Of the many areas where my knowledge is thin, macroeconomics is perhaps the field in which my ignorance is most impressive. But the war in Ukraine, and especially the West’s response to it, make it an essential topic of study if you (and I) want to understand the core topics of this newsletter. Above all, given the extraordinary breadth of the West’s financial sanctions against Russia, particularly the freezing of its central bank’s largely dollar-based reserves, lots of commentators are asking whether we’re seeing the disintegration of the dollar’s dominance.
Adam Tooze (who else? it turns out I’m not his only fan
) summarises the argument well here
. I’d also recommend this piece in the FT
, this interview with Zoltan Pozsar
on the always excellent Odd Lots podcast, and - slightly less mainstream - this podcast
with Luke Gromen, who takes a longer term perspective. The core thesis is that the sanctions push Russia (and other US adversaries) ever deeper into China’s orbit and towards China’s goal of a world with a growing share of transactions settled in renminbi.
That said, several of these commentators are skeptical we’re heading for rapid de-dollarisation (even if some think it would be a good thing
). After all, an alternative is needed and, as Rana Foroohar says:
The Chinese want to de-dollarise, but they also want complete control of their own financial system. That’s a difficult circle to square. One of the reasons that the dollar is the world’s reserve currency is that, in contrast, the US markets are so open and liquid.
Moreover, as Michael Pettis observes in this thread
), as long as China runs a large trade surplus, it has
to acquire foreign financial assets… and so avoiding the dollar is very difficult without painful domestic economic adjustment. Does this mean Bitcoin’s time has come? It’s very unlikely, as Noah Smith explains
(paywalled). Certainly this is a moment where it feels like something’s
got to give, but it doesn’t seem like it’s the dollar - at least not yet.