The Worlds Waning Appetite for the USD

Economics, Premium POM

So much has changed so fast.  These changes haven’t been discussed on the evening news and broadcasted across the airwaves.  They haven’t been streaming on YouTube with millions of views and subscribers, nor have they been used as political platforms.  But the changes have happened and most of us go about our lives with little, if any, knowledge and awareness about them.

The need for these changes has been building for decades and has now become one of the most important aspects of international relations.  Economic and monetary specialists have been warning for a long time that imbalances are developing in the international monetary system.  These imbalances are a direct result of the role of the American dollar as the primary reserve currency used in global trade.

When the post war dollar system was established at Bretton Woods in 1944 the United States had a larger percentage of the worlds GDP.   It is estimated to have been at 50% and made the case for the use of the dollar as the primary reserve currency all the more reasonable. Nations began to accumulate large amount of US dollars in their foreign exchange reserve accounts.

It is the disproportionate level of dollars in these foreign exchange reserve accounts which are contributing to the development of global imbalances.

The accumulation of USD has continued as the American percentage of world GDP has decreased.  It is estimated that this percentage is now around 15%, which is in the same range as China.  Depending on your source for data and information, China may have even surpassed America now with the largest percentage of the worlds GDP.

Outside of select working groups and institutions such as the International Monetary Fund and the Bank for International Settlements, the Asian financial crisis of 1997 and 1998 was the first overt indicator that something was seriously wrong.  As the emerging economies of Asia captured more of the worlds Gross Domestic Product the corresponding increase in trade required them to accumulate and hold larger amounts of USD at the same time that America’s percentage of global GDP was decreasing.

This disproportionate reserve accumulation created enhanced domestic strains on the currencies of the emerging nations.  This was the direct contributor to that specific crisis. The financial crisis of 2007 and 2008 was also another symptom of these imbalances.  The requirement for American monetary authorities to continue expanding the supply of the dollar to meet the international demands created a large expansion of credit markets at home.

All of this forced China to suggest that a dollar alternative be implemented as a method of transforming the international monetary system to a more fair, representative, and balanced framework.  The Special Drawing Right (SDR) of the IMF was put forward as a supra-sovereign asset which could be used to begin the incremental process of adjusting the composition of the foreign exchange reserve accounts.

Other nations and the IMF itself joined China in moving forward on this objective and put forward a series of steps and modifications to the global system which would work towards this transformation.  Reforming the quota system and governance board of the IMF itself was the first step.  Internationalizing the Chinese renminbi was another.  Opening the capital markets in China would also speed up the internationalization of the RMB.

The BRICS group (Brazil, Russia, India, China and South Africa) created a New Development Bank and established a Contingent Reserve Arrangement in order to prevent another Asian crisis like they had experienced in 1997.  These new institutions were aligned with the larger mandates and structure of the IMF itself, and would be well positioned to integrate with the existing traditional dollar based institutions when the time came.

China also had the RMB added to the SDR basket composition alongside the dollar, yen, euro, and pound.  This was a huge step forward on rebalancing the world monetary framework.  This was amplified when China began to issue SDR denominated bonds in 2016 as an alternative form of USD denominated liquidity.

Since the election of Donald Trump in America things have been fairly quiet on the SDR and international monetary front.  As we had previously discussed, the Trump doctrine has been predominantly focused on the geopolitical changes which such a transformation of the international monetary system would entail.

But in the background there is a dollar policy which is beginning to unfold.  There has been much discussion about how the dollar is overvalued, which is something which needs to be addressed in order to correct the global imbalances discussed above.  How this dollar devaluation takes place can take multiple paths.

Once some of the geopolitical challenges have been dealt with, such as issues with Russia, Ukraine, the Middle East, and the South China Sea, along with North Korea, I would suspect we will see broader discussions around the use of the SDR and the devaluation of the US dollar.

The framework to support a waning dollar appetite has already been established.  The transformation has begun and all major powers in the world agree on the need for it to happen.  The timing and real world adjustments will be fluid as each nation considers its own domestic needs and geopolitical ramification of the international changes.

The methods through which America has interacted with the world are in the process of changing.  Trump is leading the charge on this and there are domestic elites who are attempting to hamstring and misdirect as much as possible.  These attempts will fail and the transformation will continue.

The dollar will not collapse and vanish into the monetary ghost realms.  It will in fact stabilize after some devaluation occurs.  But it needs to be stated that this devaluation, which will come with a decreased demand for dollars in the world, will benefit Americans as it will make exports cheaper and bring back jobs, just like Trump has promised.

These changes will also fundamentally alter American culture and political landscape, which is another reason the liberal-left is fighting so hard to interrupt and arrest the transformation.  The lower classes and inner cities will no longer vote Democrat after factories fire back up and jobs flood back to American shores.  This will set the left back generations. – JC

JC Collins can be contacted at jcollins@philosophyofmetrics.com

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