Is The Dollar Dead?

Freedom Financial Archive | Originally posted April 13, 2023
  • What’s the current state of the U.S. dollar globally?
  • Should the BRICS Nations Cut Back the Role of the Dollar?
  • What you need to know about the risk this poses for China

Dear Reader,

The inflationary pressures around the world is going to SUPPORT the dollar hanging around for a lot longer. There has still been a significant amount of USD buying to backstop currencies, attempting to alleviate some of the fears around inflation.

I think this was a good article from Financial Times highlighting some of the nuances within the dollar structure:

“The dollar still dominates debt markets, and the volume of dollars held overseas has soared this century. And one striking, and overlooked, detail about this month’s turmoil is that the currency has retained its “near record strength vs the G10 and emerging market currencies”, as Robin Brooks, chief economist of the Institute for International Finance, recently tweeted.”

There was also a very good quote from Jim O’Neill. Jim is a former Goldman Sachs economist, who launched the “Brics” tag (short for the Brazilian, Russian, Indian and Chinese bloc).

Jim published a paper this week arguing that “The dollar plays far too dominant a role in global finance”, and calling on emerging markets to cut their risks:

Should the BRICS Nations Cut Back the Role of the Dollar?

In theory, it would actually be good for the U.S. if the BRICS nations managed to cut back the role of the USD.

That's because a less dollarized world would mean that the US would not have to run such large deficits in order to balance the world's demand for dollar assets, which itself is a consequence of very weak domestic demand in the surplus countries.

We have said from the beginning that countries LOVE to complain about the US Dollar, but it’s very difficult to replace a reserve currency.

Here is a great breakdown from Michael Pettis regarding the US Dollar, and how it would shift the underlying structure of global trade.

"Imagine for a moment that BRICS decided not just to index some trade in one of their currencies but to balance trade surpluses, perhaps with RMB.

This means that foreign countries must be allowed to buy and sell RMB at will to match their current trade and capital needs.

By definition China would have to give up control of its capital account, which ultimately means reversing its excess of savings over investment, something it hasn't been able to do for decades.

It also means, of course, giving up control of its trade account. It would also mean China reverses its structural excess of savings over investment, which ultimately means choosing between surging unemployment and even more debt as it completely transforms the structure of its economy.

Is China eager to do either? No. On the contrary, during a period of (still very small) net financial inflows in 2020-22, the PBoC warned many times about the potential risks these posed for China.

And yet some analysts say that the PBoC wants to remove all restrictions. It is surprising to me that so many analysts think that changing the dominant global currency is like changing the color of your shirt: aside from looking a little prettier, nothing fundamental in your life will have changed.

I think it is because they believe shifting from structural surpluses to structural deficits is a minor thing, a matter of importing a little more.

That shows how little they understand the relationship between a country's internal account and its external account.

A shift away from USD requires a major shift in the patterns of global trade and global imbalances. I can see why the US would benefit from such a shift, but why would the BRICS undermine the very system that accommodate their mercantilist growth polices?

If the structure of global trade and capital hadn't been so profoundly determined by the role of USD, it couldn't have become so entrenched and so difficult to dislodge. But if it is, then how can anyone talk of dislodging USD as if it were just a matter of preference?”

Essentially, the U.S. dollar isn’t going anywhere.

Kind regards,

Freedom Financial News