De-dollarization - Part 2
What's good, what's bad, for whom, and why? - Article #80
In this 14-minute article, The X Project will answer these questions:
I. Why this article now?
II. Why is Global Dollar Dominance Good for America?
III. Why is De-dollarization Bad for America?
IV. Why is Global Dollar Dominance Bad for BRICS Countries?
V. Why is De-Dollarization Good for BRICS?
VI. What’s the Alternative to the USD as a Primary GRC?
VII. Why is the Alternative so Good for BRICS?
VIII. What is the Technical Outlook for Gold Prices?
IX. What does The X Project Guy have to say?
X. Why should you care?
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I. Why This Article Now?
Okay—this one is easy… two weeks ago, I published “De-Dollarization—Part 1” and committed myself to Part 2. Given the recent market volatility (signaling potential systemic instability), I took a detour last week and published “The Great Taking” instead of Part 2.
But waiting an extra week gave me two more (related) reasons why this article is timely now. Gold prices (in U.S. Dollars/USD) climbed to new all-time highs, with the spot price ending the week at $2,509.60 per ounce. The U.S. Dollar Index (DXY) declined to its lowest level this year since the last week of December 2023.
II. Why is Global Dollar Dominance Good for America?
As was covered in Part 1, the USD is the primary global reserve currency, which means it dominates global foreign exchange reserves, export trade, and foreign exchange transactions. This dominance confers significant advantages on the United States, particularly regarding economic stability and influence. The demand for USDs ensures that the U.S. can borrow money at lower interest rates, as there is a consistent appetite for U.S. Treasury bonds. The ability to issue debt in its own currency means that the U.S. can run larger deficits with less immediate risk of currency devaluation, allowing the government to finance various initiatives and respond more effectively to economic crises.
Moreover, global dollar dominance enhances America's geopolitical power. As the preferred currency for global trade, particularly in critical markets like oil and other commodities, the U.S. dollar gives the U.S. significant leverage in international economic relations. Countries and corporations need access to dollars to conduct their business, which often requires them to engage with U.S. financial institutions and, by extension, comply with U.S. regulations and sanctions. This allows the U.S. to exert influence over global economic policies and practices, shaping the international order in ways that align with its strategic interests.
Additionally, having the U.S. dollar as the global reserve currency substantially benefits American consumers and businesses. The dollar's stability and liquidity facilitate international trade by reducing exchange rate risks, which helps keep import costs down. This, in turn, keeps inflation in check and maintains the purchasing power of American consumers. Furthermore, American companies benefit from more access to capital, as the dollar's global status attracts foreign investment into U.S. markets. Overall, global dollar dominance strengthens the U.S. economy, enhances its international influence, and supports the prosperity of its citizens.
III. Why is De-dollarization Bad for America?
De-dollarization or reduced global dollar dominance poses several significant challenges and risks for the United States, primarily affecting its economic stability, geopolitical influence, and the everyday financial well-being of its citizens. One of the most immediate impacts has been increased borrowing costs for the U.S. government. The dollar's status as the world's primary reserve currency has meant consistent global demand for U.S. Treasury bonds, allowing the U.S. to borrow at relatively low interest rates. As the dollar's dominance has declined, global demand for U.S. Treasury bonds has decreased, and the U.S. is facing higher interest rates on its debt, leading to increased costs for financing government operations and exacerbating budget deficits.
Another significant consequence of de-dollarization is the diminished global influence of the United States. The dollar's dominance has given the U.S. considerable leverage in international economic and political affairs. In the past, the U.S. could impose economic sanctions effectively because most global transactions are conducted in dollars, and the global financial system heavily relies on U.S. institutions. But as we’ve seen with Russia recently, the sanctions since the invasion of Ukraine have been mainly ineffective. The reduction in dollar dominance has weakened the tool of sanctions, limiting the U.S.'s ability to influence global events and enforce international norms. This shift leads to a more fragmented and multipolar world, where the U.S. has less control over global economic policies and decisions.
Finally, de-dollarization could negatively impact American consumers and businesses. The dollar's global status helps maintain its value, contributing to low inflation and stable import prices. If the dollar were to lose its dominant position, its value could become more volatile, leading to higher import costs and inflation in the U.S. Additionally, American businesses that benefit from the ease of conducting international trade in dollars might face increased transaction costs and currency risks if they are forced to deal with multiple currencies. Overall, reduced global dollar dominance would likely result in higher economic uncertainty, reduced global influence, and more significant financial challenges for the U.S. government and its citizens.
IV. Why is Global Dollar Dominance Bad for BRICS Countries?
In Part 1, Section IV, I introduced BRICS as a group of nations (originally Brazil, Russia, India, China, and South Africa, plus recently Iran, Egypt, Ethiopia, and the United Arab Emirates, with Saudi Arabia still considering and just this past week Azerbaijan applying) that have formed an economic and geopolitical bloc pushing for de-dollarization.
Global dollar dominance poses several challenges and disadvantages for BRICS countries, primarily affecting their economic sovereignty, financial stability, and growth potential. One of the main issues is the dependence on the U.S. dollar for international trade and financial transactions. Since the dollar is the primary global reserve currency, BRICS countries must hold substantial dollar reserves to facilitate trade and manage their economies. This reliance can expose them to external risks, particularly fluctuations in the value of the dollar and changes in U.S. monetary policy. When the U.S. Federal Reserve raises interest rates, for example, capital often flows out of emerging markets like those in BRICS, leading to currency depreciation, higher inflation, and financial instability in these countries.
Furthermore, the dominance of the U.S. dollar can hinder the economic growth and development of BRICS countries by perpetuating an unequal global financial system. The dollar's central role often results in a "dollar trap," where BRICS nations accumulate large dollar reserves to protect against financial crises rather than investing those resources in domestic development projects. This dynamic can stifle economic growth, as funds that could be used for infrastructure, education, or healthcare are instead tied up in low-yielding U.S. assets. Additionally, the need to conduct trade in dollars can increase transaction costs and limit trade diversification for BRICS countries, making their economies more vulnerable to external shocks. Overall, global dollar dominance imposes economic constraints on BRICS countries, reduces their financial sovereignty, and perpetuates an uneven global economic playing field.
V. Why is De-Dollarization Good for BRICS?
Aside from the reasons already discussed (and their inverse), de-dollarization can be particularly beneficial for BRICS countries by fostering greater regional economic cooperation, enhancing their bargaining power in international trade, and promoting the development of local financial markets.
De-dollarization encourages BRICS countries to trade more within their bloc using local currencies. This shift can strengthen economic ties among BRICS nations and create a more integrated regional economy. By relying less on the U.S. dollar, BRICS countries can facilitate smoother and more efficient trade agreements, reduce dependency on external markets, and potentially develop a shared currency or financial infrastructure that could further unify their economies. This increased regional cooperation can lead to more resilient and self-sufficient economies that can better withstand global financial shocks.
Moving away from the U.S. dollar allows BRICS countries to negotiate trade agreements with greater flexibility and autonomy. When not tied to the dollar, BRICS nations can set more favorable terms for their economic interests, such as pricing commodities or services in their currencies or establishing barter trade systems that bypass the need for currency exchanges altogether. This can lead to better trade deals and more equitable economic relationships with other nations, particularly in regions where BRICS countries have significant influence, such as Africa, Latin America, and parts of Asia.
De-dollarization can stimulate the development of domestic financial markets within BRICS countries. As they reduce their reliance on the dollar, there is a greater incentive to strengthen their local currency markets, improve financial infrastructure, and encourage the use of local currencies in both domestic and international transactions. This can lead to more robust and diversified financial systems that are less vulnerable to external shocks and more supportive of domestic economic growth. By promoting their own currencies, BRICS countries can attract foreign investment directly into their local markets, boosting liquidity and fostering economic development.
In conjunction with the previously mentioned reasons, these factors underscore the strategic advantages that de-dollarization can offer BRICS countries, empowering them to build more autonomous, resilient, and prosperous economies.
VI. What’s the Alternative to the USD as a Primary GRC?
Critics of de-dollarization, those who discount the entire notion or don’t believe it is or can ever happen, rally around the point that there is no viable alternative currency to replace the USD. The Euro is second to the USD but is unlikely to advance much further given the EU's political fragmentation, limited fiscal unity, and much smaller financial markets.
China’s economy is the second largest in the world, and a few years ago, it was expected to surpass that of the U.S. In the more recent post-pandemic years, however, U.S. economic growth has outpaced China’s, and it is no longer certain if China’s economy will accomplish that. The Chinese yuan is barely visible on the radar as a global currency. The biggest challenges for the yuan are the lack of transparency and trust in China’s financial system and the capital controls that restrict the yuan from full convertibility.
So, while it is true that there is no other fiat currency anywhere close to supplanting the USD as the primary GRC, there is another currency that is gaining at the USD’s expense, and especially as a global reserve asset at the expense of U. S. Treasurys. The BRICS countries are successfully increasing the amount of trade they are doing amongst themselves and with other foreign countries that are being transacted in their own currencies rather than dollars. Critics will counter that there is a limit to this as most countries don’t want to hold large amounts of Russian rubles, Chinese yuan, Indian rupees, or any other non-USD currency that would otherwise be required for non-USD international trade to keep growing. But this is where the critics are wrong and missing the re-emergence and role that another form of money is playing.
Here is an example of what is happening. India buys oil and natural gas from Russia using rupees. Russia uses those rupees to buy Indian goods and services. China buys Brazilian agricultural products using yuan, which Brazil uses to buy Chinese goods and services. When any trade imbalance between any trading pair of countries becomes too large or uncomfortable, they net-settle the trade imbalance using gold.
VII. Why is the Alternative so Good for BRICS?
There is a very strategically important reason that the alternative described in the section above is so good for BRICS aside from the more general reasons mentioned earlier in this article. Before the de-dollarization movement, foreign countries needed USD for most international trade transactions. One of the most crucially essential transactions for many countries that don’t produce energy is to buy crude oil and natural gas for which USDs were needed. But if a country can now buy oil and natural gas in their own currency, they can save their limited, expensive, and - for many - challenging to obtain USDs for other purposes, like servicing their USD-denominated debt. Furthermore, if need be, they can print their own currency to buy energy. And since gold is re-emerging as a strategically crucial and neutral global reserve asset and an international form of money to settle trade imbalances, countries can also print their own money to buy gold.
In the next Section, I will share the technical outlook for gold prices from @NorthstarCharts on X. Then, in Section IX, what I think, and in Section X, why should you care and, more importantly, what more can you do about it? However, I have hit a new paid subscriber threshold, so you must now be a paid subscriber to view the last three sections. The X Project’s articles always have ten sections. Soon, after a few more articles, the paywall will move up again within the article so that only paid subscribers will see the last four sections, or rather, free subscribers will only see the first six sections. I will be moving the paywall up every few weeks, so ultimately, free subscribers will only see the first four or five sections of each article. Please consider a paid subscription.
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VIII. What is the Technical Outlook for Gold Prices?
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