Yesterday morning I noticed an op ed in the Financial Times by the economist Nouriel Roubini on why the “greenback is bound sooner or later to feel the effects of intensifying geopolitical rivalry between the US and China”. He believes that the dollar be replaced by a bipolar currency regime.
I totally concur with Roubini that it is an “anachronism that the US, whose share of global gross domestic product has halved to 20 per cent since the second world war, still accounts for at least two-thirds of all so-called vehicle currency transactions.”
The structure of the global economy has completely shifted since the post War financial architecture was created. The largest economy in the world is already China according to the IMF , using PPP measures. According to UN data, in 2019 China accounted for 29% of global production - the Chinese think its already 30%. Furthermore, looking at global trade China is the top trading partner with 120 countries now according to Ambassador Mark Green:
“China is the largest trading partner to Japan, South Korea, Vietnam, and Taiwan. Given their proximity, those countries are hardly a surprise.
But it is also the top trader with Russia—and Ukraine. In Africa, China is the top partner for countries like South Africa and Kenya. In South America, for places like Brazil; in the Middle East, places like Saudi Arabia. And China is the largest external trading partner of the European Union.”
This image in the Visual Capitalist showing the shift form 1980 to 2018 might be quite a wake up call to some.
Geopolitical Catalyst
That all said, commentators have been writing off the dollar throughout my 34 years of observing markets and economies. What’s different now is geopolitics. In fact the last time we were talking about a bipolar currency regime was at the turn of the millennium (at the dawn of the Euro) when some commentators were expecting a Dollar/Euro system. I remember it all very well - I was on a ski resort in the middle of the French alps when suddenly one day we were using Euros and all the elderly local skiers were very confused. It was somewhat surreal.
This was from a speculative paper in 1998:
“This paper argues that the international monetary system will evolve into a bipolar structure consisting of a dollar area and a euro area, each of which attracting other countries to their gravitational centers.”
Although the Euro is used in many transactions globally, we didn’t see the emergence of 2 separate regimes because EU and the USA were never really geopolitical rivals. Europe has always been part of the US-led Western block. This is not the case with China and so this might be a case of where an appreciation of geopolitics and economics is useful.
Today amongst the escalation of geopolitical tension around the world the US , the West has been resorting to the weaponisation of the financial architecture that they created. Since the end of WW2 the US-UK dominated system seemed to benefit from the Wimbledon effect: decide the rules and then let anyone participate. So money would come from all over the world and pass through the financial system.
The US has used the financial system to try to inflict harm on its enemies before. But the sanctions on Russia after the war in Ukraine appear to be the first time that it was done to a major economy and geopolitical rival since the fall of the Berlin Wall.
Immediately I expected that this would accelerate a rival system. China thought it would be the next possible target. And with talk in the last few weeks again of a ‘2027 timeline’ for a war with China over Taiwan warned by high ranking US military officers tensions are rising once more: the incident over the Chinese air balloon might be called a lot of hot air if it actually wasn’t a scary barometer of where relations between the two superpowers really were.
Already there have been efforts by the Chinese, Russians and others to create alternative systems but this is now accelerating. Now any nation which might be neutral, or fear being branded as an enemy of the US, might natural look to diversify their risks when they do scenario planning. In the last 12 months there are many examples but Roubini picked up the example of oil trade with the Middle East:
“In December, China and Saudi Arabia conducted their first transaction in renminbi. And it is not farfetched to think that Beijing could offer the Saudis and other Gulf Co-operation Council petrostates the ability to trade oil in RMB and to hold a greater share of their reserves in the Chinese currency. It is likely that the GCC countries, as well as many other emerging market economies, may soon start accepting such Chinese offers given that they do a great deal more trade with China than the US.”
Technology
One of the arguments has always been that there is no alternative to the dollar. But I think technology will also enable this shift. Roubini points out:
“New technologies including CBDCs, payment systems such as WeChat Pay and Alipay, swap lines between China and other countries, and alternatives to Swift, will hasten the advent of a bipolar global monetary and financial system. For all these reasons, the relative decline of the US dollar as the main reserve currency is likely to occur over the next decade.”
Ultimately, I think that in the next decade or so the world financial system will change inexorably. But a bipolar currency world isn’t necessarily in the best interests of humanity. I suspect one longer term future scenario is a move to a greater number of local currencies, in a world less dominated by the nation state. Or perhaps eventually governments (even local) will give up trying to create and control currencies and we will all use Bitcoin. And I can think of other future scenarios. However, in the short term (for a futurist), however, I think Roubini’s future is gaining traction.