GeopoliticsPublish Date: 09-11-2018
The Demise of USD
Today, more than 60% of all foreign currency reserves in the world are in U.S.dollars. The reserves held in U.S. Dollars are now worth USD 6.13 trillion. China, Japan, OPEC Nations, Russia and Brazil the largest holding countries. However, the share of dollar reserves has declined for three consecutive quarters and this is going to have massive implications for the U.S. economy.
China is the second largest economy in the world and the size of the China economy is projected to pass the size of the U.S. economy soon. Hence, China and other major countries have been making agreements to move away from the U.S. dollar in international trade over the past few years and here is some notable bilateral agreement China had signed with its trading partners.
#1: China And Japan propose to use own currencies In Bilateral Trade
#2: The BRICS plan to use own currencies when trading with each other.
* BRICS = Brazil, Russia, India, China and South Africa
#3: China and Russia have been using their own national currencies when trading with each other for more than a year now.
#4: Use of RMB In Africa. In 2009, China became Africa’s biggest trading partner and approximately 70,000 Chinese companies are using RMB in cross-border transactions on the continent of Africa.
#5: Saudi Arabia likely to adopt RMB when dealing with China. China has emerged as the largest importer of oil in the world alongside with the oversupply situation in oil. In order to retain the most important customer, does Saudi Arabia has a choice?
The demise of the dollar will bring radical changes to the U.S. where we may expect a massive inflation, hiking interest rate and the U.S. government has a much harder time financing its debt.
Right now, there is a huge demand for U.S. dollars and for U.S. government debt since countries around the world have to keep huge reserves of U.S. currency for the sake of international trade but what if this situation changes?
We believe the U.S. government will not tolerate this to happen. The U.S may not be able to improve its economic situation but she can make others worse.
When Euro was launched in 1999, Yugoslavia war breaks out causing panic Europe investors to park their money in the U.S.
When Iraq and Libya propose to adopt Euro as their settlement currency, they are invaded and their government is toppled.
Today, Euro no longer able to replace USD in international foreign reserve but RMB arises as a new contender.
A war between the US vs China & Russia may not happen but we can expect a more chaotic world and regional geopolitical tensions may arise frequently. Only then, the U.S. has more time in saving the demise of its Dollar.
Thucydides Trap – When the established power feels the threat
【Thucydides Trap】: When a rising power causes fear in an established power, a war is inevitable.
Throughout the modern history, only the US and UK had managed to avoid a war.
With the souring US-China relationship and the “brilliant” leadership of Donald Trump, will this conflict escalate or being resolved peacefully?
Maybe the market has given us a hint if you believe the market is always efficient.