But will there really be de-dollarization? Ispi reports
The rhetoric of China and the BRICS insists heavily on dedollarization, but is hoarding the US currency really feasible? Here's what the ISPI focus says
If dedollarization has become the rallying cry of countries likeChina and blocs like the BRICS, the technical debate on the subject suffers from some analytical deficits. As observed in a recent ISPI focus by analysts Luca Fantacci and Lucio Gobbi, rather than supplanting the greenback, alternative currencies such as those that the BRICS are considering launching at the next Cape Town summit are destined to become prevalent only in specific contexts geographical areas and in very specific sectors, within a financial system that will become increasingly fragmented.
Is there no alternatives?
Fantacci and Gobbi's paper begins by recalling that the BRICS summer summit in South Africa is imminent, where the project to create a new international gold-based currency will be discussed: a currency which, the authors underline, "should take the form of a secured by reserves of gold and other raw materials, especially rare earths".
The possible decision of the BRICS brings the question of the global role of the dollar back to the fore. As is known, the processes of financialized globalization have taken place on the basis of a precept formulated starting from a well-known slogan by Margaret Thatcher: "there is no alternative". From this point of view, the main argument in favor of the persistent strength of the US currency refers to the weakness of the other currencies.
This is a concept that resonated in the recent statements by Treasury Secretary Jenet Yellen formulated at the end of her visit to China: "All the data that I am aware of – Yellen stressed – show that the dollar is used predominantly, almost 90%, in international transactions, and I don't think there is an alternative that can replace it in the near future”.
The same mantra surfaced in a recent editorial by Paul Krugman in the New York Times, where the Nobel prize-winning economist stated that: “The domination of the greenback will not last forever, because nothing is eternal. But the hype about dedollarization is much ado about next to nothing. For now, the dollar dominates because there are no viable alternatives”.
But is this argument, the authors of the paper ask, really valid? In reality it is based on the implicit assumption that the international monetary system is like a sporting competition in which there is always only one winner, when the reality is otherwise. “The end of the domination of the dollar – remarked Fantacci and Gobbi – could be marked not by the emergence of an alternative hegemony, but by a fragmentation of monetary spaces and even by a partial return to gold”.
Back to gold?
The truth is that the dollar, as a reserve instrument, faces growing competition not from rival currencies that are supposed to displace it, but from gold.
For example, China made gold purchases in June for the eighth consecutive month, bringing its gold reserves to a total of 2,113 tons for a value of 134 billion dollars. In doing so, China would have climbed positions in the ranking of the main countries holding gold reserves, reaching fifth place, not far from Italy with its 2,451 tons.
The protagonist of this new gold rush is not only China. There are other countries that are building up gold reserves and these include Poland and the Czech Republic.
In a trend that has continued uninterrupted for ten years, central banks around the world are buying more gold than they sell. In 2022 the balance was positive for 1,136 tons, the historical maximum since 1950.
This trend is set to continue: as a survey conducted in May by the World Gold Council showed, a quarter of central banks intend to increase their gold reserves this year and next. Another relevant indicator emerged from a survey conducted by Invesco, according to which many central banks are bringing back gold reserves held abroad.
The inexorable effect of these behaviors is the rise in the price of gold which, having broken all records, is now close to the quotation of 2,000 dollars an ounce.
Towards a currency fragmentation?
Massive purchases of gold are not the only way in which the dogma of the dollar as an unrivaled currency is crumbling. In reality there are other currencies that are gaining ground, even if in places and for decidedly limited uses.
This coexistence is not really new, but it closely resembles what happened in the past. In fact, as the authors observe, history “does not authorize us to believe in the dogma of the single currency, ie in the idea that a single instrument should serve all monetary functions throughout the world. If anything, it teaches the opposite: that different currencies can serve different purposes in different spaces, according to a principle of territorial and functional specialization, in which there is not always and only competition, but also complementarity".
The point we want to highlight is that the current situation of dominance of the dollar is destined to leave room for a fragmented international monetary system. According to this perspective, which finds authoritative supporters such as Mohamed El-Erian , chief economist of Allianz and Paul Gruenwald , chief economist of the S&P rating agency, the dollar will continue to maintain its pre-eminence but only in some monetary functions, while it will lose it in other.
A signal in this direction is being given by China where, in the last year, the value of US government bonds held has contracted by over 100 billion dollars, falling to 847 billion in May 2023, with a decrease of 35% compared to ten years ago.
Equally symptomatic is the fall of the dollar among the reserve currencies, down to 47% compared to 70% fifteen years ago.
Equally telling is the fact that China's use of the yuan for international payments has recently surpassed that of the dollar, with the yuan's share doubling since the start of the war in Ukraine.
However, the greenback remains strong in other sectors. Transactions via Swift, for example, in April saw a peak in the dollar share which reached almost 60% before returning to 42% the following month.
The reasons for a change
The main reason why a country like the USA achieves monetary hegemony is the fact that it has a surplus trade balance. As Adam Smith already taught and the authors of the paper reaffirm, “the only function of money is to buy consumer goods. If an economy has more to sell than to buy, its currency will be desired as the key to the goods it has to offer.
As is known, however, the US trade balance has been in deficit for decades, with the massive purchases of goods and services made by American consumers and businesses offset by the sale of securities.
Considering that, in a world that saves, it is useful to have a safe place like the USA in which to make investments, we must also remember that the reserve function is inseparable from that of medium of exchange. "Stating that the advantage of investments in dollars is their liquidity implies the possibility – Fantacci and Gobbi point out – of transforming them into consumer goods in the last resort".
The point here is that, unlike the US, the BRICS are in surplus. If we consider that their economic weight is greater than that of the G7 and that various emerging countries have expressed their willingness to join the group, we must deduce that, in the words of the authors, "a joint initiative by them to create an international currency could constitute a credible challenge to the dominance of the dollar”.
The gauntlet is therefore launched, even if it will take a long time to corrode the hegemony of a currency such as the dollar which will continue to be the preferred currency for internal trade within the West in a fragmented world divided into opposing blocs.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/mondo/dedollarizzazione-report-ispi/ on Sat, 05 Aug 2023 05:59:32 +0000.