E16 - Why De-dollarization Matters to the World Part 1 [PODCAST]

Jordi Visser

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For just about every American alive today, there have been not two certainties in life, but three. Yes, death is a certainty, at least for now, taxes are a certainty too, but then there’s the dollar. Sure, it goes up and down, but dollar dominance across the world has been constant for many decades. And that dominance has played an important role in the projection of American power and influence. But now there is reason to believe that we are entering into a new phase, which we are calling de-dollarization. In the first of a two-part series, G3 sits down with CIO Jordi Visser and Deputy CIO Mike Edwards to discuss this critical issue.

 

 

The possibility of de-dollarization is the topic de jour—is it going to happen? Are the trends there? What is a way to look through the noise to find the green marbles—those insights that potentially can give us a clue to whether it will happen? And equally important, if it does happen, what does that mean for the economy, the markets, and our lives?

The conversation begins with Mike providing a brief primer on the dollar as the world’s reserve currency. Then, the discussion segues into why this concept of de-dollarization is so important. Mike defines it as a trend towards diversifying the currency of transactions and the currency of reserves or, effectively, storage of wealth. Giselle Bundchen wanting to be paid in Euros or Odell Beckham Jr. wanting to be paid in Bitcoin represents the fraying of this dollar dominance.

An important distinction is made between a weakening dollar and de-dollarization. While they are correlated, de-dollarization is a long-term concept and secular trend, whereas a weakening dollar is a measure of FX markets that can bounce around.

Jordi then weighs in on whether he buys into the growing possibility that the world will de-dollarize. He says the trend is already underway, citing that 59% of foreign reserves are currently held in dollars, down from 70%, and he opines that this percentage will likely continue to decline.

An odd juxtaposition is that the United States has remained a safe haven when adverse geopolitical events, such as 9/11, occur. Mike asserts that this relationship hasn’t cracked to this point. However, the dollar as a financial tool, or the mechanism of enforcement for the rules-based order, is under pressure from a multi-lateral world order not invested in dollar dominance.

Before delving into the forces that are supporting this move away from the dollar. G3 seeks clarity on the implications of a world that doesn’t rely on the dollar as the global default currency. Are they as meaningful as one would think? Jordi asserts that as the world catches up to the US economically, technologically, and militarily, the US will lose the benefits it once had enjoyed. Furthermore, in a world of borderless blockchain dominance, there are implications for investors whose portfolios remain positioned for dollar dominance.

Transitioning to the trends behind this phenomenon, the conversation focuses on China. Of course, it benefits China to figure out ways to reduce dependency on the dollar if it wants to project its power around the world and be a driver of innovation. However, China is hamstrung if it is somewhat dependent on the Fed and US dollars to make this plan a reality. Finally, the conversation concludes with the economic forces at work behind de-dollarization. This includes the fight against climate change and the correlation between energy and the dollar.

To delve deeper, please listen here and subscribe to In Search of Green Marbles wherever you get your podcasts.