With the world seemingly on the path to another ‘cold war’ it is important to highlight some actions that are not receiving any real level of media coverage. These steps will in the long term impact on the US dollar and possibly hasten the adoption of Blockchain technology.
Before doing so, I need to revisit some facts about the global economy. The largest economy in the world is the US, it makes up approximately 23% of global GDP with the Eurozone and China being next. Russia is the 12th largest economy although it is the largest producer of oil followed by Saudi Arabia, US, Iraq, China, Canada and Iran. Russia is China’s second largest trading partner. With a population over 1 billion based on its current GDP growth rate China will be as large as the US economy sometime in the next 20-50 years. The same applies to India, who like China has a middle class in excess of 300 million which is approximately the population of the USA. Iran with population of around 100 million has the 27th largest economy.
Recently, Russia (who is being subjected to more economic sanctions), China (that is in a tariff war with the US and who may seek other markets to replace some its US trade) and Iran (who is also likely to be subject to more economic sanctions, if Trump does not sign on 12 May 2018, the compliance waiver on the Joint Comprehensive Action Plan ‘Nuclear deal’) agreed to trade with each other in their local currencies rather than US dollars. Amongst other things, this appears to be a way of by-passing or attempting to minimise the effects of sanctions that international banks normally play a role in enforcing through SWIFT (International payment system). It also means these economies will have less reliance on US dollars, the world’s reserve currency.
As international trade and loans are generally in US dollars, countries want them for trade and debt servicing purposes and it provides a mechanism for the US to finance its current account deficit. If countries no longer need the same level of US dollars as they do today, then in the future the US will need to increase interest rates to attract them for both current account and budget deficit purposes. The annual US budget deficit is USD 1 trillion dollars and with Trump tax cuts is projected to increase. Coincidentally, this deficit is about size of the Australian economy.
History may show that this step by China, Russia and Iran was the tipping point in the demise of the US dollar as the world’s reserve currency. China for a few years now has been open about its long term desire for the Renminbi to wear that mantle. Having said that, I am well aware that in the 1980s some economists predicted that the Yen would replace the US dollar as the world’s reserve currency and of course this did not happen; however China is a different proposition given its population size (Japan population is about 90 million and declining), global aspirations and apparent willingness to avoid involvement in wars.
There will be no overnight impact from this change; however if other countries adopt similar strategies as well as support Blockchain technologies that in the long run will disrupt payment systems, then the nature of the global monetary flows will significantly change.
It will be interesting to watch how this all plays out over the coming years.
PS - It is not well known that just before the second Gulf war, Iraq switched from selling oil in US dollars to Euros. Some people have argued this is another reason why the US invaded Iraq.
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