What is the future of the dollar-based financial order in light of Russia’s invasion of Ukraine? Are we entering a new financial and economic regime? Will it be a regime of inflation? How safe are US Treasuries as a vehicle for investment? A lot of folks are struggling with these questions right now. It has spawned a genre of future-orientated Finance-Fiction all of its own.
"There is a relish in the discomfiture of the West. The euro-dollar lock feels like the final frontier of Western power, long overdue for overthrow." This is a good insight. The current world is delimited by what the Euro/US alliance, i.e. the "West" will permit. Governments and populations outside the west, and populist movements within the West, all see the current governance as insider-driven, self-interested, and operated at their expense. Only if it is broken and superseded do new alternatives become possible. Of course, any transition will have a chaotic element. And this may be the best of all possible worlds. But when some network of people and their institutions are in charge for a long time, others will chafe, and imagine they can do better. Thus, perversely, disasters like full scale war in Europe, and the potential for famine and other hardships, also contain a glimmer, perhaps illusory, of a hope that the old order will be cast off. The future becomes blank, open, with the possibility of novelty. This prospect leads those of a creative turn of mind to speculate, even to do so in a "reverie". Interesting times when financial economists turn into dreamers of speculative fiction! And what does it say about the iron cage of our current order that people welcome catastrophe because it raises the hope of something new?
We owe a big vote of thanks to Adam and his unusual talent for synthesis and distillation of so many threads and arguments.
He then wisely leaves it to us to contemplate a final question about the likelihood that such massive change away from the dollar based system of payment and exchange will continue to be replaced and at what pace?
Thank you, Adam for doing that difficult work of digging and then synthesizing the thoughts and arguments of others whom we would never have been familiar with!!
As I said yesterday, I'm a fan of your thoughts here and a recent subscriber. I know more about Faulkner than Finance, so bear with me (though it's reassuring that both deal in fiction). I don't see "trust" adequately enumerated in these notes, or in the variables and conditional expressions in these formulas, though it is probably buried in all of them, especially in the variable "protection." At the end of the day these decisions (to complete transactions in USD or RMB or gold or whatever) are decisions made by people (some more consequential than others... leaders of states, leaders of institutions and corporate entities that are statelike in stature). Should I be as concerned as I am about the rise of state like entities cutting off access to my own reserves? Note the co-option of financial institutions in the Canada trucker scenario, and in the personal sanctions in the Russia/ Ukraine scenario. Listen to your Substack colleague Bari Weiss discuss this with David Sacks. At the end of the day, if state and statelike actors can do what they want without regard to the rule of law, assume guilt before innocence, etc. ... Clearly Xi Jingping can do what he wants; so can consequential statelike leaders like Dimon, Zuckerberg, Fink and dozens of others you could name better than me. Even inconsequential leaders like Trudeau can cause outsized trust issues. "Trust" is based on the rule of law. "Protection" harkens back to the "great man theory" of history, or something like it, against which those of us in the majority, the "great unwashed" seek protection through social contract, through judicial protection. "History shows that the great unwashed will only take so much pain before they revolt." Doesn't the "fin fi" of switching to RMB over USD propose trading an increasingly corrupt trust token (USD) for an obviously corrupt token? There has to be an interim step where all the rest of us figure out how to throw a significant enough portion of these "great men" under the bus of history. At least I hope so. Am I wrong?
It seems clear that the US is not perturbed to see China joining Russia in the penalty box (hockey term). It seems like they are rather eager for China to end up with that outcome, rather than entreating them to not go that way with carrots. I think this is because, frankly, the US feels internally at the highest levels that it can NOT compete with China on price on anything. And eventuallly, at least to my reading of it, (and there's been much racialized pooh poohing on this point at street level) the US can not compete on the quality at the China price.
If that is true, based on a very quick taking of the pulse of US posture, as gleaned from the press, thru the lens of Ukraine conflict, then we will have a new Iron curtain unlike anything seen in the past. There will be zero trade between the two sides of the curtain.
excellent post. i would argue that the real and financial are even more integrated than often assumed. Matt Stoller in his piece on inflation and ocean freight rates links to two articles that fundamentally link the time aspect of trade to inflation rates.
in general the calculation seems to show that each day spent in transit is equivalent to approximately a 1 to 3 percent increase in tariff rates. most of those costs are then passed on to consumers in the form of higher prices thus increasing inflation.
Is the debate here about: I) Whether dollar will be supplanted as the dominant currency for foreign exchange reserve holdings and settling trade accounts in the foreseeable future (admittedly both a cliche and an imprecise expression) ? Or 2) Whether, as the IMF’s Gita Gopinath, among among others, has recently stated, the degree of its dominance in both realms will continue to decline? Of course those who believe in outcome 2) are not necessarily, and indeed mostly are not, proponents of scenario 1).
Have you ever read the novel "The Mandibles" by Lionel Shriver? It was about a future dollar apocalypse. I thought it was well done and frightening, because it seemed plausible.
Today I happened across a review of a new book entitled Blood and Ruins: The Last Imperial War, 1931–1945 by Richard Overy. As the title suggest, he book reframes WWII as the last imperial war* rather than a clash of ideologies. (*I'm not sure about this in light of recent events in Ukraine.) What strikes me as perhaps relevant here is the role control of commodities as opposed to other forms of finance played in the origins of that war and how the control of colonies equated with the control of resources. The review almost reads as prequel to Chartbook #107, describing the last gasps of an old order driven by physical control of metals, foodstuffs, etc. in place before the economic transitions initiated by WWII. I have no particular expertise in economics or history so perhaps I am off-base. I'd be curious to hear what others think.
So yes, I really expect one of these new networks to be more than a byway.
Development of the new settlement currency began in earnest in February, 2009, when the PBOC concluded that no national currency could do the heavy lifting required for its vision of the future.
It derives its value from a basket of trading currencies and global commodities. Since it is digital, the PBOC's DigiYuan team were very helpful.
Testing began in 2013 and certification was issued earlier this year.
In a few weeks Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan, and China will begin using it for an increasing range of transactions.
Presumably, admission to the SDR zone will be by invitation. That will be fun to watch...
This means the velocity of money is truly calculated in knots and man hours (say unloading-loading time at docks) or that is the velocity of “real money “ - while the velocity of bank money and finance remains the speed of light ~
Hi Everyone, fantastic post. Thank you. As I was reading, I kept waiting/hoping you could offer any informed speculation about cryptocurrency’s role in any of this. Anyone care to chime in?
Much obliged that you are tackling this topic, the importance of which really cannot be overstated. Unfortunately it is not getting near enough mainstream play, though I appreciate that it's terribly resistant to the sort of "sound-bite-ification" which narrows the scope of what gets widespread attention.
"There is a relish in the discomfiture of the West. The euro-dollar lock feels like the final frontier of Western power, long overdue for overthrow." This is a good insight. The current world is delimited by what the Euro/US alliance, i.e. the "West" will permit. Governments and populations outside the west, and populist movements within the West, all see the current governance as insider-driven, self-interested, and operated at their expense. Only if it is broken and superseded do new alternatives become possible. Of course, any transition will have a chaotic element. And this may be the best of all possible worlds. But when some network of people and their institutions are in charge for a long time, others will chafe, and imagine they can do better. Thus, perversely, disasters like full scale war in Europe, and the potential for famine and other hardships, also contain a glimmer, perhaps illusory, of a hope that the old order will be cast off. The future becomes blank, open, with the possibility of novelty. This prospect leads those of a creative turn of mind to speculate, even to do so in a "reverie". Interesting times when financial economists turn into dreamers of speculative fiction! And what does it say about the iron cage of our current order that people welcome catastrophe because it raises the hope of something new?
We owe a big vote of thanks to Adam and his unusual talent for synthesis and distillation of so many threads and arguments.
He then wisely leaves it to us to contemplate a final question about the likelihood that such massive change away from the dollar based system of payment and exchange will continue to be replaced and at what pace?
Thank you, Adam for doing that difficult work of digging and then synthesizing the thoughts and arguments of others whom we would never have been familiar with!!
Single best Chartbook so far
As I said yesterday, I'm a fan of your thoughts here and a recent subscriber. I know more about Faulkner than Finance, so bear with me (though it's reassuring that both deal in fiction). I don't see "trust" adequately enumerated in these notes, or in the variables and conditional expressions in these formulas, though it is probably buried in all of them, especially in the variable "protection." At the end of the day these decisions (to complete transactions in USD or RMB or gold or whatever) are decisions made by people (some more consequential than others... leaders of states, leaders of institutions and corporate entities that are statelike in stature). Should I be as concerned as I am about the rise of state like entities cutting off access to my own reserves? Note the co-option of financial institutions in the Canada trucker scenario, and in the personal sanctions in the Russia/ Ukraine scenario. Listen to your Substack colleague Bari Weiss discuss this with David Sacks. At the end of the day, if state and statelike actors can do what they want without regard to the rule of law, assume guilt before innocence, etc. ... Clearly Xi Jingping can do what he wants; so can consequential statelike leaders like Dimon, Zuckerberg, Fink and dozens of others you could name better than me. Even inconsequential leaders like Trudeau can cause outsized trust issues. "Trust" is based on the rule of law. "Protection" harkens back to the "great man theory" of history, or something like it, against which those of us in the majority, the "great unwashed" seek protection through social contract, through judicial protection. "History shows that the great unwashed will only take so much pain before they revolt." Doesn't the "fin fi" of switching to RMB over USD propose trading an increasingly corrupt trust token (USD) for an obviously corrupt token? There has to be an interim step where all the rest of us figure out how to throw a significant enough portion of these "great men" under the bus of history. At least I hope so. Am I wrong?
It seems clear that the US is not perturbed to see China joining Russia in the penalty box (hockey term). It seems like they are rather eager for China to end up with that outcome, rather than entreating them to not go that way with carrots. I think this is because, frankly, the US feels internally at the highest levels that it can NOT compete with China on price on anything. And eventuallly, at least to my reading of it, (and there's been much racialized pooh poohing on this point at street level) the US can not compete on the quality at the China price.
If that is true, based on a very quick taking of the pulse of US posture, as gleaned from the press, thru the lens of Ukraine conflict, then we will have a new Iron curtain unlike anything seen in the past. There will be zero trade between the two sides of the curtain.
excellent post. i would argue that the real and financial are even more integrated than often assumed. Matt Stoller in his piece on inflation and ocean freight rates links to two articles that fundamentally link the time aspect of trade to inflation rates.
https://mattstoller.substack.com/p/did-the-ocean-shipping-cartel-impose?s=r
here are the links to the two papers he refers to:
Time as a trade barrier: https://www.nber.org/papers/w17758
and last weeks IMF paper on the link between longer shipping times and tariff implications:
https://www.imf.org/en/Publications/WP/Issues/2022/03/25/Supply-Chains-and-Port-Congestion-Around-the-World-515673?cid=em-COM-123-44504
in general the calculation seems to show that each day spent in transit is equivalent to approximately a 1 to 3 percent increase in tariff rates. most of those costs are then passed on to consumers in the form of higher prices thus increasing inflation.
Is the debate here about: I) Whether dollar will be supplanted as the dominant currency for foreign exchange reserve holdings and settling trade accounts in the foreseeable future (admittedly both a cliche and an imprecise expression) ? Or 2) Whether, as the IMF’s Gita Gopinath, among among others, has recently stated, the degree of its dominance in both realms will continue to decline? Of course those who believe in outcome 2) are not necessarily, and indeed mostly are not, proponents of scenario 1).
Adam,
Have you ever read the novel "The Mandibles" by Lionel Shriver? It was about a future dollar apocalypse. I thought it was well done and frightening, because it seemed plausible.
isn't the ruble now an oil and gas backed currency?
Today I happened across a review of a new book entitled Blood and Ruins: The Last Imperial War, 1931–1945 by Richard Overy. As the title suggest, he book reframes WWII as the last imperial war* rather than a clash of ideologies. (*I'm not sure about this in light of recent events in Ukraine.) What strikes me as perhaps relevant here is the role control of commodities as opposed to other forms of finance played in the origins of that war and how the control of colonies equated with the control of resources. The review almost reads as prequel to Chartbook #107, describing the last gasps of an old order driven by physical control of metals, foodstuffs, etc. in place before the economic transitions initiated by WWII. I have no particular expertise in economics or history so perhaps I am off-base. I'd be curious to hear what others think.
So yes, I really expect one of these new networks to be more than a byway.
Development of the new settlement currency began in earnest in February, 2009, when the PBOC concluded that no national currency could do the heavy lifting required for its vision of the future.
It derives its value from a basket of trading currencies and global commodities. Since it is digital, the PBOC's DigiYuan team were very helpful.
Testing began in 2013 and certification was issued earlier this year.
In a few weeks Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan, and China will begin using it for an increasing range of transactions.
Presumably, admission to the SDR zone will be by invitation. That will be fun to watch...
This means the velocity of money is truly calculated in knots and man hours (say unloading-loading time at docks) or that is the velocity of “real money “ - while the velocity of bank money and finance remains the speed of light ~
Hi Everyone, fantastic post. Thank you. As I was reading, I kept waiting/hoping you could offer any informed speculation about cryptocurrency’s role in any of this. Anyone care to chime in?
Much obliged that you are tackling this topic, the importance of which really cannot be overstated. Unfortunately it is not getting near enough mainstream play, though I appreciate that it's terribly resistant to the sort of "sound-bite-ification" which narrows the scope of what gets widespread attention.
Grazie molto!
Bravo! Thank you for the article.