like China depend on massive export trade for their economic existence.

It's not that these countries don't want the US dollar (Eurodollar) - it's that they can't get their hands on enough of them.

That's why you're seeing side deals going on - in an attempt to move some trade through direct channels in an attempt to survive.

Pretty simple explanation - but these economic rags want to turn everything into American hate.

These are the same clowns how believe the Fed is going to pivot hard in the near future on interest rates - and that gold, silver, and oil are going to the moon.

Same 'ol song they've been singing for decades - not understanding the true nature of what "debt-based" even means and why the powers that be won't let it go away.

1/2 Looks like it, and the downward trajectory doesn’t seem to be abating, yet some use spin to avoid discussing it:

The numbers: the dollar share of global reserves was 73 percent in 2001, 55 percent in 2021, and 47 percent in 2022. The key takeaway is that last year, the dollar share slid 10 times faster than the average in the past two decades.

De-dollarization kicks into high gear
By Pepe Escobar (Posted Apr 29, 2023)

“... the U.S. dollar’s status as a global reserve currency is eroding. When corporate western media begins to attack the multipolar world’s de-dollarization narrative in earnest, you know the panic in Washington has fully set in.

Now it is no longer far-fetched to project a global dollar share of only 30 percent by the end of 2024, coinciding with the next U.S. presidential election.

The defining moment—the actual trigger leading to the Fall of the Hegemon—was in February 2022, when over $300 billion in Russian foreign reserves were “frozen” by the collective west, and every other country on the planet began fearing for their own dollar stores abroad. There was some comic relief in this absurd move, though: the EU “can’t find” most of it.

Now cue to some current essential developments on the trading front.

Over 70 percent of trade deals between Russia and China now use either the ruble or the yuan, according to Russian Finance Minister Anton Siluanov.

Russia and India are trading oil in rupees. Less than four weeks ago, Banco Bocom BBM became the first Latin American bank to sign up as a direct participant of the Cross-Border Interbank Payment System (CIPS), which is the Chinese alternative to the western-led financial messaging system, SWIFT.

China’s CNOOC and France’s Total signed their first LNG trade in yuan via the Shanghai Petroleum and Natural Gas Exchange.

The deal between Russia and Bangladesh for the construction of the Rooppur nuclear plant will also bypass the U.S. dollar. The first $300 million payment will be in yuan, but Russia will try to switch the next ones to rubles. ...”

https://mronline.org/2023/04/29/de-dollarization-kicks-into-high-gear/

2/2 *Nasdaq*
Petrodollar Dusk, Petroyuan Dawn: What Investors Need To Know
4/2/23

“During a three-day state visit, Chinese President Xi Jinping held friendly talks with Russian President Vladimir Putin in a show of unity, as both countries increasingly seek to position themselves as leaders of what they call a “multipolar world order,” one that challenges U.S.-centric alliances and agreements.

Among those agreements is the petrodollar, which has been in place for over 50 years.

In case you’re wondering, “petrodollars” are not a real currency. They’re simply dollars being used to trade oil. Early in the 1970s, the U.S. government provided economic aid to Saudi Arabia, its chief oil-producing rival, in exchange for assurances that Riyadh would price its crude exports exclusively in the U.S. dollar. In 1975, other members of the Organization of Petroleum Exporting Countries (OPEC) followed suit, and the petrodollar was born.

This had the immediate effect of strengthening the U.S. dollar. Since countries around the world had to have dollars on hand in order to buy oil (and other key commodities such as gold, also priced in dollars), the greenback became the world’s reserve currency, a status formerly enjoyed by the British pound, French franc and Dutch guilder.

All things must come to an end, however. We may be witnessing the end of the petrodollar as more and more countries, including China and Russia, are agreeing to make settlements in currencies other than the U.S. dollar. ...”

https://www.nasdaq.com/articles/petrodollar-dusk-petroyuan-dawn:-what-investors-need-to-know

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