Rise and fall, or not necessarily?

Published on
February 17, 2023
February 2, 2023

The world is changing at an increasingly rapid pace and the macro landscape is challenging at the moment. Energy crises, war, inflation, in combination with the largest shift of global political + economic power from "West" to "East".

The role of China, Saudi Arabia and Russia as bankers, is rising in the developing world, displacing the United Stated to a less important position. Many argue that this phenomenon, implies the decline of the dollar and the benefits the US at the moment has, with the USD being the international reserve currency. Looking at the situation from a 19th and early 20th century point of view, this makes sense. During those times capital was scarce and countries with excess savings controlled the flow of capital.

Nowadays the system does not function as such. It’s a commonly made mistake to think that "emerging countries" are sitting on scarce resources, strategically assigning capital to each other and the world’s other emerging economies.

This is far from the truth. These countries are forced to export capital, merely for the reason that they are not capable of delivering enough domestic demand to satisfy their growth needs. They have to run large surpluses, which by definition have to be invested abroad and only in countries that are able and willing to run the large corresponding deficits (e.g., the US and India). In other words, the role of the US dollar is not determined by who has the most savings, but more by who is willing and able to absorb the savings.

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Especially China’s huge surplus of excess savings is clearly not absorbed by developing countries. Since 2015/2016 the outflow to developing economies (which was already a small part of the total outflow) started declining even more as Beijing increasingly labels such economies as "risky".

China, KSA and Russia can obviously increase gross investments in each other’s economies, but on a net basis they are not able to facilitate that.

Even though it is established that the rise of emerging economies, it doesn’t mean the downfall of the US dollar, it can still leave an uncertainty among many people and here is why... Since the end of the World War II, investors only had to deal with one Great Power conflict: the Cold War. After that, the world enjoyed a unipolar moment with only one ruling currency.

Today for the first time since WWII there is a challenger to the world order and for the first time in history the US is facing an economically equal, or by some measures, even superior power. China is proactively writing a new set of rules, creating a new type of globalization with new institutions like the "Belt and Road Initiative", BRICS+, and the SCO. Global warming is helping Russia add an “artic suspender” to China’s Belt and Road vision. And while China was in lockdown, it forged a special relationship not only with Russia but with all within OPEC+.

If the world is going form unipolar to multipolar, and if the G20 is splitting into multiple parts, it’s impossible that the monetary system won’t be affected. The G20 is splitting up in “G7+ Australia” (=8 countries) on one side, and “BRICS + new applicants (Turkey, KSA and Argentina) + the thematically aligned (Indonesia, Mexico and South Korea)” (= 11 countries) on the other side. If you’ve done the math, then yes, 8 + 11 = 19. The remaining member, the 20th is European Union and is perhaps the most directly affected by this global “split”.

The BRICSpansion doesn’t stop with the above-mentioned countries, but many other countries are already applying or planning to apply in the coming years.

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A remarkable part of the BRICSpansion is that the one thing that the BRICS are most aligned on is the de-dollarization of their fast-growing, bilateral trade flows, and therefore it is likely that the further BRICSpansion is reaching, the more de-dollarization will happen.

Since the outbreak of the war in Russia and Ukraine, both current and aspiring BRICS members sped up their de -dollarization efforts. These are all headlines from 2022, all involving BRICS member India, that arguably has the best relations with the G7:

India rupee settlement mechanism draws interest from more nations India

UAE in talks for rupee -dirham denominated bilateral trade

Russia is seeking oil payments from India in UAE dirhams.

We started this article with the growing role of China, Russia and KSA as banker to EM countries that are dealing with dollar debts. For example, Russia is funding Turkey, China is funding Russia, the Saudis and the GCC are providing more financing to Egypt than the IMF, and China and Saudi Arabia are providing funds to Pakistan.

And yes, these are all new dynamics for U.S. dollar system, but don’t perse mean the downfall of the U.S. Dollar.

Interesting times in macro land...

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