Bretton Woods System 3.0? USD domination era over?
Quite interesting statistic ( www.stansberryresearch.com) showed that, since 1450, the currencies of Portugal, Spain, the Netherlands, France, and the United Kingdom have all served as global reserve currencies, and each currency has dominated for about 80 years to 110 years. This statistic argues that since 1920, the dollar has in fact been solidified as the No.1 global reserve currency. that means, if the pattern of history repeats itself, the dollar’s global reserve status could be weaken around 2030. Once this acturally happened, which currency would have the potential to replace the USD?
In fact, the US dollar was truly recognized as the №1 global reserve currency by countries around the world after the Bretton Woods Conference in 1945. The Bretton Woods System was offically formed after World War II. The biggest feature of this system is the so-called double-Anchoring system, that is, the USD was Anchored to gold, and then other currencies were Anchored to the USD. Bretton Woods I system has run successfully for two decades,but From the second half of the 1960s, problems with the system became apparent. As the rapid recovery of the European economy and the Japanese economy after World War II, the absolute competitive advantage of the US economy had gradually been weakened. The “Triffin Dilemma” began to emerge with its natural born defects literally without effective cure at all even until present day .
The so-called “Triffin Dilemma” means that, in order to satisfy the global economy’s demand for a steady supply of reserve currency, the United States must export dollars overseas continuously; but as the total supply of offshore global dollar kept on growing, other countries would naturally cast doubts on the United States’ ability to maintain the dollar’s firm Anchoring to gold. In fact, from the second half of the 1960s, mainly due to the Massive Vietnam War Expenditure, some Western countries represented by France began to launch bank run on the dollar. With the rapid declining on U.S. gold reserves, the Nixon administration announced in 1971 that the dollar would cease to be to Anchored with gold. The “Nixon Shock” was considered to be the sign of the end of Bretton Woods I system.
In the 1970s, the global economy faced an era of stagflation caused by two oil crises, which also became a transition period for the international monetary system. After the Jamaica Conference in 1976, the international monetary system gradually shifted to Bretton Woods II system.
The biggest feature of Bretton Woods II system is that the US dollar continued to serve as the No1 global reserve currency,even after almost completely having broken away from anchoring to gold. A few years later,Export-oriented emerging economies (especially like the Four Asian Tigers, and China, etc.) began to export increasing amount of commodities to the United States in exchange for dollars, meanwhile resource-exporting economies (Middle East countries, Russia, etc.) were keen on exporting natural resources to the United States in exchange for dollars,too. then what happened? major portion of the offshore dollars was reinvested as foreign exchange reserves into so-called US safe assets (especially US Treasury Bonds etc). In other words, under Bretton Woods II system, the United States would inevitably face large-scale current account deficits & capital account surpluses, while peripheral countries would for sure have large-scale current account surpluses but capital account deficits.
Under Bretton Woods I system, gold was treated as the undoubtable sole source anchoring to the stability on global monetary system. But Under Bretton Woods II, the Federal Reserve’s monetary policy credibility had transfered itself as the only source determined the stability to the global monetary system. Thus,Peripheral countries had no choice but to believe involuntarily that a highly independent Fed will implement responsible monetary policies which based on stable US domestic economic growth and inflation, and latter would bring stability to the dollar exchange rate and also the price of dollar-safe assets,sound like a joke,huh?
then,After entering the 21st century, there was a significant current account imbalance in the world. In other words, countries such as China, Germany, and oil-exporting countries have accumulated large and persistent current account surpluses, meanwhile the United States has accumulated massive current account deficits. At that time, China and other creditors worried that once the foreign debt burden of the US government was overwhelmed, the United States might reduce its actural foreign debt level through a sharp depreciation of the USD, which would cause heavy losses to global creditors.
Then something odd suddenly popped out, After the subprime mortgage crisis broke out, in order to deal with the crisis and boost the economy, the Federal Reserve implemented three rounds of quantitative easing policy within 5–6 years, which increased the total assets of the Federal Reserve from more than 1 trillion US dollars to about 4.5 trillion US dollars. The resulting sudden floods of global liquidity has greatly boosted global asset prices (especially US equities). But interestingly, the dollar index (that is, the weighted average exchange rate of the greenback against other major developed country currencies) rose up instead of falling during this period. Especially after the European sovereign debt crisis hit the euro hard in the nuts, the US dollar’s status as a global reserve currency has generally risen and then fallen since the subprime mortgage crisis broke out, remaining largely unchanged.
Later on,After the outbreak of COV19,the Fed’s quantitative easing policy can be said to have intensified, raising its total assets from $4 trillion to $9 trillion in just two years. U.S. stock market indexes were once again skyrocketing along with the implementation of quantitative easing. The U.S. dollar index remained relatively strong overall.
In fact,ever after the subprime mortgage crisis or COV19, other countries around the world are very critical of the negative spillover effects of the US domestic monetary policy. The US dudes only focused on boosting domestic economic growth and maintaining domestic financial stability, and implemented an extremely loose monetary policy, which exacerbated the global excess liquidity, pushed up the debt levels of emerging markets and developing countries, and significantly deteriorated the Financial instability of them. However, Americans “don’t care about the external flood.” Once the domestic economic recovery in the United States led to an increase in the inflation rate, the Federal Reserve would begin to tighten monetary policy, and this continuous tightening actions of monetary policy would certainly cause fresh series of negative shockwaves to peripheral countries.
While Although other countries have criticized the negative spillover effects of U.S. domestic monetary policy, the U.S. government has still maintainede stepping on its own pace. The international status of the dollar has not been significantly weakened. The most important reason is that the dollar lacks a sufficiently competitive opponent,at least for another 50 years to come. Other currencies such as the Euro, the CNY, the British pound, and the Japanese Yen are still too difficult to challenge the centrality status of the dollar in the short term.
However, the outbreak of the Russian-Ukrainian conflict in 2022 may exacerbate the diminutive transmutation of the current international monetary system. After the outbreak of the Russia-Ukraine conflict, developed countries represented by the United States imposed a number of financial sanctions on Russia, including adding some Russian banks to the SDN list, removing some Russian banks from the SWIFT system, and partially freezing Russia’s foreign exchange reserves and gold reserves altogether.
The biggest impact on the current international monetary system is that the United States and some European countries have frozen Russia’s foreign exchange reserves and gold reserves, which has practically destroyed the safety reputation related closely to the the world’s most important safe asset (US Treasury bonds) so far. As mentioned above, the basic pillar supporting the very existence of Bretton Woods II system,is that China and other current account surplus countries firmly believe that US national debts are the safest assets in the world, and the US government will not default on its debts. But as the U.S. government has frozen U.S. dollar assets held byAfghanistan and Russia since the beginning of this year, this means that the U.S. government no longer abides by the market rules (even in name). incredulity by other countries about the dollar’s safe assets fuctions will naturally weaken the foundation of the current international monetary system.
For countries such as China, Saudi Arabia, and India that holding a large amount of foreign exchange reserve assets, but are not allies to the United States, this means that it will be no longer safe as before that investing in US treasury bonds in the future, and US government would later on weighted more on gaining upper hands in its Geopolitical confrontations,than maintaining its reputation. Once the US treasury bonds lose its status as the most important safe asset in the world, the status of the US dollar in the international monetary system will undoubtedly decline significantly.
The fact that the United States has joined forces with some European countries and Japan to sanction Russia has vividly demonstrated to many countries that,it’s quite dump to try to avoid the systemic risk of multinational joint sanctions by simply diversifying asset investments within the United States and its allies.So what other better options are there? If one kind of internationally accepted credit currency no longer reliable, then it becomes a quite rational choice to allocate a higher proportion of sovereign foreign exchange assets to physical assets, especially on commodities. The logic is as simple as itself. Since the main purpose of accumulating U.S. dollar reserves is to cope with imports’ price hikes for a longer period in the future, as with U.S. dollar assets have become less reliable, it is better to directly use them to buy commodities right now. This is why Credit Suisse analyst Zoltan believes that the world would enter the Bretton Woods system III, and under the new international monetary system, the US dollar and commodities will share the logic of global reserve currency status.
Therefore,my prediction is, as the Russian-Ukrainian War meant to last long,it means that the single reserve currency system formed since the establishment of the Bretton Woods system will be transformed into a multiple reserve currency system,in it,commodities would gain more important status as the next Gen vital gloal value Anchoring carrier,but,at the same time,it’s still naive to take it for granted that,USD domination has gone,quite the opposite,USD as No1 global reserve status would largely solidify further,as EU economy slumped into recession,and China facing irreversible recession even Massive potential social unrests next 5 to 10 years.
All in all, under the multiple pressures of intensified Geopolitical confrontation, the global epidemic, and climatecrisis etc, globalization already offpeak, and both economic and financial globalization may give way to regionalized and fragmented cooperation among regional allies. This trend would for sure be reflected on the trade side, which means regionalization and shortening of global supply chains . Meanwhile,This trend would be also reflect in the financial side, which may largely cause the diversification of international reserve currencies and the fragmentation of the international monetary system .