Autumn 2022

Will commodity-based currencies supplant Eurodollar?

Currencies usually enjoy a century of dominance, with the dollar gaining its status in 1944. That may be coming to an end, writes Willem Middelkoop, member of the OMFIF advisory board.

Monetary resets happen on average every 92 years. The Spanish, Portuguese, Dutch and British all have seen their world reserve currency status rise and fall within a century. The latest full monetary reset happened in 1944, when the Bretton Woods system was born. The beginning of a new (gold-backed) dollar standard was welcomed by 44 countries. It marked the start of the current US hegemony.

In 1971, President Richard Nixon was forced to close the gold window, after the US lost half of its gold reserves in the late 60s. European countries decided to exchange surplus dollars for physical gold after the US printed too many dollars to finance the Vietnam war. In 1944, the US had promised the dollar was ‘as good as gold’, to win European support. So, 1971 can be seen as the start of Bretton Woods 2.0.

Now we seem to be on the verge of Bretton Woods 3.0. It all started in 2020, when the International Monetary Fund published a new section on their website, ‘A New Bretton Woods Moment’. Just one month after Russia invaded Ukraine, an influential interest rate strategist at Credit Suisse, Zoltan Pozsar, published an article, ‘Bretton Woods 3.0’, with an intriguing thesis: that we are witnessing the birth of a new world monetary order centred around commodity-based currencies in the East that is likely to weaken the Eurodollar system. He calls it a move away from ‘inside money’ (fiat dollars) to ‘outside money’ (gold bullion and other commodities) and claims there is no further need for many countries to collect ‘any more paper assets.’

According to Pozsar, we have reached the end of a decades-long trend of dollarisation and globalisation. The weaponisation of the dollar, by confiscating $650m of Russian reserves, gave many countries a reason to consider moving away from it.

This de-dollarisation trend is not only visible in Brazil, Russia, India, China and South Africa. All of Africa, Latin and Central America, the Middle East and most of Asia are not joining the financial economic sanctions against Russia. Over 80% of all countries worldwide choose to stay neutral. Even the Council of Foreign Relations pointed to the fact countries like India and Saudi Arabia now want to ‘de-dollarise’.

Over half a century after the start of the petrodollar deal of 1971, the Saudis are openly flirting with Russia and China. According to press reports, they are even considering joining their BRICS-alliance. A video of Mohamed bin Salman, the kingdom’s crown prince, high fiving Russian President Vladimir Putin during the 2018 G20 summit gave us an early signal. Saudi imports of Russian oil have doubled in the second quarter of 2022, while they have started to supply India with oil to be paid in rupees, instead of dollars. According to the Wall Street Journal, Saudi Arabia even ‘considers accepting yuan instead of dollars for China oil sales’.

‘Over half a century after the start of the petrodollar deal of 1971, the Saudis are openly flirting with Russia and China.’

The BRICS and their new friends no longer consider US treasuries safe assets. They now prefer assets without counterparty risk. Over 30 countries have added to their central bank gold reserves recently. The Russians and Chinese, who have been accumulating massive amounts of gold since the global financial crisis, understand the importance of gold. A Putin adviser, Andrey Bykov, has written several articles about ‘paper gold’ and the ‘gold price suppression scheme’. The old wisdom of ‘he who has the gold makes the rules’ hasn’t been forgotten in the East.

The massive and open revolt against the US system was discussed on Indian national television. The host openly discussed western double standards. Why didn’t the world call for sanctions after the unilateral military aggression against Iraq, Afghanistan and Libya? As a result, the US seems to have lost respect as the world leader. Influential Arab scholar Ebrahim Hashem, AsiaGlobal fellow at the Asia Global Institute, recently tweeted: ‘To stabilize the international financial system and end US dollar weaponization, there’s no need to completely supplant it. The world needs to only eliminate dollar’s dominance by boosting the share of other currencies such as RMB in international trade & reserves. Happening now.’

This geopolitical shift away from a unipolar to a multipolar system will have huge consequences. For almost 80 years the world has harvested a peace dividend. This was especially true after the fall of the Berlin wall in 1989, when former communist countries adopted the western capitalist system. Now another change is in the air. El Salvador welcomed financial representatives from 44 countries for a bitcoin-centred conference, while planning to structure the first bitcoin-linked sovereign bond.

With inflation rising, we seem to have reached the end of cheap labour, energy and even cheap money. And we have reached the end of cheap solutions as well. Every crisis in the last 50 years was solved by printing more and more money. However, inflation is one of the few economic problems you can’t fix with easy money.

For now, China is the big winner. It is one of the few countries willing to arbitrage Russian commodities. According to Pozsar, China can now be seen as the ’natural leader in the BRICS alliance,’ with the People’s Bank of China as the ‘central bank of commodities.’

The world of commodities is moving away from a ‘just in time’ to a ‘just in case’ model. Stockpiling commodities seems to be wise, according to Goldman Sachs. ‘Buy commodities now, worry about a recession later,’ was their recent advice to clients. The old mantra of ‘it’s our currency, but your problem’ has now morphed into ‘it’s our commodity, but your problem.’

It’s hard to predict the outcome of all these changes. However, the West needs to prepare for a world no longer accepting the rules of the game designed in Washington or New York.

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