The De-dollarization Threat — Accelerating and Deserving of Our Attention...
A lot has been said and written about the end of the dollar-centric era over the years, and a lot more since the efforts to dethrone the USD as the world reserve currency became more concerted and systematic. We repeatedly discussed this issue in the past in our reports and our blog posts, most recently in our ,article highlighting the latest developments in the de-dollarization push by China and Russia. We have felt for some time now that this shift is something that investors should keep an eye on, even though we didn’t perceive it as urgent or imminent. We are starting to reconsider that stance.
As we’re sure you must have noticed by now, especially over the last few weeks, it has become an increasingly headline-grabbing topic. The Russian invasion of Ukraine and especially the sanctions imposed in retaliation to it have acted as a catalyst for the shift away from the dollar. It’s not just Russia and China that are actively seeking and pushing for an alternative trade and reserve currency - they have been joined by more countries, some of them clearly considered US allies and dollar-aligned mere months ago.
While the dollar still dominates debt markets, a growing number of nations have been striking deals in other currencies, particularly the renminbi, including India, Brazil and even France, with the China National Offshore Oil Corporation and TotalEnergies completing the first yuan-settled LNG trade in March. While it appears unlikely that the yuan will be the one to topple and replace the dollar, the rise of the BRICS bloc and the push to create a new common currency, based on a basket of currencies of its members, could prove to be a more formidable challenge. The emergence of a credible, viable and impending challenge to the USD’s quasi-monopoly as the global trade and reserve currency seemed unimaginable not too long ago. Now it is starting to look more realistic, and even likely.
In recent years, BRICS has begun to expand beyond their founding members. This trend is accelerating. It is increasingly being referred to as BRICS+, or BRICS PLUS. The group is growing its influence and promoting the idea of a multipolar world. Iran, Argentina, and Algeria applied to join BRICS in 2022. Other countries have formally expressed their interest to join. Among them are Turkey, Mexico (!!), Indonesia, Argentina, Saudi Arabia (!!), the UAE, Egypt and a number of other African countries. Particularly the announcements of Mexico and Saudi Arabia have drawn much attention.
For fear of sounding alarmist, we must make it clear at this point that we do not believe that such a tectonic shift will happen overnight. However, although this threat to the greenback might be something that investors can worry about another day, the process of de-dollarization does seem to be in a mode of acceleration, and the potential ramifications are so severe and far-reaching that we want to alert you to the situation.
BRICS PLUS in the making – founding members, and potential new members
For Source: reddit.com / mapchart.net
Moreover, the reaction of the US government to this challenge, in terms of international economic and geopolitical policies, does in fact require our immediate attention! Clearly, the US see China as a threat to US dollar dominance. And that is increasingly driving the US geo-political agenda.
America has benefitted vastly from the dollar’s dominance as the global trade and reserve currency. This competitive advantage has allowed the United States, to some degree, to live beyond its means, consuming more than it produces for a long time. It has enabled and fortified US hegemony and global dominance. The model appears to be coming to an end, or it is at least losing its absolute character.
As the old geopolitical order shows signs of faltering and as the US, and by extension the West in its entirety, appear to be closer than ever to the Thucydides trap *1, it can be argued that what can make or break a (reigning or aspiring) global superpower is its currency. In the face of what is potentially an existential threat to its status as a world leader, many have been wondering to what lengths the US will go to protect that unique position that has benefitted America for so long.
*1 The Thucydides Trap describes the tendency towards conflict and war when an emerging power threatens the throne of an entrenched hegemon. This type of situation has been seen throughout history, and the term originates from the ancient Greek historian and military general Thucydides. He posited that the Peloponnesian War between Athens and Sparta had been inevitable because the Spartans feared the growing power of Athens. Today, China's economic and political power is growing, and the US is feeling threatened. This has become a core theme and driving force across all dimensions of the global economic and geo-political system.
In this context, it has gone shockingly under reported and under discussed, but it would appear that the “FedNow” system might be part of that response. It has been so sparsely and so superficially covered by the media that it would not be at all surprising if you have never heard of it. Unlike the much talked about Central Bank Digital Currencies (CBDCs), a race in which China is the frontrunner, FedNow is not a currency at all. While the US launched its own pilot program for a digital dollar last year, it would appear that it decided to take a faster route to keep the dollar relevant, competitive and widely used in the digital era.
Instead of waiting until it can create the infrastructure and the intricate systems needed for the full rollout of a digital USD, the Fed recognized that it was late in entering the race, so it would be easier to start by replicating what is already there and what is a lot less technically complicated. Instead of trying to play catch up with other nations’ CBDC progress, it simply copied what the private sector pioneered over a decade ago. Far from a cutting-edge innovation, FedNow is simply an instant payments system, scheduled to be launched this coming July. As Reuters describes it, “it will be available to banks and credit unions, enabling them to speed up the processing of checks and electronic payments. This will mean people can access their paychecks and transfer money to other accounts instantly, any time of the day or week.”
It is basically like PayPal, or Apple Pay, or Cash, or Venmo, “but better”, as it will be controlled and operated by the Federal Reserve. To many of us, it might seem like a perfectly inane idea for a government to try and copy a product that has been perfected long ago by multiple private companies. For many others though, even if it is embarrassingly late to the party, the idea of having the central bank step in and offer the same services, but with the gravitas and perceived reliability of the state itself, can seem like an attractive and “safer” alternative.
The implications of this move are far-reaching: from the obvious privacy-related concerns and financial sovereignty considerations to the impact it can have on an international level and in the “battle of the currencies”. Regardless of whether this gambit succeeds or fails, it is likely to pose serious direct or indirect dangers to investors and savers and it represents yet another red flag and one more reason for international diversification and for hedging against government-borne risks.
We’ll be discussing this topic in the coming weeks, as it does have a direct influence on wealth preservation and investing, particularly for dollar-based investors, but then really for everyone else as well.