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The death of the dollar is once again, imminent. The petroyuan's taking over. Must be a day ending in y.
We covered the dollar's many flirtations with death (55 years and counting) back in June 2021. Druckenmiller was airing his fears on CNBC 👇
Lately, it's been Zoltan's turn to bang that particular drum. He's been making the case that "For starters, a lot more oil trade will be done in renminbi".
At the risk of over-simplifying his arguments, his basic premise is that the group of BRICS+ countries (China, Iran, Russia, India, Middle East energy exporters) will get together and implement a new financial system to compete with the US and the dollar.
If you want to dig in (and I'd recommend doing so, even though I disagree with many of the conclusions), his latest includes links to the earlier editions that build out the thesis 👇
That last line stands out. Investors should remain mindful of non-linear risks. Always, not just for 2023.
And, there's definitely the potential for more trade to be invoiced in non-USD currencies over time. The diminishing state of geopolitics and the end of The Great Moderation increase the prospects.
But we need to be mindful of over-stating the scope and impact of that change. Real world constraints and incentives always take precedence over ideals in the end.
So, let's consider the role of the dollar. On one hand, it facilitates trade. USD is the dominant global currency. It's easy to convert, widely accepted, most commodities are 'priced' in dollars, and so on...
Some of those mechanics could be replicated to reduce the role of the dollar at the margin, especially for trade between 'unfriendly' nations that have been hit by US sanctions and had their USD access restricted.
The Two Michaels
But this analysis is missing some depth. Michael Pettis explains 👇
If you insist that the balance of payments must balance (both globally and nationally), and that net capital outflows must be equal globally to net capital inflows, it's very hard to see how a group of countries with large, structural trade surpluses and excess domestic savings can form their own trading bloc around the use of their own currencies. Who will absorb their excess savings?
It's a fatal flaw. By definition, if your economy is running a trade surplus, it means you're producing more than you domestically consume.
This phenomenon creates 'excess' profits (savings) that the domestic economy cannot absorb.
Sure, you can invest in more production, but that just makes the eventual problem bigger. An even larger trade surplus and even more savings. So you need to look further afield.
Back to Michael Pettis 👇
It is a mistake (albeit a very common one) to see countries like China, Saudi Arabia and Russia as sitting on scarce resources (excess global savings) which they are carefully apportioning to the world's emerging economies. This has it backwards.
These countries must export capital because they have no choice. For structural reasons that are very hard to resolve they are incapable of delivering enough domestic demand to satisfy their growth needs, and do have to run large surpluses.
That's a pretty big constraint. It's also why you'll see headlines like this... 👇
In the end while China, Saudi Arabia and Russia can incrementally increase gross investments in each other's economies, they cannot do so on a net basis. This is just basic BoP (Balance of Payments) accounting.
The Other Michael
Enter Michael Every. Rabobank's global strategist has taken the other side of Zoltan's musings, or at least the over-reach 👇
In short, the structure of the global economy and markets is rapidly changing, and in ways few fully grasp or address despite the lessons of history.
Understandably, this is also generating some epic, ‘War and Peace’, Russia-centric market narratives on the forces of history, Great Men, and The Rise and Fall and Rise of The Great Powers (and The Great Currencies), etc. Equally understandably, these focus on the outlook for the dollar.
As a particular example, there is some excitement around an emerging ‘petroyuan’ argued as marking the emergence of a new bloc of Eastern economies backed by commodities such as oil, and linked to China’s CNY.
Collectively, this is seen as heralding the relative collapse of the US/West and global US dollar hegemony.
Yet at the same time it is also important to realise that after having long ignored realpolitik, the analytical pendulum arguably swings too far the other way to presume everything is now about war/geopolitics and nothing is about ‘peace’, i.e., central banks or markets.
Crucially, this inverse approach to the pre-2022 research norm overlooks that market forces still matter hugely in some areas; so does the US Federal Reserve – which is also deeply geopolitical when it needs to be. One thus ideally needs to look at ‘war’ and ‘peace’ together.
It's almost as if one shouldn't take things to extremes, and instead make every effort to understand as much as possible so that one may draw probabilistic conclusions rather than definitive ones...
Ultimately, it's always a question of balance. Trade is mutually beneficial. There's always going to be conflict over setting the terms of trade. The US has held a near-monopoly over that 'rulebook' via the dollar system for a long time.
This is a privilege that the US can abuse at times, and the persistent attempts at creating alternatives should be noted as a sign of protest.
Big change is hard however, and war is destructive. Nobody benefits from impoverishing their trade partners.
“A nation that would enrich itself by foreign trade is certainly most likely to do so when its neighbours are all rich, industrious, and commercial nations.” ~ Adam Smith (Wealth of nations)