De-Dollerisation, it’s coming

A social media commentator, like me, who writes about China’s society and Western misinterpretations of it, is hardly qualified to write on dedollarisation and would likely to attract a lot criticism. Experts would correctly say: this guy isn’t an expert; he isn’t an economist; he has no background to discuss geopolitical matters; and all of that would be true.

So, let’s leave it to the experts to describe when and how the dollar might collapse. We, casual observers, can look on and, when it does collapse, say: well, that was obvious. Because obvious it is. Why?

The US method of overcoming problems is to print more money. Money is very cheap to print, According to the Fed, a $100 bill costs 17c per note. So printing isn’t a problem; making disposable napkins is easier and much cheaper, they don’t have the same safety or security features but it appears, future disposable napkins are exactly what the Fed is now printing.

US Debt, national debt, currently sits at almost $32 trillion with about $1 million being added every 40 seconds. If we search Western media, using western search engines, we see many different headlines suggesting that China is about to collapse because of its “massive debts” (which are $7tn) and no one is suggesting the US has the same or similar issues.

The reasoning is because the USD is the reserve currency, until recently, well over half of all the world’s financial transactions took place under the SWIFT system and this meant using mostly USD; Euros and GB Pounds took up much of the rest.

The USD is a FIAT currency. That means it has no value except for the demand there is for it. So, economies needing to use the dollar is what keeps it, and the USA, strong. But fewer economies now need to use it as more of them are finding different ways to do international business.

The USA’s solution of printing money works well when most countries need to buy dollars so they can purchase goods. It doesn’t matter if they purchase goods from China, they need USD to do it. But the era of dollar dominance is ending.

One small way, which won’t really hurt dollar dominance is trade for infrastructure, China will build schools in Iraq, Iraq will give China oil. Similar deals will likely go on in Afghanistan and other places with economies destroyed by US wars and if this gets bigger will still only marginally impact on the dollar’s strength because those economies are very small now.

For most of us though, when we go to the bank in any one of 200 countries, territories and regions, we transfer money though the SWIFT system, it’s ubiquitous. In 2014 however, China and Russia launched a different system and, in the last 12 months, particularly since sanctions were placed on Russia, that alternative is starting to gather momentum, now the Transferring Financial Messages System (known in Russian as SPFS), is growing rapidly and many countries are taking advantage of it.

Imagine being in Cuba, Iran or Venezuela, you can’t transfer money through any banking system in or out of the country because SWIFT complies with US sanctions. So, when SPFS became available, suddenly transactions in another system became possible. But more importantly, transfers in another currency are now possible too. So, US sanctions are no longer the important economic weapon they once were.

The emerging economies of Brazil, Russia, India, China and South Africa (BRICS), now have a GDP larger than the G7, of which Russia was once a member but removed, India’s economy would qualify them to enter G7 but India is considered too poor, due to it’s low per-capita GDP, to be of any use to G7

And, of course, China could be in there but it holds an ideology that the “shared values” of the “international Community” can’t accept so will never gain entry. These 5 BRICS economies are now doing more business than the G7 economies and are not restricted to using the Dollar.

The advent of SPFS has changed this. BRICS countries are currently trading in a range of currencies and particularly India has benefited enormously. Buying gas from Russia and transferring it to the EU has given India a spike in profitability at the expense of European economies as they could be buying the same gas cheaper, if only Russia wasn’t sanctioned.

If all that wasn’t bad enough news for a now precariously placed US Dollar, the news just keeps getting worse.

Saudi Arabia, sitting at No18 in the world nominal GDP rankings, has applied to join BRICS, Argentina, Latin America’s second largest economy wants to join and Venezuela are likely to do the same to avoid further US sanctions. Once inside BRICS and the period leading up to their acceptance, they will not use as many dollars as they did, the strength of the dollar will slide as those countries’ dependence on it reduces.

In fact, at the time of writing there are 19 prospective applicants to BRICS and the expansion wouldn’t stop there as other countries and regions watching the expansion of BRICS, it’s likely they will want to be part of it, further demoralizing the dollar, if that’s the right world to use!

But there’s more: it’s not just the use of, and demand for, the dollar that keeps it, and the USA, strong. Until a couple of years ago, China bought US debt. China owned US Treasury bonds to the value $1.06 Trillion in 2019. Now, they hold $859 billion, that’s a 20% reduction and there is a very good reason for China to get out of holding US debt.

Some senators have declared that the US should default on the debt. It’s not hard to imagine that this kind of idea would hold great sway with the 37.9 million people living in poverty in the world’s richest country but it’s highly unlikely the US government would pass the benefit to the poor.

For now, Japan is buying up more US debt as China is selling it off. But Japan has its own problems, its Debt to GDP ratio is 260%, it’s getting a NATO office and this means increases in military spending, it has a stagnant economy and an ageing population and, at some stage soon, will need to cash in too, in order to make ends meet.

As these lent out dollars flow back to the USA, there will be more of them in the country than the value of the goods and services that they represent, so they devalue in worth, massive inflation follows.

Furthermore, China witnessed what happened to Russia when the US applied the harshest possible sanctions. Russian property and Russian bank accounts were seized, The entire country of Russia was excluded from SWIFT and therefore no one could do business with them in Dollars, Pounds or Euros.

For a moment there it looked like Russia was finished but SPFS provided the answer and Russia’s economy hardly took a dent. According to the World Bank, it will grow further.

There is much confusion over what investments China holds in the USA but there is little doubt that China is reducing exposure to the US economy, while at the same time, in a classic shot to the foot, USA is restricting China from investing in many large corporations in the US. In the highly unlikely event of conflict in Taiwan, China can expect at least the same or even harsher sanctions from the USA.

When the world’s largest economy has a debt 50% higher than its GDP; when large countries are selling their investments in it; when the only system that keeps it strong has growing alternatives; When economic sanctions are no longer a useful weapon; when their banks start to collapse in quick succession; and when the leader of the second largest economy won’t take their calls, it’s not about casual observers knowing what’s coming, only a fool wouldn’t see it.

So, this is why a social media commentator can talk about an economic situation. Some people say it will be over as soon as June, others say it will take years but the bottom line is, it’s coming and the entire world is going to be affected but not nearly as much as the 330 million people living in the most indebted country in the world.