A Multipolar New World
The role of America’s adversaries on the global stage is accelerating faster than ever. China, Russia, Saudi Arabia & others are all making moves away from the US-hegemonic system. What’s it mean?
What this means for the US dollar going forward…
We’ve seen several stories just in the past couple of weeks of America’s adversaries taking a larger role on the global stage. China brokered a peace deal with Saudi Arabia and Iran, Russia held a conference with 40+ African nations, Saudi Arabia is rumored to start accepting different currencies for oil transactions, and the list goes on. The world is rapidly changing. What does this mean for the United States – or more specifically, for our dollar?
As I’ve written in previous articles, much of America’s hegemony around the world relies heavily on the USD being the world reserve asset. Not only does our influence abroad rely on it, but our domestic economic policies do as well.
For decades, the world settled the vast majority of transactions in USD. This means if France buys oil from Saudi Arabia, they transact in USD. If Russia sells natural gas to China, they transact in USD. This system creates a huge demand for the US dollar. Since every country needs dollars to settle international transactions, they hold billions of US dollars in their central banks. This makes the US economy the most powerful system in the world – by far. We have the strongest currency, which gives us the strongest economy, which brings in more capital and investment into our markets and so on.
During the COVID pandemic, the US Federal Reserve printed trillions of dollars resulting in high inflation. But on a relative basis, not as high as many other countries, and certainly not as high if other countries printed the amount that we did. Our inflation was kept relatively low because of the worldwide demand for our dollar. In fact, we outsource a lot of our inflation when we print.
What if that all changed? What if our adversaries started to deal in their own currencies instead of our US dollars? Well, we’re starting to see that. In fact, this has been happening for decades, albeit slowly. This trend seems to be accelerating. Just yesterday, France bought natural gas from China and used the Chinese Yuan.
Will the dollar go from world reserve currency to the equivalent of the currency of Zimbabwe? No – or at least not for a very long time. However, this trend is something serious to watch as its implications could turn the world economy upside down. US power and influence could wane around the world, we could see heavy inflation, our asset markets nosedive overtime.
If supply of USD keeps increasing (it will) and demand significantly drops off, we’re going to see massive economic troubles that we are not at all equipped for. There’s a lot of “unipolarists” out there who say this all means absolutely nothing. Does it? Russia was kicked off of the US-hegemonic system and is now arm-in-arm with countries like China and India. China is establishing close relations with Saudi Arabia and Iran.
So what? This all matters because Russia is the largest exporter of energy in the world. China is largest importer of energy in the world and the largest manufacturer. India has one of the largest growing populations in the world and a middle class that is quickly being established. Saudi Arabia is the largest exporter of oil in the world. These are all powerful economies of natural resources teaming up together while leaving the US out. What is America’s largest export? The dollar…
This is why maintaining a diversified portfolio is extremely important going forward. Exposure to alternative investments, such as: energy, precious metals, cryptocurrency, real estate/land are the best way to hedge against this. We’ll continue to keep an eye on this trend and provide updates as major world events ramp up.