Leveraging the Transition Points of a New Monetary Framework
By JC Collins
The growing similarities between the consequences of the multilateral monetary transition and the American Presidential race are beginning to form the externalization of the script which we have been discussing for over two years.
Taking the lead on these talking points is Donald Trump with his “Make America Great Again” slogan and straight-forward statements on what needs to happen. Everything from funding the military protection of other nations to the need to restructure NATO have been brought up as important factors of America’s role in the world which need to be addressed.
But why this sudden focus on America’s position in the world?
One answer has to do with the coming US dollar depreciation. It is my prediction that the dollar will see around a 30% depreciation against the currencies of its largest trading partners. This depreciation will be the effect of changes to the international reserve framework. These changes will be focused on rebalancing the foreign exchange account reserves between multiple currencies, which will now include the Chinese renminbi. But the SDR will also play a role in this rebalancing.
The role of the SDR may be small at first, but its influence and prominence will grow over time until it takes over the full liquidity responsibilities of the other national currencies. It is expected that changes to the SDR usage will happen this year. The initial function of the SDR will likely be centered on shifting macroeconomic stress from the national/domestic currencies onto the IMF itself, as member nation’s demand loans to address slow and contracting growth.
The transition from a monetary world where the USD is the dominant reserve currency to a world where the responsibility is shared with other nations and institutions will not be as dramatic as many would consider. The geopolitical strategies which America has depended on for decades will need to be adjusted to accommodate the growing influence of other nations.
These adjustments have in fact been taking place for a few years already, and are now being shifted to the next level with the campaign statements of Trump. The need for pulling back on America’s geopolitical commitments is directly connected to the expected depreciation of the dollar.
A weakening dollar will make it more expensive for the US to maintain a foreign military presence. The bases in Japan and South Korea immediately come to mind, with both having been talking points of Trump.
The other factor which needs to be considered under a depreciating dollar regime should be the ability of US policy makers to buy the cooperation of foreign governments. This also includes the function of USD denominated foreign aid which has been used to build strategic relationships and influence decision makers in other nations.
Trump, the astute deal maker, understands this changing dynamic and is openly expressing the requirement to renegotiate America’s foreign commitments and make better deals. Other countries, such as Japan and South Korea, will need to make larger financial contributions to their own protection.
But we also need to consider that some of these geopolitical challenges which will now have to change are the direct and indirect result of the growth of US dollar strategies over the last seven to eight decades. Any renegotiating which will take place will have to deal with the imbalances, both economic and geopolitical, which have developed because of America’s exorbitant privilege.
The International Monetary Fund has also been getting into the externalization of scripting with its recent statements on slow global growth and the need for “immediate action by the world’s economic powers to shore up growth”. Economic activity has been too slow for too long and now the threat of further volatility has increased. The recent “violent swings” in global markets has “impaired confidence and demand”.
The point was made here two years ago that volatility would be used as a pretext to develop broader and deeper multilateral controls and methodologies which would be used to “shore up growth”.
The coalescing of US campaign promises with the larger macro monetary adjustments are the next indicators of the multilateral transition. The leveraging of each transition point, whether economic or geopolitical, will take place in real-time as the transition itself progresses.
Some aspects of the transition itself are dependent upon the collective agreements between nations, such as the statements from the G20 about broadening the use of the SDR this year. Other aspects will take place domestically as many countries, which have become accustomed to a world structured around US hegemony, such as Japan, South Korea, and in some regards Great Britain, will now have to reposition themselves both financially and geopolitically.
America itself is shifting position. The early semi-policy statements of the Trump campaign are planting the seeds of these changes. Whether Trump wins or losses (I think he will win), is not as important as the purpose of socioeconomic scripting. As the script continues to be externalized, watch for the tell-tale signs of transition points. Some have been discussed in this article. But there are many more. – JC