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Uncontrolled globalization has ended. That’s not a controversial claim at the moment for obvious reasons, from the post-Covid-19 pandemic retraction of complex international supply chains to the untying of the US and China. It’s hard to imagine a return to the neoliberal mindset of the 1990s, even if Joe Biden wins the US presidential election, or if the EU experiences a moment of renewed cohesion in response to the pandemic.
The world is more likely to become tripolar – or at least bipolar – with further regionalization of trade, migration, and even capital flows in the future. There are all kinds of reasons for this, some troubling (the rise of nationalism) and others benign (a desire to have more resilient and inclusive local economies).
That raises a question that has been considered controversial: Are we entering a post-dollar world? It may seem like an easy question, given that more than 60 percent of the world’s foreign exchange reserves are in dollars, which is also used for the vast majority of world trade. The recent stimulus to the dollar markets abroad by the US Federal Reserve, in response to the coronavirus crisis, has given new impetus to the global dominance of the dollar.
As a result, many people would repeat the mantra that in this, as in so many other things, “you can’t fight the Federal Reserve.” Dominance of the US banking system and liquidity of the dollar, both backed by the Federal Reserve, will give the US dollar unquestionable supremacy in the global financial system and capital markets indefinitely.
Others argue that “you cannot replace something with nothing.” By this they mean that even though China, Russia, and other emerging market countries (as well as some wealthy nations like Germany) would love to move away from dollar dominance, they have no real alternatives. This desire is especially intense in a world of finance that is increasingly used as a weapon. Consider the recent measures by Beijing and Washington to curb private sector participation in each country’s capital markets. However, the euro, which accounts for around 20 percent of world reserves, cannot be compared in terms of liquidity and there are still big questions about the future of the eurozone. The gold market is too restricted, as evidenced by the fact that it is now virtually impossible to buy the physical metal.
But there are economic statistics, and then there is politics. Tellingly, China has recently bought a lot of gold as a hedge against the value of its dollar holdings. It is also testing its own digital currency regime, the e-RMB, becoming the first sovereign nation to launch a central bank-backed cryptocurrency. You could imagine that it would be easy to implement it across the orbit of the One Belt, One China Road Initiative, as an attractive alternative for countries and companies that want to trade with each other without having to use dollars to hedge type risk. exchange.
This alone should not pose a challenge to the supremacy of the dollar, although it was enough to prompt former US Treasury Secretary Hank Paulson, a man who does not comment lightly, to write a recent essay on the future of the dollar. But all this is not happening in a vacuum.
The European Commission’s plan to tighten its recovery budget for bailouts after the Covid-19 pandemic by issuing debt that will be tax-reimbursed by the entire EU could become the basis for a true fiscal union and, ultimately a United States of Europe. If it does, then I can imagine that many more people would want to have more euros.
I can also imagine a continuing weakening of relations between the US and Saudi Arabia, which in turn could undermine the dollar. Among the many reasons why central banks and global investors have US dollars, one of the most important is that oil is priced in dollars. Saudi Arabia’s continued actions to undermine the US shale weakened relations between the administration of US President Donald Trump and Riyadh. It is unlikely that if Mr. Biden, who would likely follow Barack Obama’s pro-Iran stance, becomes president, he will repair such relationships.
Even with oil prices so low, Dallas Federal Reserve Chairman Robert Kaplan recently told me that energy independence remains “strategically important” to the US and that “there will continue to be substantial shale production in the future. USA”. So who will fill the void left by Saudi Arabia? Most likely China, which will want oil to be quoted in renminbi. A disengaged world may require less dollars.
Finally, there are questions about how the Federal Reserve’s unofficial support for US government spending in the wake of the pandemic has politicized the money supply. The issue here is not really a Weimar Republic-style inflation risk, at least not in the short term. It’s more about trust. Some people will say that the dollar is a world currency and that its luck does not really depend on the perceptions of the United States as such. Certainly, the events of recent years would support that view.
But there may be a limit to that disconnect. The US can get away with it in many economic ways, as long as it remains politically credible, but less if it isn’t. As economist and venture capitalist Bill Janeway recently told me: “The American economy bottomed out in the winter of 1932 to 1933 after [el presidente Herbert] Hoover lost all credibility for his response to the Depression, and confidence in the banks disappeared along with confidence in the government. ”
It could be that one day confidence in the dollar and confidence in the US converge once again.
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