As China’s leader, Xi Jinping, left the Moscow Summit recently, he turned to Putin and told the Russian leader, “Change is coming that has not happened in 100 years, and we are driving this change together.” Putin clasped hands and said, “I agree.” What were they talking about? Among other things, they were discussing one of the worst strategic foreign policy blunders – Washington knowingly or unknowingly pushing China and Russia together. Two powers and neighbors who historically have not shared a great love for each other are now partners. These two intend to hurt us where it matters – the de-dollarization of the world. De-dollarization is the ultimate substitution of the dollar for alternative currencies as the reserve currency of the world. The hegemony of the dollar over the global monetary system is the single most important source of America’s power, and the failure of the dollar as the world’s reserve currency is the no. 1 security issue we have as a nation. Why?
Our government spends beyond its means. The United States has accumulated $30 trillion of debt and has been adding to that debt at an average of $2 trillion a year over the last decade. We are 5% of the world’s population accounting for over 20% of the world’s debt. Roughly half our debt is held by domestic investors and half by foreign governments in the form of U.S. Treasuries because the United States is seen as stable, rich and dependable. The biggest foreign holders of U.S. Treasuries are China, Japan, the UK and Saudi and their Sunni allies. If the demand for U.S. Treasuries goes down through de-dollarization, then, as a debtor country, we would be unable to fund our military or our way of life. De-dollarization is driven by countries who feel the U.S. government is using the power of the dollar to indiscriminately impose policy goals through sanctions or by countries who look at the irresponsible spending by the U.S. government and no longer view the dollar as a fiscally stable investment. De-throning the dollar as a world reserve currency significantly reduces our influence on world affairs and jeopardizes our ability to continue selling U.S. Treasuries to the world to fund our military and our myriad spending programs.
Global trade runs in U.S. dollars. Approximately 80% of international payments and 60% of foreign exchange reserves held by central banks all over the world are in dollars, giving the United States extraordinary power over nearly every entity that imports or exports anything anywhere. Since 1998, almost 20 countries worldwide and a quarter of the world’s population have been under some form of U.S. sanctions, causing these countries to look for alternatives to the dollar.
The de-dollarization effort started about a decade ago and gained momentum when sanctions were imposed on Russia in 2014 and on Iran and the EU during the Trump administration. The recent war in Ukraine has accelerated this effort. In 2018, Russia realized that sanctions against them for the Crimea invasion would last forever because giving up Crimea and allowing the Black Sea Port of Sevastopol to become a NATO base was a nonstarter. Russia became the first country to announce a comprehensive, multistep de-dollarization plan, which, among other things, involved selling all $110 billion of U.S. Treasury holdings, replacing them with gold and alternate currencies and shifting import/ export transactions away from the dollar.
“As soon as we and China dump the dollar, it will be the end of U.S. military might,” said Dr. Sergei Glazyev, a key Putin advisor. China, through its Belt and Road initiative, where it loans money to other countries – 68 so far – to build ports, roads and bridges to enhance trade, mostly with China, has made significant inroads in Africa and Asia. These countries are now being encouraged not only to trade in yuan but also to barter their oil and minerals for Chinese products. Central banks in Angola, Zimbabwe and Nigeria already have adopted yuan as a reserve currency, and other countries in Africa have plans to follow. More recently, the “petro dollar” has joined the de-dollarization efforts. Oil is ground zero for the dollar as a reserve currency. The dollar has come to dominate trade in oil and other commodities such as minerals, food and agriculture – a $5 trillion per year market.
Several OPEC countries are now under U.S. sanctions, and the Saudi relationship has grown fragile. In addition, Saudi has now become the no. 1 supplier to China and is under pressure to accept the Chinese yuan for oil trades. China also struck deals with Turkey and Pakistan to trade and barter with the yuan. In addition, Iran, Venezuela and Libya have moved away from trade in dollars. The European Union has never been comfortable with the control the dollar gave the United States over its policies and has joined the de-dollarization movement. French President Emmanuel Macron: “This is an issue of sovereignty to me, and that’s why I want to work with our partners to be less dollar-dependent.”
Finally, about a decade ago, BRICS was formed to enhance trade among Brazil, Russia, India, China and South Africa. Russia and China are now pushing BRICS, which represents 40% of the world’s population and 25% of the world’s gross domestic product, to trade in alternate currencies and maybe even develop their own currency backed by a basket of precious metals. China and Russia are also trying to attract other countries like the Saudis and Turkey to join a BRICS+, which could become ground zero for de-dollarization.
Is this a lost cause and is the dollar doomed to lose its status as a world currency like what happened to the Spanish peso, the French franc and the British pound? No, but we need to wake up. The federal government needs to monitor and influence de-dollarization efforts, including nondollarized oil trading, movement of gold – which often replaces dollar reserves – and influencing BRICS through allies like India and Brazil. We also need to back off trigger-happy sanctions or at least understand the impact on de-dollarization when they are applied to major countries.
And, finally, we need to restore confidence in our fiscal house and realize that uncontrolled borrowed spending gives our enemies leverage and causes our allies to lose confidence in the stability of our fiscal system. The economic mix of rising interest rates, ballooning debt, slowing global growth and growing pushback against the dollar led by a powerful China/Russia combo is an explosive mix that, if not managed, can have consequences far bigger and wider than almost any other single issue facing us.
Reddy or Not is a periodic column representing the opinion of Lucky Dog Publishing owner Rom Reddy but not necessarily the opinion of the newspaper. In keeping with the paper’s philosophy of publishing all opinions, the publisher welcomes responses, which must be limited to 300 words and will be published on a space-available basis.
